UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08162
Master Investment Portfolio
(Exact name of registrant as specified in charter)
c/o: State Street Bank and Trust Company
200 Clarendon Street, Boston, MA 02116-5021
(Address of principal executive offices) (Zip code)
RL&F Service Corp.
One Rodney Square, 10th Floor
Tenth and King Streets, Wilmington, DE 19801
(Name and address of agent for service)
Registrant’s telephone number, including area code: 1-877-244-1544
Date of fiscal year end: December 31, 2009
Date of reporting period: June 30, 2009
Item 1. Reports to Stockholders.
BOND INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
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BOND INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 12 |
BOND INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 13 |
BOND INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 14 |
BOND INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 15 |
BOND INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 16 |
BOND INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 17 |
S&P 500 INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 18 |
S&P 500 INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 19 |
S&P 500 INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 20 |
S&P 500 INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 21 |
S&P 500 INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 22 |
S&P 500 INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 23 |
S&P 500 INDEX MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 24 |
Portfolio Allocations (Unaudited)
June 30, 2009
| 25 |
STATEMENTS OF ASSETS AND LIABILITIES (Unaudited)
June 30, 2009
| Bond Index Master Portfolio |
S&P 500 Index Master Portfolio | |||||
| ASSETS |
||||||
| Investments, at cost: |
||||||
| Unaffiliated issuers |
$ | 137,537,280 | $ | 2,055,390,766 | ||
| Affiliated issuers (Note 2) |
28,867,245 | 344,803,073 | ||||
| Total cost of investments |
$ | 166,404,525 | $ | 2,400,193,839 | ||
| Investments in securities, at fair value (including securities on loan(a)) (Note 1): |
||||||
| Unaffiliated issuers |
$ | 140,122,498 | $ | 1,656,733,825 | ||
| Affiliated issuers (Note 2) |
28,867,245 | 344,803,073 | ||||
| Total fair value of investments |
168,989,743 | 2,001,536,898 | ||||
| Receivables: |
||||||
| Investment securities sold |
375,358 | 1,361,122 | ||||
| Dividends and interest |
1,253,189 | 2,436,757 | ||||
| Total Assets |
170,618,290 | 2,005,334,777 | ||||
| LIABILITIES |
||||||
| Payables: |
||||||
| Investment securities purchased |
3,604,902 | 2,872,349 | ||||
| Due to broker – variation margin |
— | 276,025 | ||||
| Collateral for securities on loan (Note 4) |
23,311,226 | 308,220,513 | ||||
| Investment advisory fees (Note 2) |
7,658 | 67,979 | ||||
| Accrued expenses: |
||||||
| Professional fees (Note 2) |
10,347 | 12,160 | ||||
| Independent trustees’ fees (Note 2) |
80 | 2,740 | ||||
| Total Liabilities |
26,934,213 | 311,451,766 | ||||
| NET ASSETS |
$ | 143,684,077 | $ | 1,693,883,011 | ||
| (a) | Securities on loan with values of $22,903,774 and $301,219,965, respectively. See Note 4. |
STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2009
| Bond Index Master Portfolio |
S&P 500 Index Master Portfolio |
|||||||
| NET INVESTMENT INCOME |
||||||||
| Dividends from unaffiliated issuers |
$ | — | $ | 20,560,376 | ||||
| Interest from unaffiliated issuers |
3,073,096 | 5,494 | ||||||
| Interest from affiliated issuers (Note 2) |
25,976 | 58,523 | ||||||
| Securities lending income from affiliated issuers (Note 2) |
36,325 | 907,541 | ||||||
| Total investment income |
3,135,397 | 21,531,934 | ||||||
| EXPENSES (Note 2) |
||||||||
| Investment advisory fees |
54,762 | 387,014 | ||||||
| Professional fees |
10,253 | 11,763 | ||||||
| Independent trustees’ fees |
543 | 7,936 | ||||||
| Total expenses |
65,558 | 406,713 | ||||||
| Less expense reductions (Note 2) |
(10,796 | ) | (19,699 | ) | ||||
| Net expenses |
54,762 | 387,014 | ||||||
| Net investment income |
3,080,635 | 21,144,920 | ||||||
| REALIZED AND UNREALIZED GAIN (LOSS) |
||||||||
| Net realized gain (loss) from sale of investments in unaffiliated issuers |
44,279 | (48,727,459 | ) | |||||
| Net realized gain on futures contracts |
— | 6,685,534 | ||||||
| Net change in unrealized appreciation (depreciation) of investments |
(766,596 | ) | 73,270,203 | |||||
| Net change in unrealized appreciation (depreciation) of futures contracts |
— | (1,697,376 | ) | |||||
| Net realized and unrealized gain (loss) |
(722,317 | ) | 29,530,902 | |||||
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 2,358,318 | $ | 50,675,822 | ||||
|
|
||||||||
The accompanying notes are an integral part of these financial statements.
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MASTER INVESTMENT PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
| Bond Index Master Portfolio | S&P 500 Index Master Portfolio | |||||||||||||||
| For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
|||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||
| Operations: |
||||||||||||||||
| Net investment income |
$ | 3,080,635 | $ | 6,314,472 | $ | 21,144,920 | $ | 55,448,050 | ||||||||
| Net realized gain (loss) |
44,279 | (423,541 | ) | (42,041,925 | ) | (142,694,921 | ) | |||||||||
| Net change in unrealized appreciation (depreciation) |
(766,596 | ) | 1,434,040 | 71,572,827 | (937,962,325 | ) | ||||||||||
| Net increase (decrease) in net assets resulting from operations |
2,358,318 | 7,324,971 | 50,675,822 | (1,025,209,196 | ) | |||||||||||
| Interestholder transactions: |
||||||||||||||||
| Contributions |
19,688,042 | 45,530,591 | 275,449,924 | 600,316,999 | ||||||||||||
| Withdrawals |
(11,840,168 | ) | (39,285,080 | ) | (323,222,457 | ) | (804,875,751 | ) | ||||||||
| Net increase (decrease) in net assets resulting from interestholder transactions |
7,847,874 | 6,245,511 | (47,772,533 | ) | (204,558,752 | ) | ||||||||||
| Increase (decrease) in net assets |
10,206,192 | 13,570,482 | 2,903,289 | (1,229,767,948 | ) | |||||||||||
| NET ASSETS: |
||||||||||||||||
| Beginning of period |
133,477,885 | 119,907,403 | 1,690,979,722 | 2,920,747,670 | ||||||||||||
| End of period |
$ | 143,684,077 | $ | 133,477,885 | $ | 1,693,883,011 | $ | 1,690,979,722 | ||||||||
The accompanying notes are an integral part of these financial statements.
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NOTES TO FINANCIAL STATEMENTS (Unaudited)
Master Investment Portfolio (“MIP”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end series management investment company organized as a Delaware statutory trust.
These financial statements relate only to the Bond Index and S&P 500 Index Master Portfolios (each, a “Master Portfolio,” collectively, the “Master Portfolios”).
Pursuant to MIP’s organizational documents, the Master Portfolios’ officers and trustees are indemnified against certain liabilities that may arise out of the performance of their duties to the Master Portfolios. Additionally, in the normal course of business, the Master Portfolios enter into contracts with service providers that contain general indemnification clauses. The Master Portfolios’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Master Portfolios that have not yet occurred.
| 1. | SIGNIFICANT ACCOUNTING POLICIES |
The following significant accounting policies are consistently followed by MIP in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
SECURITY VALUATION
The securities and other assets of each Master Portfolio are valued pursuant to the pricing policy and procedures approved by the Board of Trustees of MIP (the “Board”). The Master Portfolios are subject to the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Inputs may be based on independent market data (“observable inputs”) or they may be internally developed (“unobservable inputs”). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are as follows:
| • | Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Master Portfolio has the ability to access at the measurement date (a “Level 1 Price”); |
| • | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (a “Level 2 Price”); |
| • | Level 3 – Inputs that are unobservable for the asset or liability (a “Level 3 Price”). |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3 of the fair value hierarchy.
The level of a value determined for a financial instrument within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement in its entirety. The categorization of a value determined for a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Master Portfolios’ perceived risk of that instrument.
Investments whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 Prices, include active listed equities and certain U.S. government securities. The Master Portfolios do not adjust the quoted price for such instruments, even in situations where the Master Portfolios hold a large position and a sale could reasonably impact the quoted price.
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MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
Investments that trade in markets that are not considered to be active, but whose values are based on inputs such as quoted market prices, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs are classified within Level 2. These generally include certain U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage products, less liquid listed equities, and state, municipal and provincial obligations. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.
Investments whose values are classified Level 3 Prices have significant unobservable inputs, as they may trade infrequently or not at all. Investments whose values are classified as Level 3 Prices may include unlisted securities related to corporate actions, securities whose trading have been suspended or which have been de-listed from their primary trading exchange, less liquid corporate debt securities (including distressed debt instruments), collateralized debt obligations, and less liquid mortgage securities (backed by either commercial or residential real estate). When observable prices are not available for these securities, the Master Portfolios use one or more valuation techniques (e.g., the market approach or the income approach) for which sufficient and reliable data is available. Within Level 3 of the fair value hierarchy, the use of the market approach generally consists of using comparable market transactions, while the use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
The inputs used by the Master Portfolios in estimating the value of Level 3 Prices may include the original transaction price, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3 Prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Master Portfolios in the absence of market information. The fair value measurement of Level 3 Prices does not include transaction costs that may have been capitalized as part of the security’s cost basis. Assumptions used by the Master Portfolios due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Master Portfolios’ results of operations.
Derivative instruments can be exchange-traded or privately negotiated over-the-counter. Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within Level 1 of the fair value hierarchy.
Fair value pricing could result in a difference between the prices used to calculate a Master Portfolio’s net assets and the prices used by the Master Portfolio’s underlying index, which in turn, could result in a difference between the Master Portfolio’s performance and the performance of the Master Portfolio’s underlying index.
The following tables summarize the values of each of the Master Portfolios’ investments according to the fair value hierarchy as of June 30, 2009. The breakdown of the S&P 500 Index Master Portfolio’s investments into major categories is disclosed in its Schedule of Investments.
| Investments in Securities | ||||||||||||
| Master Portfolio | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Bond Index |
||||||||||||
| Corporate Bonds & Notes |
$ | — | $ | 30,392,298 | $ | — | $ | 30,392,298 | ||||
| Asset-Backed Securities |
— | 960,213 | — | 960,213 | ||||||||
| Collateralized Mortgage Obligations |
— | 4,359,110 | — | 4,359,110 | ||||||||
| Foreign Government Bonds & Notes |
— | 2,744,901 | — | 2,744,901 | ||||||||
| Municipal Debt Obligations |
— | 560,417 | 560,417 | |||||||||
| U.S. Government & Agency Obligations |
35,058,650 | 66,046,909 | — | 101,105,559 | ||||||||
| Short-Term Investments |
28,867,245 | — | — | 28,867,245 | ||||||||
| $ | 63,925,895 | $ | 105,063,848 | $ | — | $ | 168,989,743 | |||||
| S&P 500 Index |
$ | 2,001,536,898 | $ | — | $ | — | $ | 2,001,536,898 | ||||
| 29 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Other Financial Instruments(a) | ||||||||||||||
| Master Portfolio | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| S&P 500 Index |
$ | (1,365,949 | ) | $ | — | $ | — | $ | (1,365,949 | ) | ||||
| (a) | Other financial instruments include futures contracts, which are valued at the unrealized appreciation (depreciation) on the financial instrument. |
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for on trade date. Dividend income is recognized on the ex-dividend date, net of any foreign tax withheld at source, and interest income is accrued daily. Non-cash dividends received by the S&P 500 Index Master Portfolio in the form of stock in an elective dividend, if any, are recorded as dividend income at fair value. Distributions received by the S&P 500 Index Master Portfolio may include a return of capital that is estimated by management. Such amounts are recorded as a reduction of the cost of investments or reclassified to capital gains. Realized gains and losses on investment transactions are determined using the specific identification method. The Master Portfolios amortize premiums and accrete discounts on debt securities purchased using a constant yield to maturity method.
FEDERAL INCOME TAXES
In general, MIP believes that each Master Portfolio has and will continue to be operated in a manner so as to qualify it as a non-publicly traded partnership for federal income tax purposes. Provided that each such Master Portfolio so qualifies, it will not be subject to any federal income tax on its income and gains (if any). However, each interestholder in such a Master Portfolio will be taxed on its distributive share of the Master Portfolio’s taxable income in determining its federal income tax liability. As a non-publicly traded partnership for federal income tax purposes, each such Master Portfolio will be deemed to have “passed through” to its interestholders any interest, dividends, gains or losses of the Master Portfolio for such purposes. The determination of such share will be made in accordance with the Internal Revenue Code of 1986, as amended (the “Code”), and regulations promulgated thereunder.
It is intended that each Master Portfolio’s assets, income and distributions will be managed in such a way that an entity electing and qualifying as a “regulated investment company” under the Code can continue to so qualify by investing substantially all of its assets through the Master Portfolio, provided that the regulated investment company meets other requirements for such qualifications not within the control of the Master Portfolio (e.g., distributing at least 90% of the regulated investment company’s “investment company taxable income” annually).
As of June 30, 2009, the gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes for the Master Portfolios were as follows:
| Master Portfolio | Tax Cost | Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Net Unrealized Appreciation (Depreciation) |
||||||||||
| Bond Index |
$ | 166,786,917 | $ | 4,805,957 | $ | (2,603,131 | ) | $ | 2,202,826 | |||||
| S&P 500 Index |
2,455,203,813 | 252,332,142 | (705,999,057 | ) | (453,666,915 | ) | ||||||||
Management has reviewed the tax positions as of June 30, 2009, inclusive of the prior three open tax return years and has determined that no provision for income tax is required in the Master Portfolios’ financial statements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2009, the Master Portfolios adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires enhanced financial statement disclosures that enable investors to understand how and why the Master Portfolios use derivatives, how derivatives are accounted for, and how the derivative instruments affect the Master Portfolios’ results of operations and financial positions.
FUTURES CONTRACTS
The Master Portfolios are subject to equity price risk or interest-rate risk in the normal course of pursuing their investment objectives. The Master Portfolios may enter into futures contracts as substitutes for comparable positions in underlying securities, to position the portfolio for anticipated changes in markets, or to offset a potential decline in the value of other holdings. A futures contract is an agreement between two parties, a buyer and a seller, to exchange a particular commodity or financial instrument at a specific price on a specific date in the future. Upon entering into a futures
| 30 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
contract, a Master Portfolio is required to pledge to the broker and hold in a segregated account, an amount of cash, U.S. government securities or other high-quality debt and equity securities equal to the minimum “initial margin” requirements of the exchange. Pursuant to the contract, the Master Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as “variation margin” and are recorded by the Master Portfolio as receivables or payables in the accompanying Statements of Assets and Liabilities. When the contract is closed, the Master Portfolio records a “realized gain (loss) on futures contracts” in its Statement of Operations, equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risks of entering into futures contracts include the risk of default by the counterparty, imperfect correlation between the price of the futures contract and movements in the price of the underlying asset and the possibility that there may be an illiquid market. The amount at risk for futures contracts may exceed the amount reflected in the financial statements. Futures contracts are standardized and traded on exchanges, where the exchange serves as the ultimate counterparty for all contracts. Consequently, the primary credit risk on futures contracts is the creditworthiness of the exchange.
As of June 30, 2009, the S&P 500 Index Master Portfolio has pledged to brokers a U.S. Treasury Bill with a face amount of $6,600,000 for initial margin requirements on outstanding futures contracts.
WHEN ISSUED/TBA TRANSACTIONS
The Bond Index Master Portfolio may purchase mortgage pass-through securities on a when-issued or to-be-announced (“TBA”) basis, with payment and delivery scheduled for a future date. The Master Portfolio may enter into a TBA agreement, sell the obligation to purchase the pools stipulated in the TBA agreement prior to the stipulated settlement date and enter into a new TBA agreement for future delivery of pools of mortgage pass-through securities (a “TBA roll”). A TBA roll is treated by the Master Portfolio as a purchase transaction and a sale transaction in which the Master Portfolio realizes a gain or loss. The Master Portfolio’s use of TBA rolls may cause the Master Portfolio to experience higher portfolio turnover and higher transaction costs. The Master Portfolio could be exposed to possible risk if there is adverse market action, expenses or delays in connection with the TBA transactions, or if the counterparty fails to complete the transaction.
| 2. | AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES |
Pursuant to an Investment Advisory Contract with each Master Portfolio, Barclays Global Fund Advisors (“BGFA”) provides investment advisory services to each Master Portfolio. BGFA is a California corporation indirectly owned by Barclays Bank PLC. BGFA is entitled to receive an annual investment advisory fee of 0.08% and 0.05% of the average daily net assets of the Bond Index and S&P 500 Index Master Portfolios, respectively, as compensation for investment advisory services. From time to time, BGFA may waive a portion of its advisory fees. Any such waivers will reduce the expenses of the Master Portfolio and, accordingly, have a favorable impact on its performance.
The fees and expenses of the Master Portfolios’ trustees who are not “interested persons” of MIP, as defined in the 1940 Act (“Independent Trustees”), counsel to the Independent Trustees and MIP’s independent registered public accounting firm (the “independent expenses”) are paid directly by the Master Portfolios. BGFA has contractually agreed to cap the expenses of the Master Portfolios at the rate at which the Master Portfolios pay an advisory fee to BGFA by providing an offsetting credit against the investment advisory fees paid by the Master Portfolios in an amount equal to the independent expenses.
For the six months ended June 30, 2009, BGFA credited investment advisory fees for the Bond Index and S&P 500 Index Master Portfolios in the amounts of $10,796 and $19,699, respectively.
State Street Bank and Trust Company (“State Street”) serves as the custodian and sub-administrator of the Master Portfolios. State Street will not be entitled to receive fees for its custodial services, so long as it is entitled to receive a separate fee from Barclays Global Investors, N.A. (“BGI”) for its services as sub-administrator of the Master Portfolios.
SEI Investments Distribution Company (“SEI”) is the sponsor and placement agent for the Master Portfolios. SEI does not receive any fee from the Master Portfolios for acting as placement agent.
Pursuant to an exemptive order issued by the U.S. Securities and Exchange Commission (“SEC”), BGI serves as securities lending agent for MIP. BGI is an affiliate of BGFA, the Master Portfolios’ investment adviser. As securities lending agent, BGI receives, as fees, a share of the income earned on investment of the cash collateral received for the loan of securities.
| 31 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
For the six months ended June 30, 2009, BGI earned securities lending agent fees as follows:
| Master Portfolio | Securities Lending Agent Fees | ||
| Bond Index |
$ | 36,325 | |
| S&P 500 Index |
907,541 | ||
MIP has entered into an administration services arrangement with BGI, which has agreed to provide general administration services, such as managing and coordinating third-party service relationships (e.g., the Master Portfolios’ custodian, financial printer, legal counsel and independent registered public accounting firm), to the Master Portfolios. BGI is not entitled to compensation for providing administration services to the Master Portfolios, for so long as BGI is entitled to compensation for providing administration services to corresponding feeder funds that invest substantially all of their assets in the Master Portfolios, or BGI (or an affiliate) receives investment advisory fees from the Master Portfolios. BGI may delegate certain of its administration duties to sub-administrators.
Cross trades for the six months ended June 30, 2009, if any, were executed by the Master Portfolios pursuant to Rule 17a-7 under the 1940 Act. Cross trading is the buying or selling of portfolio securities between funds to which BGFA (or an affiliate) serves as investment adviser. At its regularly scheduled quarterly meetings, the Board reviews such transactions as of the most recent calendar quarter for compliance with the requirements and restrictions set forth by Rule 17a-7.
Each Master Portfolio may invest in certain money market funds managed by BGFA, the Master Portfolios’ investment adviser, including the Government Money Market Fund (“GMMF”), Institutional Money Market Fund (“IMMF”), Prime Money Market Fund (“PMMF”) and Treasury Money Market Fund (“TMMF”) of Barclays Global Investors Funds. These money market funds seek to achieve their investment objectives by investing in high-quality, short-term money market instruments that, at the time of investment, have remaining maturities of 397 calendar days or less from the date of acquisition. The GMMF, IMMF, PMMF and TMMF are feeder funds in a master/feeder fund structure that invest substantially all of their assets in the Government Money Market Master Portfolio, Money Market Master Portfolio, Prime Money Market Master Portfolio and Treasury Money Market Master Portfolio (collectively, the “Money Market Master Portfolios”), respectively, which are also managed by BGFA. While the GMMF, IMMF, PMMF and TMMF do not directly charge an investment advisory fee, the Money Market Master Portfolios in which they invest do charge an investment advisory fee. Income distributions from the GMMF, IMMF, PMMF and TMMF are declared daily and paid monthly from net investment income. Income distributions earned by the Master Portfolios from temporary cash investments are recorded as interest from affiliated issuers in the accompanying Statements of Operations. Income distributions earned by the Master Portfolios from the investment of securities lending collateral, if any, are included in securities lending income in the accompanying Statements of Operations.
Certain officers and trustees of MIP are also officers of BGI and/or BGFA. As of June 30, 2009, these officers of BGI and/or BGFA collectively owned less than 1% of MIP’s outstanding beneficial interests.
| 3. | INVESTMENT PORTFOLIO TRANSACTIONS |
Investment transactions (excluding short-term investments) for the Master Portfolios for the six months ended June 30, 2009 were as follows:
| U.S. Government Obligations | Other Securities | |||||||||||
| Master Portfolio | Purchases | Sales | Purchases | Sales | ||||||||
| Bond Index |
$ | 54,987,913 | $ | 45,400,697 | $ | 5,142,619 | $ | 2,153,602 | ||||
| S&P 500 Index |
— | — | 34,219,957 | 40,215,618 | ||||||||
| 4. | PORTFOLIO SECURITIES LOANED |
Each Master Portfolio may lend its investment securities to approved borrowers, such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Master Portfolio collateral consisting of cash, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. government. The initial collateral received by each Master Portfolio is required to have a value of at least 102% of the market value of the loaned securities plus the interest accrued on such securities, if any, for securities traded on U.S. exchanges and a value of at least 105% for all other securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current market value of the securities on loan plus accrued interest, if any. The risks to the Master Portfolios of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities
| 32 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
when due. Any securities lending cash collateral may be reinvested in certain short-term instruments either directly on behalf of a Master Portfolio or through one or more joint accounts or money market funds, including those managed by BGFA; such reinvestments are subject to investment risk.
As of June 30, 2009, the Master Portfolios had loaned securities which were collateralized by cash. The cash collateral received was invested in money market funds managed by BGFA. The market value of the securities on loan as of June 30, 2009 and the value of the related collateral are disclosed in the Statements of Assets and Liabilities. Securities lending income, as disclosed in the Master Portfolios’ Statements of Operations, represents the income earned from the investment of the cash collateral, net of rebates paid to, or fees paid by, borrowers and less the fees paid to BGI as securities lending agent.
| 5. | FINANCIAL HIGHLIGHTS |
Financial highlights for each of the Master Portfolios were as follows:
| Master Portfolio | Six Months Ended June 30, 2009 (Unaudited) |
Year Ended December 31, 2008 |
Year Ended December 31, 2007 |
Year Ended December 31, 2006 |
Year Ended December 31, 2005 |
Year Ended December 31, 2004 |
||||||||||||
| Bond Index |
||||||||||||||||||
| Ratio of expenses to average net assets(a) |
0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % | 0.08 | % | ||||||
| Ratio of expenses to average net assets prior to expense reductions(a) |
0.10 | % | 0.10 | % | 0.11 | % | 0.10 | % | n/a | n/a | ||||||||
| Ratio of net investment income to average net assets(a) |
4.50 | % | 4.99 | % | 5.15 | % | 4.97 | % | 4.56 | % | 4.17 | % | ||||||
| Portfolio turnover rate(b) |
36 | % | 89 | % | 61 | % | 57 | % | 76 | % | 148 | % | ||||||
| Total return |
1.68 | %(c) | 6.06 | % | 7.31 | % | 4.91 | % | 2.27 | % | 4.20 | % | ||||||
| S&P 500 Index |
||||||||||||||||||
| Ratio of expenses to average net assets(a) |
0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | ||||||
| Ratio of expenses to average net assets prior to expense reductions(a) |
0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | n/a | n/a | ||||||||
| Ratio of net investment income to average net assets(a) |
2.73 | % | 2.32 | % | 1.98 | % | 1.93 | % | 1.84 | % | 1.91 | % | ||||||
| Portfolio turnover rate(b) |
2 | % | 8 | % | 7 | % | 14 | % | 10 | % | 14 | % | ||||||
| Total return |
3.30 | %(c) | (36.86 | )% | 5.54 | % | 15.75 | % | 4.87 | % | 10.82 | % |
| (a) | Annualized for periods of less than one year. |
| (b) | Portfolio turnover rates include in-kind transactions, if any. |
| (c) | Not annualized. |
| 6. | BLACKROCK TRANSACTION |
On June 16, 2009, Barclays PLC, the ultimate parent company of BGI and BGFA, accepted a binding offer and entered into an agreement to sell its interests in the BGFA, BGI and certain affiliated companies, to BlackRock, Inc., (the “BlackRock Transaction”). The BlackRock Transaction is subject to certain regulatory approvals, as well as other conditions to closing.
Under the 1940 Act, completion of the BlackRock Transaction will cause the automatic termination of each Master Portfolio’s current investment advisory agreement with BGFA. In order for the investment management of each Master Portfolio to continue uninterrupted, the Board will be asked to approve a new investment advisory agreement for each Master Portfolio. If approved by the Board, the new investment advisory agreements will be submitted for approval by the investors in the Master Portfolios (each, a “Fund”). Each Fund will in turn call a meeting of its shareholders at which shareholders will vote to instruct the Fund how to vote on the applicable Master Portfolio’s new investment advisory agreement.
| 7. | REVIEW OF SUBSEQUENT EVENTS |
In connection with the preparation of the financial statements of the Master Portfolios as of and for the six months ended June 30, 2009, events and transactions subsequent to June 30, 2009 through August 28, 2009, the date the financial statements were issued, have been evaluated by the Master Portfolios’ management for possible adjustment and/or disclosure. No subsequent events requiring financial statement disclosure have been identified.
| 33 |
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited)
Under Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), the Master Investment Portfolio (“MIP”) Board of Trustees (the “Board”), including a majority of Trustees who are not “interested persons” of MIP, as that term is defined in the 1940 Act (the “Independent Trustees”), is required annually to consider each Investment Advisory Contract between MIP and BGFA (each, an “Advisory Contract” and together, the “Advisory Contracts”) on behalf of the Bond Index Master Portfolio and S&P 500 Index Master Portfolio (together, the “Master Portfolios”). As required by Section 15(c), the Board requested, and BGFA provided, such information as the Board deemed to be reasonably necessary to evaluate the terms of the Advisory Contracts. At a meeting held on March 18-19, 2009, the Board approved the selection of BGFA and the continuance of the Advisory Contracts, based on its review of qualitative and quantitative information provided by BGFA. In selecting BGFA and approving the Advisory Contracts for the Master Portfolios, the Board, including the Independent Trustees, advised by their independent counsel, considered the following factors, none of which was controlling, and made the following conclusions:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY BGFA
The Board anticipated that there would be no diminution in the scope of services required of or provided by BGFA under the Advisory Contracts for the coming year as compared to the scope of services provided by BGFA over the past year. In reviewing the scope of these services, the Board considered BGFA’s investment philosophy and experience, noting that, over the past several years, BGFA and its affiliates have committed significant resources to the support of the Master Portfolios. The Board considered in particular that BGFA’s services for the Master Portfolios capitalize on BGFA’s core competencies as an industry leader in index management, including the effective use of its proprietary investment model that maximizes efficiencies in implementing index changes and in maintaining fully invested portfolios. The Board also considered services provided by BGFA and its affiliates in connection with analyzing corporate actions (for the S&P 500 Index Master Portfolio), managing risk and diversification (for the Bond Index Master Portfolio), employing customized trading strategies, reviewing securities lending opportunities and overseeing intermediaries that provide BGI feeder fund shareholder support and processing functions.
The Board also considered BGFA’s compliance program and its compliance record with respect to the Master Portfolios. The Board noted that BGFA reports to the Board about portfolio management and compliance matters on a periodic basis in connection with regularly scheduled meetings of the Board and has made appropriate officers available as needed to provide further assistance with these matters. The Board also reviewed the background and experience of the senior management and relevant investment and other personnel, including those persons responsible for the day-to-day management of the Master Portfolios and the adequacy of the time and attention that such persons devote to the Master Portfolios. The Board also considered the reputation and overall financial strength of BGFA and its affiliates, as well as the Board’s past experience with BGFA. In addition to the above considerations, the Board reviewed and considered BGFA’s investment processes and strategies, and matters related to BGFA’s portfolio transaction policies and procedures. In addition, the Board reviewed the performance of (i) other registered investment companies with substantially similar investment objectives and strategies as the Master Portfolios for which BGFA provides investment advisory services, and (ii) the Master Portfolios’ published performance benchmarks, the S&P 500 Index or the Barclays Capital U.S. Aggregate Index, as applicable. The Board noted that the S&P 500 Index Master Portfolio, net of expenses, underperformed its published benchmark on an annualized basis in 2008 and over three years, over five years, and over ten years, which would be expected, such underperformance being attributable to the effect of fees, and noted that the published benchmark is an index, which does not have expenses. The Board also noted that the Bond Index Master Portfolio outperformed its published benchmark in 2008 and on an annualized basis over three years, over five years, and over ten years. The Board also noted that during BGFA’s term as investment adviser, the Master Portfolios have met their investment objectives consistently over time. Based on this review, the Board concluded that the nature, extent and quality of services to be provided by BGFA to the Master Portfolios under the Advisory Contracts were appropriate and supported the Board’s approval of the Advisory Contracts for the coming year.
MASTER PORTFOLIOS’ EXPENSES AND PERFORMANCE OF THE MASTER PORTFOLIOS
The Board reviewed statistical information prepared by Lipper Inc. (“Lipper”), an independent provider of investment company data, regarding the expense ratio components, including actual advisory fees, waivers/reimbursements, and gross and net total expenses of each Master Portfolio in comparison with the same information for other investment companies registered under the 1940 Act, objectively selected by Lipper as comprising such Master Portfolio’s peer group pursuant to Lipper’s proprietary methodology and registered funds that would otherwise have been excluded from Lipper’s comparison groups because of their size or other differentiating factors, but were nonetheless included at the
| 34 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited) (Continued)
request of BGFA (each, a “Lipper Expense Group”). In addition, the Board reviewed statistical information prepared by Lipper regarding the performance of each Master Portfolio for the one-, three-, five-, and ten-year (or since inception) periods ended December 31, 2008, and as compared to the performance of other registered investment companies with similar investment objectives, as selected by Lipper as comprising such Master Portfolio’s peer group pursuant to Lipper’s proprietary methodology and registered investment companies that would otherwise have been excluded from Lipper’s comparison groups because of their size or other differentiating factors, but were nonetheless included at the request of BGFA (the “Lipper Performance Group,” and collectively with the Lipper Expense Groups, the “Lipper Groups”). The Board considered that the component funds of the Lipper Groups are publicly available funds, more analogous in overall expense structure to the Barclays Global Investors Funds Index Funds than to underlying Master Portfolios, which are not available for investment except to other investment companies. In support of its review of the statistical information, the Board was provided with a detailed description of the methodology used by Lipper to determine the Lipper Groups and to prepare this information.
The Board noted that each Master Portfolio generally performed in line with its performance benchmark index over relevant periods. The Board noted that the advisory fee rate for each Master Portfolio was lower than the median of the advisory fee rates of the funds in its Lipper Expense Group, and the overall expenses for each Master Portfolio were lower than median of the overall expenses of the funds in its Lipper Expense Group. Based on this review, the Board concluded that the investment advisory fees and expense levels and the historical performance of the Master Portfolios, as managed by BGFA, as compared to the investment advisory fees and expense levels and performance of the funds in the Lipper Expense Groups, were satisfactory for the purposes of approving the Advisory Contracts for the coming year.
COSTS OF SERVICES PROVIDED TO MASTER PORTFOLIOS AND PROFITS REALIZED BY BGFA AND AFFILIATES
The Board reviewed information about the profitability to BGFA of the Master Portfolios, and the Barclays Global Investors Funds, separately and together, based on the fees payable to BGFA, and its affiliates (including fees under the Advisory Contracts), and all other sources of revenue and expense to BGFA and its affiliates from the operations of the Master Portfolios and the Barclays Global Investors Funds for the last calendar year. The Board discussed the sources of direct and ancillary revenue with management, including the revenues to BGI from securities lending by MIP (including any securities lending by a Master Portfolio), revenues received from transactions for MIP executed through affiliates (including any such transactions for a Master Portfolio), and any fee revenue from any investments by a Master Portfolio in other funds for which BGFA provides advisory services and/or BGI provides administration services. The Board also noted that BGFA had provided information relating to management estimates of 2009 profitability from the operations of the Master Portfolios; however, the Board considered these forward-looking estimates to be of limited value, and did not base its conclusions on this information. Based on this review, the Board concluded that the profits realized by BGFA and its affiliates under the Advisory Contracts and from other relationships between the Master Portfolios and BGFA and/or its affiliates were within the range the Board considered reasonable and appropriate.
ECONOMIES OF SCALE
In connection with its review of BGFA’s profitability analysis, the Board received information regarding economies of scale or other efficiencies that may result from increases in the Master Portfolios’ asset levels. The Board noted that the Advisory Contracts do not provide any breakpoints in the investment advisory fee rates as a result of any increases in the asset levels of the Master Portfolios. However, the Board noted that the investment advisory fee rates for the Master Portfolios had been set initially at the lower end of the marketplace so as to afford the Master Portfolios’ interestholders the opportunity to share in anticipated economies of scale from inception. The Board also noted the difficulty of considering the potential for economies of scale based on advisory services independently and separately from any potential for economies of scale based on other services provided by BGFA and its affiliates. Based on the profitability analysis presented to the Board, the Board discussed the potential for future economies of scale as the asset levels of the Master Portfolios increase. In light of this analysis and the relatively low investment advisory fee rates for the Master Portfolios, the Board determined that whether further economies of scale may be realized by the Master Portfolios or reflected in fee levels was not a significant factor at this juncture in its consideration of whether to approve the Advisory Contracts.
| 35 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited) (Continued)
FEES AND SERVICES PROVIDED FOR OTHER COMPARABLE FUNDS/ACCOUNTS MANAGED BY BGFA AND ITS AFFILIATES
The Board considered the Master Portfolios’ annual investment advisory fee rates under the Advisory Contracts in comparison to the investment advisory/management fee rates for other funds/accounts with substantially similar investment objectives and strategies for which BGFA (or its affiliate BGI) provides investment advisory/management services, including other funds registered under the 1940 Act, collective funds and separate accounts (collectively, the “Other Accounts”). The Board noted that BGFA had provided information distinguishing the level of services provided to the Other Accounts from the level of services provided to the Master Portfolios. In the context of the comparative fee analysis, the Board compared the nature and extent of services provided to the Master Portfolios to the nature and extent of services provided to the Other Accounts, including, among other things, the level of complexity in managing the Master Portfolios and the Other Accounts under differing regulatory requirements and client guidelines.
The Board noted that the investment advisory fee rate under the Advisory Contract for the Bond Index Master Portfolio was generally lower than or in line with the investment advisory fee rates for other funds registered under the 1940 Act and higher than the investment management fee rates for the collective funds. The Board noted that the investment advisory fee rate under the Advisory Contract for the S&P 500 Index Master Portfolio was generally within the ranges of the investment advisory/management fee rates for the Other Accounts. The Board further noted that any differences between the investment advisory fee rates for the Master Portfolios and the investment advisory/management fee rates for the Other Accounts appeared to be attributable to, among other things, the type and level of services provided and/or the asset levels of the Other Accounts. Based on this review, the Board determined that the investment advisory fee rates under the Advisory Contracts do not constitute fees that are so disproportionately large as to bear no reasonable relationship to the services rendered and that could not have been the product of arm’s-length bargaining, and concluded that the investment advisory fee rates under the Advisory Contracts are fair and reasonable.
OTHER BENEFITS TO BGFA AND/OR ITS AFFILIATES
The Board reviewed any ancillary revenue received by BGFA and/or its affiliates in connection with the services provided to MIP and the Master Portfolios by BGFA, such as any payment of revenue to BGI, MIP’s securities lending agent, for loaning any portfolio securities, payment of administration fees to BGI, MIP’s administrator, and payment of advisory fees and/or administration fees to BGFA and BGI in connection with any investments by the Master Portfolios in other funds for which BGFA provides investment advisory services and/or BGI provides administration services, as well as the associated voluntary waivers by BGFA and/or its affiliates of these fees, if any. The Board noted that BGFA does not use soft dollars or consider the value of research or other services that may be provided to BGFA (including its affiliates) in selecting brokers for portfolio transactions for the Master Portfolios. The Board further noted that during the past year no portfolio transactions were placed through a BGFA affiliate, as would be required to be reported to and considered by the Board pursuant to Rule 17e-1 under the 1940 Act. The Board concluded that any ancillary benefits would not be disadvantageous to the Master Portfolios’ interestholders.
Based on this analysis, the Board determined that the Advisory Contracts, including the investment advisory fee rates thereunder, are fair and reasonable in light of all relevant circumstances and concluded that it is in the best interest of the Master Portfolios and their interestholders to approve the Advisory Contracts for the coming year.
| 36 |
LIFEPATH RETIREMENT MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 36 |
LIFEPATH 2010 MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 37 |
LIFEPATH 2020 MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 38 |
LIFEPATH 2030 MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 39 |
LIFEPATH 2040 MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 40 |
LIFEPATH 2050 MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 41 |
Schedule of Investments (Unaudited)
June 30, 2009
| 42 |
ACTIVE STOCK MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 43 |
ACTIVE STOCK MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 44 |
ACTIVE STOCK MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 45 |
ACTIVE STOCK MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 46 |
ACTIVE STOCK MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 47 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 48 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 49 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 50 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 51 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 52 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 53 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 54 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 55 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 56 |
COREALPHA BOND MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 57 |
MASTER INVESTMENT PORTFOLIO
Portfolio Allocations (Unaudited)
June 30, 2009
| 58 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF ASSETS AND LIABILITIES (Unaudited)
June 30, 2009
| LifePath Retirement Master Portfolio |
LifePath 2010 Master Portfolio |
LifePath 2020 Master Portfolio |
LifePath 2030 Master Portfolio | |||||||||
| ASSETS |
||||||||||||
| Investments, at cost: |
||||||||||||
| Affiliated issuers (Note 2) |
$ | 107,527,973 | $ | 281,084,239 | $ | 720,568,865 | $ | 643,735,304 | ||||
| Total cost of investments |
$ | 107,527,973 | $ | 281,084,239 | $ | 720,568,865 | $ | 643,735,304 | ||||
| Investments, at fair value (including securities on |
||||||||||||
| Affiliated issuers (Note 2) |
$ | 101,867,206 | $ | 262,184,678 | $ | 651,779,006 | $ | 569,079,011 | ||||
| Affiliated Master Portfolios |
194,736,715 | 521,381,884 | 898,079,105 | 648,192,058 | ||||||||
| Total fair value of investments |
296,603,921 | 783,566,562 | 1,549,858,111 | 1,217,271,069 | ||||||||
| Receivables: |
||||||||||||
| Investment securities sold |
500,000 | 3,454,324 | 3,000,000 | — | ||||||||
| Dividends and interest |
3,677 | 8,466 | 24,555 | 19,200 | ||||||||
| Contributions |
51,215 | 1,200,000 | 584,793 | 401,449 | ||||||||
| Total Assets |
297,158,813 | 788,229,352 | 1,553,467,459 | 1,217,691,718 | ||||||||
| LIABILITIES |
||||||||||||
| Payables: |
||||||||||||
| Investment securities purchased |
616,471 | 3,347,383 | 4,280,100 | 1,368,594 | ||||||||
| Collateral for securities on loan (Note 4) |
24,697,136 | 48,374,925 | 147,789,085 | 114,642,103 | ||||||||
| Investment advisory fees (Note 2) |
3,829 | 11,844 | 17,423 | 10,724 | ||||||||
| Withdrawals |
500,000 | 3,454,325 | 3,000,000 | — | ||||||||
| Accrued expenses: |
||||||||||||
| Professional fees (Note 2) |
6,909 | 7,302 | 7,762 | 7,501 | ||||||||
| Independent trustees’ fees (Note 2) |
249 | 826 | 1,504 | 1,145 | ||||||||
| Total Liabilities |
25,824,594 | 55,196,605 | 155,095,874 | 116,030,067 | ||||||||
| NET ASSETS |
$ | 271,334,219 | $ | 733,032,747 | $ | 1,398,371,585 | $ | 1,101,661,651 | ||||
| (a) | Securities on loan with values of $24,188,507, $47,166,324, $143,738,965 and $111,905,678, respectively. See Note 4. |
The accompanying notes are an integral part of these financial statements.
| 59 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF ASSETS AND LIABILITIES (Unaudited) (Continued)
June 30, 2009
| LifePath 2040 Master Portfolio |
LifePath 2050 Master Portfolio | |||||
| ASSETS |
||||||
| Investments, at cost: |
||||||
| Affiliated issuers (Note 2) |
$ | 603,787,594 | $ | 9,559,262 | ||
| Total cost of investments |
$ | 603,787,594 | $ | 9,559,262 | ||
| Investments, at fair value (including securities on loan(a)) (Note 1): |
||||||
| Affiliated issuers (Note 2) |
$ | 527,299,563 | $ | 10,288,365 | ||
| Affiliated Master Portfolios |
471,204,724 | 8,351,822 | ||||
| Total fair value of investments |
998,504,287 | 18,640,187 | ||||
| Receivables: |
||||||
| Investment securities sold |
— | 632,651 | ||||
| Dividends and interest |
17,278 | 261 | ||||
| Due from investment adviser |
— | 873 | ||||
| Contributions |
555,782 | 476,017 | ||||
| Total Assets |
999,077,347 | 19,749,989 | ||||
| LIABILITIES |
||||||
| Payables: |
||||||
| Investment securities purchased |
1,684,561 | 802,590 | ||||
| Collateral for securities on loan (Note 4) |
136,362,499 | 1,008,268 | ||||
| Investment advisory fees (Note 2) |
6,100 | — | ||||
| Accrued expenses: |
||||||
| Professional fees (Note 2) |
7,301 | 6,699 | ||||
| Independent trustees’ fees (Note 2) |
867 | — | ||||
| Total Liabilities |
138,061,328 | 1,817,557 | ||||
| NET ASSETS |
$ | 861,016,019 | $ | 17,932,432 | ||
| (a) | Securities on loan with values of $133,186,472 and $984,098, respectively. See Note 4. |
The accompanying notes are an integral part of these financial statements.
| 60 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF ASSETS AND LIABILITIES (Unaudited) (Continued)
June 30, 2009
| Active Stock Master Portfolio |
CoreAlpha Bond Master Portfolio | |||||
| ASSETS |
||||||
| Investments, at cost: |
||||||
| Unaffiliated issuers |
$ | 1,521,095,240 | $ | 1,225,888,897 | ||
| Affiliated issuers (Note 2) |
318,867,538 | 249,986,962 | ||||
| Total cost of investments |
$ | 1,839,962,778 | $ | 1,475,875,859 | ||
| Investments in securities, at fair value (including securities on loan(a)) (Note 1): |
||||||
| Unaffiliated issuers |
$ | 1,409,305,899 | $ | 1,227,378,256 | ||
| Affiliated issuers (Note 2) |
318,867,538 | 249,986,962 | ||||
| Total fair value of investments |
1,728,173,437 | 1,477,365,218 | ||||
| Receivables: |
||||||
| Investment securities sold |
13,850,045 | 19,737,739 | ||||
| Dividends and interest |
1,705,898 | 9,807,991 | ||||
| Due from broker – swaps collateral |
— | 2,150,794 | ||||
| Collateral for open futures contracts |
— | 1,553,000 | ||||
| Open interest-rate swap contracts (Note 1) |
— | 448,075 | ||||
| Total Assets |
1,743,729,380 | 1,511,062,817 | ||||
| LIABILITIES |
||||||
| Payables: |
||||||
| Investment securities purchased |
21,044,667 | 184,454,141 | ||||
| Due to broker – variation margin |
205,055 | 121,578 | ||||
| Collateral for securities on loan (Note 4) |
283,070,055 | 13,017,995 | ||||
| Due to broker – swaps collateral |
— | 8,671,373 | ||||
| Credit default swaps at fair value(b) |
— | 1,528,745 | ||||
| Investment advisory fees (Note 2) |
231,696 | 256,698 | ||||
| Administration fees (Note 2) |
113,683 | 99,889 | ||||
| Accrued expenses: |
||||||
| Professional fees (Note 2) |
11,857 | 15,543 | ||||
| Independent trustees’ fees (Note 2) |
1,663 | 1,250 | ||||
| Total Liabilities |
304,678,676 | 208,167,212 | ||||
| NET ASSETS |
$ | 1,439,050,704 | $ | 1,302,895,605 | ||
| (a) | Securities on loan with values of $275,822,644 and $12,663,591, respectively. See Note 4. |
| (b) | Includes premiums paid and received in the amount of $2,327,364 and $5,141,029, respectively, for the CoreAlpha Bond Master Portfolio. |
The accompanying notes are an integral part of these financial statements.
| 61 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2009
| LifePath Retirement Master Portfolio |
LifePath 2010 Master Portfolio |
LifePath 2020 Master Portfolio |
LifePath 2030 Master Portfolio |
|||||||||||||
| NET INVESTMENT INCOME |
||||||||||||||||
| Dividends from affiliated issuers (Note 2) |
$ | 991,618 | $ | 2,813,464 | $ | 6,961,793 | $ | 6,534,715 | ||||||||
| Dividends allocated from Master Portfolios |
596,064 | 1,752,154 | 4,805,955 | 4,635,491 | ||||||||||||
| Interest from affiliated issuers (Note 2) |
2,835 | 5,073 | 10,577 | 9,037 | ||||||||||||
| Interest allocated from Master Portfolios |
3,301,883 | 8,678,351 | 10,440,070 | 5,093,218 | ||||||||||||
| Securities lending income from affiliated issuers (Note 2) |
24,476 | 65,834 | 152,420 | 130,571 | ||||||||||||
| Expenses allocated from Master Portfolios(a) |
(295,097 | ) | (796,165 | ) | (1,255,387 | ) | (869,003 | ) | ||||||||
| Total investment income |
4,621,779 | 12,518,711 | 21,115,428 | 15,534,029 | ||||||||||||
| EXPENSES (Note 2) |
||||||||||||||||
| Investment advisory fees |
430,617 | 1,179,754 | 2,121,873 | 1,642,110 | ||||||||||||
| Professional fees |
6,913 | 7,242 | 7,627 | 7,391 | ||||||||||||
| Independent trustees’ fees |
1,084 | 3,130 | 5,536 | 4,212 | ||||||||||||
| Total expenses |
438,614 | 1,190,126 | 2,135,036 | 1,653,713 | ||||||||||||
| Less expense reductions (Note 2) |
(410,417 | ) | (1,115,584 | ) | (2,030,361 | ) | (1,586,986 | ) | ||||||||
| Net expenses |
28,197 | 74,542 | 104,675 | 66,727 | ||||||||||||
| Net investment income |
4,593,582 | 12,444,169 | 21,010,753 | 15,467,302 | ||||||||||||
| REALIZED AND UNREALIZED GAIN (LOSS) |
||||||||||||||||
| Net realized gain from sale of investments in unaffiliated issuers |
16,518 | 42,363 | 202,616 | 63,424 | ||||||||||||
| Net realized loss from sale of investments in affiliated issuers (Note 2) |
(7,046,648 | ) | (22,988,138 | ) | (43,817,307 | ) | (40,998,952 | ) | ||||||||
| Net realized loss allocated from Master Portfolios |
(8,983,245 | ) | (26,569,957 | ) | (76,060,326 | ) | (74,331,387 | ) | ||||||||
| Net change in unrealized appreciation (depreciation) of investments |
11,553,909 | 34,722,011 | 77,886,334 | 75,627,352 | ||||||||||||
| Net change in unrealized appreciation (depreciation) allocated from Master Portfolios |
13,204,702 | 36,975,033 | 92,765,286 | 85,823,015 | ||||||||||||
| Net realized and unrealized gain |
8,745,236 | 22,181,312 | 50,976,603 | 46,183,452 | ||||||||||||
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 13,338,818 | $ | 34,625,481 | $ | 71,987,356 | $ | 61,650,754 | ||||||||
| (a) | Net of fee reductions of $14,503, $41,796, $105,211 and $98,074, respectively. |
The accompanying notes are an integral part of these financial statements.
| 62 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF OPERATIONS (Unaudited) (Continued)
For the Six Months Ended June 30, 2009
| LifePath 2040 Master Portfolio |
LifePath 2050 Master Portfolio |
|||||||
| NET INVESTMENT INCOME |
||||||||
| Dividends from affiliated issuers (Note 2) |
$ | 5,741,772 | $ | 107,971 | ||||
| Dividends allocated from Master Portfolios |
4,152,297 | 58,845 | ||||||
| Interest from affiliated issuers (Note 2) |
7,955 | 473 | ||||||
| Interest allocated from Master Portfolios |
2,032,270 | 5,741 | ||||||
| Securities lending income from affiliated issuers (Note 2) |
122,705 | 682 | ||||||
| Expenses allocated from Master Portfolios(a) |
(604,872 | ) | (7,146 | ) | ||||
| Total investment income |
11,452,127 | 166,566 | ||||||
| EXPENSES (Note 2) |
||||||||
| Investment advisory fees |
1,260,883 | 17,742 | ||||||
| Professional fees |
7,179 | 6,695 | ||||||
| Independent trustees’ fees |
3,189 | — | ||||||
| Total expenses |
1,271,251 | 24,437 | ||||||
| Less expense reductions (Note 2) |
(1,230,235 | ) | (23,703 | ) | ||||
| Net expenses |
41,016 | 734 | ||||||
| Net investment income |
11,411,111 | 165,832 | ||||||
| REALIZED AND UNREALIZED GAIN (LOSS) |
||||||||
| Net realized gain from sale of investments in unaffiliated issuers |
41,468 | — | ||||||
| Net realized loss from sale of investments in affiliated issuers (Note 2) |
(32,171,277 | ) | (653,181 | ) | ||||
| Net realized loss allocated from Master Portfolios |
(66,880,752 | ) | (935,343 | ) | ||||
| Net change in unrealized appreciation (depreciation) of investments |
63,641,640 | 1,563,354 | ||||||
| Net change in unrealized appreciation (depreciation) allocated from Master Portfolios |
73,968,118 | 1,274,628 | ||||||
| Net realized and unrealized gain |
38,599,197 | 1,249,458 | ||||||
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 50,010,308 | $ | 1,415,290 | ||||
| (a) | Net of fee reductions of $86,077 and $1,230, respectively. |
The accompanying notes are an integral part of these financial statements.
| 63 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF OPERATIONS (Unaudited) (Continued)
For the Six Months Ended June 30, 2009
| Active Stock Master Portfolio |
CoreAlpha Bond Master Portfolio |
|||||||
| NET INVESTMENT INCOME |
||||||||
| Dividends from unaffiliated issuers(a) |
$ | 16,000,803 | $ | — | ||||
| Interest from unaffiliated issuers |
3,907 | 28,186,604 | ||||||
| Interest from affiliated issuers (Note 2) |
79,145 | 429,163 | ||||||
| Securities lending income from affiliated issuers (Note 2) |
786,296 | 66,421 | ||||||
| Total investment income |
16,870,151 | 28,682,188 | ||||||
| EXPENSES |
||||||||
| Investment advisory fees (Note 2) |
1,544,816 | 1,405,379 | ||||||
| Administration fees (Note 2) |
617,927 | 562,152 | ||||||
| Professional fees (Note 2) |
11,716 | 15,440 | ||||||
| Independent trustees’ fees (Note 2) |
5,715 | 5,056 | ||||||
| Interest expense on securities sold short |
— | 6,359 | ||||||
| Total expenses |
2,180,174 | 1,994,386 | ||||||
| Less expense reductions (Note 2) |
(326,394 | ) | (20,496 | ) | ||||
| Net expenses |
1,853,780 | 1,973,890 | ||||||
| Net investment income |
15,016,371 | 26,708,298 | ||||||
| REALIZED AND UNREALIZED GAIN (LOSS) |
||||||||
| Net realized loss from sale of investments in unaffiliated issuers |
(262,131,511 | ) | (102,475 | ) | ||||
| Net realized gain (loss) on futures contracts |
2,032,558 | (6,931,139 | ) | |||||
| Net realized gain on swap contracts |
— | 13,371,553 | ||||||
| Net change in unrealized appreciation (depreciation) of investments |
285,200,055 | 29,769,937 | ||||||
| Net change in unrealized appreciation (depreciation) of futures contracts |
(391,566 | ) | 1,215,640 | |||||
| Net change in unrealized appreciation (depreciation) of swap contracts |
— | (11,783,281 | ) | |||||
| Net realized and unrealized gain |
24,709,536 | 25,540,235 | ||||||
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 39,725,907 | $ | 52,248,533 | ||||
| (a) | Net of foreign withholding tax of $3,574 and $—, respectively. |
The accompanying notes are an integral part of these financial statements.
| 64 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
| LifePath Retirement Master Portfolio | LifePath 2010 Master Portfolio | |||||||||||||||
| For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
|||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||
| Operations: |
||||||||||||||||
| Net investment income |
$ | 4,593,582 | $ | 11,626,514 | $ | 12,444,169 | $ | 31,740,053 | ||||||||
| Net realized loss |
(16,013,375 | ) | (14,187,053 | ) | (49,515,732 | ) | (35,390,983 | ) | ||||||||
| Net change in unrealized appreciation (depreciation) |
24,758,611 | (44,596,915 | ) | 71,697,044 | (148,126,149 | ) | ||||||||||
| Net increase (decrease) in net assets resulting from operations |
13,338,818 | (47,157,454 | ) | 34,625,481 | (151,777,079 | ) | ||||||||||
| Interestholder transactions: |
||||||||||||||||
| Contributions |
47,095,181 | 123,355,314 | 89,644,109 | 259,286,260 | ||||||||||||
| Withdrawals |
(42,703,398 | ) | (154,327,624 | ) | (100,189,148 | ) | (396,966,875 | ) | ||||||||
| Net increase (decrease) in net assets resulting from interestholder transactions |
4,391,783 | (30,972,310 | ) | (10,545,039 | ) | (137,680,615 | ) | |||||||||
| Increase (decrease) in net assets |
17,730,601 | (78,129,764 | ) | 24,080,442 | (289,457,694 | ) | ||||||||||
| NET ASSETS: |
||||||||||||||||
| Beginning of period |
253,603,618 | 331,733,382 | 708,952,305 | 998,409,999 | ||||||||||||
| End of period |
$ | 271,334,219 | $ | 253,603,618 | $ | 733,032,747 | $ | 708,952,305 | ||||||||
| LifePath 2020 Master Portfolio | LifePath 2030 Master Portfolio | |||||||||||||||
| For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
|||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||
| Operations: |
||||||||||||||||
| Net investment income |
$ | 21,010,753 | $ | 50,433,715 | $ | 15,467,302 | $ | 34,121,231 | ||||||||
| Net realized loss |
(119,675,017 | ) | (98,148,224 | ) | (115,266,915 | ) | (98,691,682 | ) | ||||||||
| Net change in unrealized appreciation (depreciation) |
170,651,620 | (381,110,283 | ) | 161,450,367 | (353,104,158 | ) | ||||||||||
| Net increase (decrease) in net assets resulting from operations |
71,987,356 | (428,824,792 | ) | 61,650,754 | (417,674,609 | ) | ||||||||||
| Interestholder transactions: |
||||||||||||||||
| Contributions |
211,039,230 | 466,911,021 | 181,097,794 | 401,789,907 | ||||||||||||
| Withdrawals |
(130,325,813 | ) | (620,303,397 | ) | (93,267,931 | ) | (425,112,568 | ) | ||||||||
| Net increase (decrease) in net assets resulting from interestholder transactions |
80,713,417 | (153,392,376 | ) | 87,829,863 | (23,322,661 | ) | ||||||||||
| Increase (decrease) in net assets |
152,700,773 | (582,217,168 | ) | 149,480,617 | (440,997,270 | ) | ||||||||||
| NET ASSETS: |
||||||||||||||||
| Beginning of period |
1,245,670,812 | 1,827,887,980 | 952,181,034 | 1,393,178,304 | ||||||||||||
| End of period |
$ | 1,398,371,585 | $ | 1,245,670,812 | $ | 1,101,661,651 | $ | 952,181,034 | ||||||||
The accompanying notes are an integral part of these financial statements.
| 65 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
| LifePath 2040 Master Portfolio | LifePath 2050 Master Portfolio | |||||||||||||||
| For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
For the six months ended June 30, 2009 (Unaudited) |
For the period June 30, 2008(a) to December 31, 2008 |
|||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||
| Operations: |
||||||||||||||||
| Net investment income |
$ | 11,411,111 | $ | 22,769,576 | $ | 165,832 | $ | 66,878 | ||||||||
| Net realized loss |
(99,010,561 | ) | (90,735,051 | ) | (1,588,524 | ) | (235,891 | ) | ||||||||
| Net change in unrealized appreciation (depreciation) |
137,609,758 | (302,802,465 | ) | 2,837,982 | (1,363,124 | ) | ||||||||||
| Net increase (decrease) in net assets resulting from operations |
50,010,308 | (370,767,940 | ) | 1,415,290 | (1,532,137 | ) | ||||||||||
| Interestholder transactions: |
||||||||||||||||
| Contributions |
165,015,517 | 353,484,261 | 10,180,184 | 8,619,796 | ||||||||||||
| Withdrawals |
(74,549,143 | ) | (285,117,887 | ) | (558,342 | ) | (192,359 | ) | ||||||||
| Net increase in net assets resulting from interestholder transactions |
90,466,374 | 68,366,374 | 9,621,842 | 8,427,437 | ||||||||||||
| Increase (decrease) in net assets |
140,476,682 | (302,401,566 | ) | 11,037,132 | 6,895,300 | |||||||||||
| NET ASSETS: |
||||||||||||||||
| Beginning of period |
720,539,337 | 1,022,940,903 | 6,895,300 | — | ||||||||||||
| End of period |
$ | 861,016,019 | $ | 720,539,337 | $ | 17,932,432 | $ | 6,895,300 | ||||||||
| Active Stock Master Portfolio | CoreAlpha Bond Master Portfolio | |||||||||||||||
| For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
|||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||
| Operations: |
||||||||||||||||
| Net investment income |
$ | 15,016,371 | $ | 32,369,505 | $ | 26,708,298 | $ | 62,784,467 | ||||||||
| Net realized gain (loss) |
(260,098,953 | ) | (256,059,676 | ) | 6,337,939 | (4,838,876 | ) | |||||||||
| Net change in unrealized appreciation (depreciation) |
284,808,489 | (471,381,523 | ) | 19,202,296 | (18,428,398 | ) | ||||||||||
| Net increase (decrease) in net assets resulting from operations |
39,725,907 | (695,071,694 | ) | 52,248,533 | 39,517,193 | |||||||||||
| Interestholder transactions: |
||||||||||||||||
| Contributions |
218,720,751 | 459,317,337 | 288,714,012 | 383,150,603 | ||||||||||||
| Withdrawals |
(70,382,768 | ) | (598,773,276 | ) | (153,969,471 | ) | (786,653,367 | ) | ||||||||
| Net increase (decrease) in net assets resulting from interestholder transactions |
148,337,983 | (139,455,939 | ) | 134,744,541 | (403,502,764 | ) | ||||||||||
| Increase (decrease) in net assets |
188,063,890 | (834,527,633 | ) | 186,993,074 | (363,985,571 | ) | ||||||||||
| NET ASSETS: |
||||||||||||||||
| Beginning of period |
1,250,986,814 | 2,085,514,447 | 1,115,902,531 | 1,479,888,102 | ||||||||||||
| End of period |
$ | 1,439,050,704 | $ | 1,250,986,814 | $ | 1,302,895,605 | $ | 1,115,902,531 | ||||||||
| (a) | Commencement of operations. |
The accompanying notes are an integral part of these financial statements.
| 66 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited)
Master Investment Portfolio (“MIP”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end series management investment company organized as a Delaware statutory trust.
These financial statements relate only to the LifePath Retirement, LifePath 2010, LifePath 2020, LifePath 2030, LifePath 2040, LifePath 2050, Active Stock and CoreAlpha Bond Master Portfolios (each, a “Master Portfolio,” collectively, the “Master Portfolios”).
Each of the LifePath Retirement, LifePath 2010, LifePath 2020, LifePath 2030, LifePath 2040 and LifePath 2050 Master Portfolios (each, a “LifePath Master Portfolio,” collectively, the “LifePath Master Portfolios”) seeks to achieve its investment objective by investing in a combination of equity securities, bond and money market funds (the “Underlying Funds”) in proportions suggested by its own comprehensive investment strategy. The Underlying Funds are advised by Barclays Global Fund Advisors (“BGFA”), and include the Active Stock and CoreAlpha Bond Master Portfolios, the Barclays Global Investors Funds Institutional Money Market Fund and exchange-traded funds in the iShares® family of funds.
Pursuant to MIP’s organizational documents, the Master Portfolios’ officers and trustees are indemnified against certain liabilities that may arise out of the performance of their duties to the Master Portfolios. Additionally, in the normal course of business, the Master Portfolios enter into contracts with service providers that contain general indemnification clauses. The Master Portfolios’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Master Portfolios that have not yet occurred.
| 1. | SIGNIFICANT ACCOUNTING POLICIES |
The following significant accounting policies are consistently followed by MIP in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
SECURITY VALUATION
The securities and other assets of each Master Portfolio are valued pursuant to the pricing policy and procedures approved by the Board of Trustees of MIP (the “Board”). The Master Portfolios are subject to the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Inputs may be based on independent market data (“observable inputs”) or they may be internally developed (“unobservable inputs”). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are as follows:
| • | Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Master Portfolio has the ability to access at the measurement date (a “Level 1 Price”); |
| • | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (a “Level 2 Price”); |
| • | Level 3 – Inputs that are unobservable for the asset or liability (a “Level 3 Price”). |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3 of the fair value hierarchy.
| 67 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
The level of a value determined for a financial instrument within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement in its entirety. The categorization of a value determined for a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Master Portfolios’ perceived risk of that instrument.
Investments whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 Prices, include active listed equities and certain U.S. government securities. The Master Portfolios do not adjust the quoted price for such instruments, even in situations where the Master Portfolios hold a large position and a sale could reasonably impact the quoted price.
Investments that trade in markets that are not considered to be active, but whose values are based on inputs such as quoted market prices, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs are classified within Level 2. These generally include certain U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage products, less liquid listed equities, and state, municipal and provincial obligations. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.
Investments whose values are classified as Level 3 Prices have significant unobservable inputs, as they may trade infrequently or not at all. Investments whose values are classified as Level 3 Prices may include unlisted securities related to corporate actions, securities whose trading have been suspended or which have been de-listed from their primary trading exchange, less liquid corporate debt securities (including distressed debt instruments), collateralized debt obligations, and less liquid mortgage securities (backed by either commercial or residential real estate). When observable prices are not available for these securities, the Master Portfolios use one or more valuation techniques (e.g., the market approach or the income approach) for which sufficient and reliable data is available. Within Level 3 of the fair value hierarchy, the use of the market approach generally consists of using comparable market transactions, while the use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
The inputs used by the Master Portfolios in estimating the value of Level 3 Prices may include the original transaction price, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3 Prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Master Portfolios in the absence of market information. The fair value measurement of Level 3 Prices does not include transaction costs that may have been capitalized as part of the security’s cost basis. Assumptions used by the Master Portfolios due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Master Portfolios’ results of operations.
Derivative instruments can be exchange-traded or privately negotiated over-the-counter (“OTC”). Exchange-traded derivatives, such as futures contracts and exchange-traded option contracts, are typically classified within Level 1 of the fair value hierarchy.
OTC derivatives, including forwards, credit default swaps, total return swaps, and interest rate swaps, are valued by the CoreAlpha Bond Master Portfolio using observable inputs, such as quotations received from the counterparty, dealers or brokers, whenever available and considered reliable. In instances where models are used, the value of an OTC derivative depends upon the contractual terms of, and specific risks inherent in the instrument as well as the availability and reliability of observable inputs. Such inputs may include market prices for reference securities, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. Certain OTC derivatives, such as generic forwards, swaps and options, have inputs which can generally be corroborated by market data and are therefore classified within Level 2. In circumstances where the CoreAlpha Bond Master Portfolio has used a quotation provided by a counterparty or dealer for an OTC derivative, but cannot verify the model value through alternative sources, it is possible that a different valuation model could produce a materially different estimate of fair value.
Those OTC derivatives that have less liquidity or for which inputs are unobservable are classified within Level 3 Prices. While the valuations of less liquid OTC derivatives may utilize some Level 1 and/or Level 2 inputs, they may also include other unobservable inputs which are considered significant to the fair value determination. At each measurement date, the CoreAlpha Bond Master Portfolio updates the Level 1 and Level 2 inputs to reflect observable inputs, though the resulting gains and losses are reflected within Level 3 Prices due to the significance of the unobservable inputs.
| 68 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
Fair value pricing could result in a difference between the prices used to calculate a Master Portfolio’s net assets and the prices used by the Master Portfolio’s underlying index, which in turn, could result in a difference between the Master Portfolio’s performance and the performance of the Master Portfolio’s underlying index.
The following tables summarize the values of each of the Master Portfolios’ investments according to their fair value hierarchy as of June 30, 2009. The breakdown of the Active Stock Master Portfolio’s investments into major categories is disclosed in its Schedule of Investments.
| Investments in Securities | ||||||||||||
| Master Portfolio | Level 1 | Level 2 | Level 3 | Total | ||||||||
| LifePath Retirement |
||||||||||||
| Master Portfolios |
$ | — | $ | 194,736,715 | $ | — | $ | 194,736,715 | ||||
| Exchange-Traded Funds |
76,286,434 | — | — | 76,286,434 | ||||||||
| Short-Term Investments |
25,580,772 | — | — | 25,580,772 | ||||||||
| $ | 101,867,206 | $ | 194,736,715 | $ | — | $ | 296,603,921 | |||||
| LifePath 2010 |
||||||||||||
| Master Portfolios |
$ | — | $ | 521,381,884 | $ | — | $ | 521,381,884 | ||||
| Exchange-Traded Funds |
212,225,842 | — | — | 212,225,842 | ||||||||
| Short-Term Investments |
49,958,836 | — | — | 49,958,836 | ||||||||
| $ | 262,184,678 | $ | 521,381,884 | $ | — | $ | 783,566,562 | |||||
| LifePath 2020 |
||||||||||||
| Master Portfolios |
$ | — | $ | 898,079,105 | $ | — | $ | 898,079,105 | ||||
| Exchange-Traded Funds |
499,985,154 | — | — | 499,985,154 | ||||||||
| Short-Term Investments |
151,793,852 | — | — | 151,793,852 | ||||||||
| $ | 651,779,006 | $ | 898,079,105 | $ | — | $ | 1,549,858,111 | |||||
| LifePath 2030 |
||||||||||||
| Master Portfolios |
$ | — | $ | 648,192,058 | $ | — | $ | 648,192,058 | ||||
| Exchange-Traded Funds |
451,252,652 | — | — | 451,252,652 | ||||||||
| Short-Term Investments |
117,826,359 | — | — | 117,826,359 | ||||||||
| $ | 569,079,011 | $ | 648,192,058 | $ | — | $ | 1,217,271,069 | |||||
| LifePath 2040 |
||||||||||||
| Master Portfolios |
$ | — | $ | 471,204,724 | $ | — | $ | 471,204,724 | ||||
| Exchange-Traded Funds |
388,071,772 | — | — | 388,071,772 | ||||||||
| Short-Term Investments |
139,227,791 | — | — | 139,227,791 | ||||||||
| $ | 527,299,563 | $ | 471,204,724 | $ | — | $ | 998,504,287 | |||||
| LifePath 2050 |
||||||||||||
| Master Portfolios |
$ | — | $ | 8,351,822 | $ | — | $ | 8,351,822 | ||||
| Exchange-Traded Funds |
9,104,346 | — | — | 9,104,346 | ||||||||
| Short-Term Investments |
1,184,019 | — | — | 1,184,019 | ||||||||
| $ | 10,288,365 | $ | 8,351,822 | $ | — | $ | 18,640,187 | |||||
| Active Stock |
$ | 1,728,173,437 | $ | — | $ | — | $ | 1,728,173,437 | ||||
| CoreAlpha Bond |
||||||||||||
| Corporate Bonds & Notes |
$ | — | $ | 452,751,080 | $ | — | $ | 452,751,080 | ||||
| Asset-Backed Securities |
— | 83,167,667 | 3,523,010 | 86,690,677 | ||||||||
| Collateralized Mortgage Obligations |
— | 71,079,350 | 7,038,932 | 78,118,282 | ||||||||
| U.S. Government & Agency Obligations |
2,316,323 | 596,742,519 | 10,759,375 | 609,818,217 | ||||||||
| Short-Term Investments |
249,986,962 | — | — | 249,986,962 | ||||||||
| $ | 252,303,285 | $ | 1,203,740,616 | $ | 21,321,317 | $ | 1,477,365,218 | |||||
| 69 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Other Financial Instruments(a) | |||||||||||||||
| Master Portfolio | Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Active Stock |
$ | (12,253 | ) | $ | — | $ | — | $ | (12,253 | ) | |||||
| CoreAlpha Bond |
1,121,169 | (1,166,252 | ) | — | (45,083 | ) | |||||||||
| (a) | Other financial instruments include futures and swap contracts, which are valued at the unrealized appreciation (depreciation) on the financial instrument. |
The following table provides the reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value of the CoreAlpha Bond Master Portfolio for the six months ended June 30, 2009:
| Balance at Beginning of Period |
(Amortized Premiums) Accreted Discounts |
Realized Gain (Loss) and Change in Unrealized Appreciation (Depreciation) |
Net Purchases (Sales) |
Net Transfers in (out) |
Balance at End of Period |
Net Change in Unrealized Appreciation (Depreciation) from Investments Still Held at End of Period | ||||||||||||||||||
| Corporate Bonds & Notes |
$ | 2,531,250 | $ | — | $ | 114,375 | $ | (2,441,875 | ) | $ | (203,750 | ) | $ | — | $ | — | ||||||||
| Asset-Backed Securities |
2,668,170 | — | — | 3,523,010 | (2,668,170 | ) | 3,523,010 | — | ||||||||||||||||
| Collateralized Mortgage Obligations |
21,774,832 | — | (265,275 | ) | (2,951,421 | ) | (11,519,204 | ) | 7,038,932 | 597,294 | ||||||||||||||
| U.S. Government & Agency Obligations |
— | — | 26,563 | 10,732,812 | — | 10,759,375 | 26,563 | |||||||||||||||||
| $ | 26,974,252 | $ | — | $ | (124,337 | ) | $ | 8,862,526 | $ | (14,391,124 | ) | $ | 21,321,317 | $ | 623,857 | |||||||||
The value of a LifePath Master Portfolio’s investment in each of the Active Stock Master Portfolio and CoreAlpha Bond Master Portfolio reflects that LifePath Master Portfolio’s proportionate interest in the net assets of that Master Portfolio. As of June 30, 2009, the interests of the Active Stock and CoreAlpha Bond Master Portfolios held by each LifePath Master Portfolio were as follows:
| Master Portfolio | Active Stock Master Portfolio |
CoreAlpha Bond |
||||
| LifePath Retirement |
3.58 | % | 10.99 | % | ||
| LifePath 2010 |
10.25 | 28.70 | ||||
| LifePath 2020 |
29.75 | 36.07 | ||||
| LifePath 2030 |
29.19 | 17.51 | ||||
| LifePath 2040 |
26.66 | 6.72 | ||||
| LifePath 2050 |
0.57 | 0.01 |
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for on trade date. Dividend income is recognized on the ex-dividend date, net of any foreign tax withheld at source, and interest income is accrued daily. Non-cash dividends received by the Active Stock Master Portfolio in the form of stock in an elective dividend, if any, are recorded as dividend income at fair value. Distributions received by the LifePath and Active Stock Master Portfolios may include a return of capital that is estimated by management. Such amounts are recorded as a reduction of the cost of investments or reclassified to capital gains. Realized gains and losses on investment transactions are determined using the specific identification method. The Master Portfolios amortize premiums and accrete discounts on debt securities purchased using a constant yield to maturity method.
Each LifePath Master Portfolio records daily its proportionate interest in the net investment income and realized and unrealized capital gains and losses of the Active Stock and CoreAlpha Bond Master Portfolios. In addition, each LifePath Master Portfolio accrues its own expenses.
| 70 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
FEDERAL INCOME TAXES
In general, MIP believes that each Master Portfolio has and will continue to be operated in a manner so as to qualify it as a non-publicly traded partnership for federal income tax purposes. Provided that each such Master Portfolio so qualifies, it will not be subject to any federal income tax on its income and gains (if any). However, each interestholder in such a Master Portfolio will be taxed on its distributive share of the Master Portfolio’s taxable income in determining its federal income tax liability. As a non-publicly traded partnership for federal income tax purposes, each such Master Portfolio will be deemed to have “passed through” to its interestholders any interest, dividends, gains or losses of the Master Portfolio for such purposes. The determination of such share will be made in accordance with the Internal Revenue Code of 1986, as amended (the “Code”), and regulations promulgated thereunder.
It is intended that each Master Portfolio’s assets, income and distributions will be managed in such a way that an entity electing and qualifying as a “regulated investment company” under the Code can continue to so qualify by investing substantially all of its assets through the Master Portfolio, provided that the regulated investment company meets other requirements for such qualifications not within the control of the Master Portfolio (e.g., distributing at least 90% of the regulated investment company’s “investment company taxable income” annually).
As of June 30, 2009, the gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes for the Master Portfolios were as follows:
| Master Portfolio | Tax Cost | Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Net Unrealized Appreciation (Depreciation) |
||||||||||
| LifePath Retirement(a) |
$ | 111,352,238 | $ | — | $ | (9,485,032 | ) | $ | (9,485,032 | ) | ||||
| LifePath 2010(a) |
290,284,402 | — | (28,099,724 | ) | (28,099,724 | ) | ||||||||
| LifePath 2020(a) |
744,465,393 | — | (92,686,387 | ) | (92,686,387 | ) | ||||||||
| LifePath 2030(a) |
670,674,032 | — | (101,595,021 | ) | (101,595,021 | ) | ||||||||
| LifePath 2040(a) |
633,368,531 | — | (106,068,968 | ) | (106,068,968 | ) | ||||||||
| LifePath 2050(a) |
10,208,658 | 79,707 | — | 79,707 | ||||||||||
| Active Stock |
2,011,315,188 | 62,998,460 | (346,140,211 | ) | (283,141,751 | ) | ||||||||
| CoreAlpha Bond |
1,475,924,755 | 31,179,801 | (29,739,338 | ) | 1,440,463 | |||||||||
| (a) | Tax cost information does not include investments in the underlying Master Portfolios. |
Management has reviewed the tax positions as of June 30, 2009, inclusive of the prior three open tax return years and has determined that no provision for income tax is required in the Master Portfolios’ financial statements.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2009, the Master Portfolios adopted FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires enhanced financial statement disclosures that enable investors to understand how and why the Master Portfolios use derivatives, how derivatives are accounted for, and how the derivative instruments affect the Master Portfolios’ results of operations and financial positions.
The following table shows the fair values of derivatives not accounted for as hedging instruments under FASB Statement No. 133, by risk exposure category, on the Statement of Assets and Liabilities for the Master Portfolios as of June 30, 2009:
| Asset Derivatives |
Liability Derivatives |
|||||||||
| Master Portfolio | Location on Statement of Assets and Liabilities |
Fair Value |
Location on Statement of Assets and Liabilities |
Fair Value |
||||||
| Active Stock |
Receivables due from broker – variation margin |
$ | — | Payables due to broker – variation margin |
$205,055 | (a) | ||||
| 71 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Asset Derivatives |
Liability Derivatives |
||||||||||
| Master Portfolio | Location on Statement of Assets and Liabilities |
Fair Value |
Location on Statement of Assets and Liabilities |
Fair Value |
|||||||
| CoreAlpha Bond |
Receivables for open interest-rate swap contracts |
$ | 448,075 | Payables due to broker – variation margin |
$ | 121,578 | (a) | ||||
| Credit contracts |
Credit default swaps at fair value | — | Payables for credit default swaps at fair value | 1,528,745 | |||||||
| $ | 448,075 | $ | 1,650,323 | ||||||||
| (a) | Cumulative appreciation (depreciation) on futures contracts for the reporting period is disclosed in the Statement of Operations. Variation margin disclosed on the Statement of Assets and Liabilities is for the last day of the period. |
The following table shows the effect of derivatives not accounted for as hedging instruments under FASB Statement No. 133, by risk exposure category, on the Statement of Operations for the Master Portfolios as of June 30, 2009:
| Master Portfolio | Location of Gain (Loss) on Statement of Operations |
Realized Gain (Loss) on Statement of Operations |
Change in Unrealized Gain (Loss) on Statement of Operations |
||||||
| Active Stock |
Net realized gain (loss) on futures contracts/Net change in unrealized appreciation (depreciation) of futures contracts |
$ | 2,032,558 | $ | (391,566 | ) | |||
| CoreAlpha Bond |
Net realized gain (loss) on futures and swap contracts/Net change in unrealized appreciation (depreciation) of futures and swap contracts |
$ | 4,441,797 | $ | (9,200,398 | ) | |||
| Credit contracts |
Net realized gain (loss) on swap contracts/Net change in unrealized appreciation (depreciation) of swap contracts | 1,998,617 | (1,367,243 | ) | |||||
| $ | 6,440,414 | $ | (10,567,641 | ) | |||||
FUTURES CONTRACTS
The Active Stock and CoreAlpha Bond Master Portfolios are subject to equity price risk or interest-rate risk in the normal course of pursuing their investment objectives. The Master Portfolios may enter into futures contracts as substitutes for comparable positions in underlying securities, to position the portfolio for anticipated changes in markets, or to offset a potential decline in the value of other holdings. A futures contract is an agreement between two parties, a buyer and a seller, to exchange a particular commodity or financial instrument at a specific price on a specific date in the future. Upon entering into a futures contract, the Master Portfolio is required to pledge to the broker and hold in a segregated account, an amount of cash, U.S. government securities or other high-quality debt and equity securities equal to the minimum “initial margin” requirements of the exchange. Pursuant to the contract, the Master Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as “variation margin” and are recorded by the Master Portfolio as receivables or payables in the accompanying Statements of Assets and Liabilities. When the contract is closed, the Master Portfolio records a “realized
| 72 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
gain (loss) on futures contracts” in its Statement of Operations, equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risks of entering into futures contracts include the risk of default by the counterparty, imperfect correlation between the price of the futures contract and movements in the price of the underlying asset and the possibility that there may be an illiquid market. The amount at risk for futures contracts may exceed the amount reflected in the financial statements. Futures contracts are standardized and traded on exchanges, where the exchange serves as the ultimate counterparty for all contracts. Consequently, the primary credit risk on futures contracts is the creditworthiness of the exchange.
As of June 30, 2009, the Active Stock and CoreAlpha Bond Master Portfolios have pledged to brokers U.S. Treasury Bills and U.S. Treasury Bonds and Notes with face amounts of $3,950,000 and $2,050,000, respectively, for initial margin requirements on outstanding futures contracts.
SWAP TRANSACTIONS
The CoreAlpha Bond Master Portfolio may enter into swaps, including, but not limited to, interest-rate, index and credit default swaps as well as structured credit instruments, including but not limited to ABX (an index of asset-backed securities), CMBX (an index of commercial mortgage-backed securities), and CDX (an index of credit default securities) indexes, which are comprised of credit default swaps. Swap transactions generally do not involve the delivery of securities or other underlying assets or principal. If the Master Portfolio enters into a swap transaction, cash or securities may be posted by or to the Master Portfolio as collateral in accordance with the terms of the swap agreement. If there is a default by the other party to such a transaction, the Master Portfolio will have contractual remedies pursuant to the agreements related to the transaction. Upon early termination of a swap agreement due to an event of default or termination event with respect to the Master Portfolio or other party, the risk of loss to the Master Portfolio would generally be limited to the net amount of payments that the Master Portfolio is contractually obligated to make if, after exercising in accordance with the swap agreement the rights with respect to early close-out of the swap transaction(s), it is determined that the Master Portfolio would be obligated to make a net payment with respect to the swap transaction(s). In the event the other party to the swap transaction(s) were to owe a net amount to the Master Portfolio upon an early termination of the swap agreement as described above, the Master Portfolio could be exposed to the risk of loss in the event that any collateral held by the Master Portfolio would be insufficient. The use of swaps is a highly specialized activity that involves investment techniques and risks different from those associated with conventional securities transactions. The Master Portfolio maintains liquid assets in connection with transactions in swaps.
The Master Portfolio is subject to interest-rate risk in the normal course of pursuing its investment objectives. Because the Master Portfolio holds fixed-rate bonds, the value of these bonds may decrease if interest-rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, the Master Portfolio may enter into interest-rate swaps. Interest-rate swaps involve the exchange by the Master Portfolio with another party of their respective commitments to pay or receive interest (for example, an exchange of floating-rate payments for fixed-rate payments). The exchange of commitments can involve payments to be made in the same currency or in different currencies. If there is a default by the other party to such a transaction, the Master Portfolio will have contractual remedies pursuant to the agreements related to the transaction. The Master Portfolio’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from/paid to the counterparty over the contract’s remaining life, to the extent that that amount is positive. This risk may be mitigated by having a master netting arrangement between the Master Portfolio and the counterparty and by the posting of collateral by the counterparty to the Master Portfolio to cover the Master Portfolio’s exposure to the counterparty. Details of interest-rate swaps, if any, held by the Master Portfolio as of June 30, 2009 are included in its Schedule of Investments.
The Master Portfolio is subject to credit risk in the normal course of pursuing its investment objectives. The Master Portfolio may enter into credit default swaps to manage its exposure to the market or certain sectors of the market, to reduce its risk exposure to defaults and sovereign issuers, or to create exposure to corporate or sovereign issuers to which it is not otherwise exposed. A credit default swap is a contract between two parties which transfers the credit risk of an entity (the “reference entity”) for a defined period whereby if there is a Credit Event then the seller of protection pays a predetermined amount to the buyer of protection. A “Credit Event” is commonly defined as the reference entity’s (a) failing to pay principal or interest on time, (b) restructuring its debt, (c) accelerating its debt, or (d) entering bankruptcy. The buyer of credit protection pays a premium to the seller of credit protection until the earlier of a Credit Event or the scheduled termination date of the credit default swap. Credit default swaps can be used to implement BGFA’s
| 73 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
view that a particular credit, or group of credits, will experience credit improvement. In the case of expected credit improvement, the Master Portfolio may sell credit default protection in which it receives a premium to take on the risk. In such an instance, the obligation of the Master Portfolio to make payments upon the occurrence of a Credit Event creates leveraged exposure to the credit risk of the referenced entity. The Master Portfolio may also buy credit default protection with respect to a reference entity if, in the judgment of BGFA, there is a high likelihood of credit deterioration. In such instance, the Master Portfolio will pay a premium regardless of whether there is a Credit Event. The credit default swap market in high yield securities is a rapidly evolving market compared to the credit default swap market for more seasoned and liquid investment grade securities creating the risk that the newer markets will be less liquid and it may be difficult to exit or enter into a particular transaction. In the event of counterparty default, the Master Portfolio would have rights solely against the counterparty and will have no recourse against the reference entity as a result of the counterparty default. The Master Portfolio’s maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the contract. This risk may be mitigated by having a master netting arrangement between the Master Portfolio and the counterparty and by the posting of collateral by the counterparty to the Master Portfolio to cover the Master Portfolio’s exposure to the counterparty. Details of credit default swaps held by the Master Portfolio as of June 30, 2009 are included in its Schedule of Investments.
In a cash-settled credit default swap where the Master Portfolio is buying protection, the Master Portfolio makes a stream of fixed payments to the counterparty in exchange for the right to receive compensation for the loss in market value of the designated obligation that is being hedged, in the event the reference entity experiences a Credit Event. In a cash-settled credit default swap where the Master Portfolio is selling protection, the Master Portfolio would be compensated for assuming the transfer of credit risk from the counterparty by receiving a fixed premium over the life of the transaction.
Alternatively, if the transaction were to be physically settled, the counterparty, as seller of protection, would agree that if a specified Credit Event occurs, it would take delivery of an obligation specified by the Master Portfolio and pay to the Master Portfolio an amount equal to the notional amount of the transaction. In exchange for this risk protection, the Master Portfolio would pay the counterparty a fixed premium over the specified life of the credit default swap. In instances where the Master Portfolio sells protection, the Master Portfolio would be compensated for assuming the transfer of credit risk from the counterparty by receiving a fixed premium over the life of the credit default swap. The Master Portfolio would be required to compensate the counterparty for the loss in market value of the designated obligation if the reference entity suffered a Credit Event and the credit default swap were to be cash settled. In the event that the transaction were to be physically settled on the occurrence of a specified Credit Event with respect to the reference entity, the Master Portfolio would be required to take physical delivery of an obligation specified at the time of the occurrence of the relevant Credit Event and would pay to the counterparty an amount equal to the notional amount of the transaction.
In an attempt to increase the liquidity of credit default swaps, numerous credit default swaps may also be aggregated into structured credit instruments based on indexes such as the ABX (an index of asset-backed securities), CMBX (an index of commercial mortgage-backed securities), and CDX (an index of credit default securities) indexes. In addition to the risks generally associated with credit default swaps, these structured credit instruments carry additional risks including, but not limited to: (i) concentrated portfolios with heightened exposure to movements in a particular segment of the market; (ii) significant leverage that could magnify the affect of adverse events; (iii) distributions from the collateral may not be adequate to make interest or other payments; (iv) the quality of the collateral may decline in value or default; (v) structured credit instruments may be organized into tranches, with subordinate tranches facing increased exposure to adverse events; (vi) the market for structured credit instruments may become illiquid; and (vii) structured credit instruments may give rise to disputes with the issuer or unexpected investment results.
| 74 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table summarizes the open credit default swap agreements in which the CoreAlpha Bond Master Portfolio sold credit default protection as of June 30, 2009:
| Counterparty | Security Deliverable on Default |
Currency | Expiration Date |
Receive Fixed Rate |
Notional Amount |
Maximum Potential Amount of Future Payments by the Master Portfolio Under the Contract |
Fair Value(a) | ||||||||||||
| Deutsche Bank AG |
General Electric |
USD | 12/20/13 | 3.25 | % | $ | 4,000,000 | $ | 4,000,000 | $ | (163,390 | ) | |||||||
| JPMorgan Chase Bank N.A. |
SLM Corp. | USD | 12/20/13 | 5.00 | % | 900,000 | 900,000 | (93,093 | ) | ||||||||||
| Merrill Lynch International |
Dow Jones Credit |
USD | 6/20/14 | 1.00 | % | 69,000,000 | 69,000,000 | (1,085,869 | ) | ||||||||||
| $ | 73,900,000 | $ | (1,342,352 | ) | |||||||||||||||
| (a) | Valued at the unrealized appreciation (depreciation) of the credit default swaps. |
The Master Portfolio has entered into the above credit default swaps to simulate long bond positions that are unavailable in the bond market. These are bilateral contracts between the counterparty and the Master Portfolio; as a result, there are no recourse provisions that would enable the Master Portfolio to recover from third parties any of the amounts paid under these credit default swaps.
WHEN ISSUED/TBA TRANSACTIONS
The CoreAlpha Bond Master Portfolio may purchase mortgage pass-through securities on a when-issued or to-be-announced (“TBA”) basis, with payment and delivery scheduled for a future date. The Master Portfolio may enter into a TBA agreement, sell the obligation to purchase the pools stipulated in the TBA agreement prior to the stipulated settlement date and enter into a new TBA agreement for future delivery of pools of mortgage pass-through securities (a “TBA roll”). A TBA roll is treated by the Master Portfolio as a purchase transaction and a sale transaction in which the Master Portfolio realizes a gain or loss. The Master Portfolio’s use of TBA rolls may cause the Master Portfolio to experience higher portfolio turnover and higher transaction costs. The Master Portfolio could be exposed to possible risk if there is adverse market action, expenses or delays in connection with the TBA transactions, or if the counterparty fails to complete the transaction.
SHORT SALES
The Active Stock and CoreAlpha Bond Master Portfolios may make short sales of securities as part of its overall portfolio management strategies or to offset potential declines in long positions in similar securities. A short sale involves the sale of securities, with the ultimate obligation to deliver these securities. To make delivery to the buyer of the securities, the seller purchases or borrows the securities to offset the short obligation. When making a short sale, the Master Portfolio must cover its position. Short sales expose the Master Portfolio to the risk that it will be required to acquire, convert or exchange securities to replace the securities sold short at a time when the securities sold short have appreciated in value, thus resulting in a loss to the Master Portfolio. The successful use of short selling may be adversely affected by an imperfect correlation between movements in the price of the security sold short and the securities being hedged. The amount at risk for short sales may exceed the amount reflected in the financial statements. Details of the short positions held by the Master Portfolios as of June 30, 2009, if any, are included in the Schedules of Investments.
| 2. | AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES |
Pursuant to an Investment Advisory Contract with each Master Portfolio, BGFA provides investment advisory services to each Master Portfolio. BGFA is a California corporation indirectly owned by Barclays Bank PLC.
| 75 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
For its investment advisory services to each Master Portfolio, BGFA is entitled to receive an annual investment advisory fee based on the average daily net assets of each Master Portfolio as follows:
| Master Portfolio | Investment Advisory Fee |
||
| LifePath Retirement |
0.35 | % | |
| LifePath 2010 |
0.35 | ||
| LifePath 2020 |
0.35 | ||
| LifePath 2030 |
0.35 | ||
| LifePath 2040 |
0.35 | ||
| LifePath 2050 |
0.35 | ||
| Active Stock |
0.25 | ||
| CoreAlpha Bond |
0.25 |
BGFA has contractually agreed to waive investment advisory fees charged to the LifePath Master Portfolios in an amount equal to investment advisory fees and administration fees, if any, charged to the Underlying Funds through April 30, 2011.
The fees and expenses of the Master Portfolios’ trustees who are not “interested persons” of MIP, as defined in the 1940 Act (“Independent Trustees”), counsel to the Independent Trustees and MIP’s independent registered public accounting firm (the “independent expenses”) are paid directly by the Master Portfolios. For those Master Portfolios that do not pay an administration fee to Barclays Global Investors, N.A. (“BGI”), BGFA has contractually agreed to cap the expenses of the Master Portfolios at the rate at which those Master Portfolios pay an advisory fee to BGFA by providing an offsetting credit against the investment advisory fees paid by the Master Portfolios in an amount equal to the independent expenses.
For the six months ended June 30, 2009, BGFA waived and/or credited investment advisory fees as follows:
| Master Portfolio | Investment Advisory Fees Waived/Credited | ||
| LifePath Retirement |
$ | 410,417 | |
| LifePath 2010 |
1,115,584 | ||
| LifePath 2020 |
2,030,361 | ||
| LifePath 2030 |
1,586,986 | ||
| LifePath 2040 |
1,230,235 | ||
| LifePath 2050 |
23,703 | ||
MIP has entered into an administration services arrangement with BGI, which has agreed to provide general administration services, such as managing and coordinating third-party service relationships (e.g., the Master Portfolios’ custodian, financial printer, legal counsel and independent registered public accounting firm), to the Master Portfolios. BGI may delegate certain of its administration duties to sub-administrators.
BGI is not entitled to compensation for providing administration services to the LifePath Master Portfolios, for so long as BGI is entitled to compensation for providing administration services to corresponding feeder funds that invest substantially all of their assets in the LifePath Master Portfolios, or BGI (or an affiliate) receives investment advisory fees from the LifePath Master Portfolios.
BGI is entitled to receive a monthly fee for administration services from each of the Active Stock and CoreAlpha Bond Master Portfolios at an annual rate of 0.10% of their respective average daily net assets. BGI has agreed to bear all costs of each of these Master Portfolios, excluding, generally, investment advisory fees, administration fees, brokerage and other expenses related to the execution of portfolio transactions, extraordinary expenses and certain other expenses which are borne by each Master Portfolio.
With respect to the independent expenses discussed above, BGI has contractually agreed to provide an offsetting credit against the administration fees paid by these Master Portfolios in an amount equal to the independent expenses through April 30, 2011. Effective October 2, 2007, BGI began voluntarily waiving a portion of its administration fees payable by the Active Stock Master Portfolio in an amount sufficient to maintain the investment advisory fees of the LifePath Master Portfolios which are not to exceed 0.35% of the average daily net assets of each LifePath Master Portfolio. This arrangement is voluntary and may be terminated by BGI at any time. Any such waivers will reduce the expenses of the
| 76 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
Master Portfolio and, accordingly, will have a favorable impact on the Master Portfolio’s performance. For the six months ended June 30, 2009, BGI credited and/or waived administration fees of $326,394 and $20,496 for the Active Stock and CoreAlpha Bond Master Portfolios, respectively.
State Street Bank and Trust Company (“State Street”) serves as the custodian and sub-administrator of the Master Portfolios. State Street will not be entitled to receive fees for its custodial services, so long as it is entitled to receive a separate fee from BGI for its services as sub-administrator of the Master Portfolios.
SEI Investments Distribution Company (“SEI”) is the sponsor and placement agent for the Master Portfolios. SEI does not receive any fee from the Master Portfolios for acting as placement agent.
Pursuant to an exemptive order issued by the U.S. Securities and Exchange Commission (“SEC”), BGI serves as securities lending agent for MIP. BGI is an affiliate of BGFA, the Master Portfolios’ investment adviser. As securities lending agent, BGI receives, as fees, a share of the income earned on investment of the cash collateral received for the loan of securities.
For the six months ended June 30, 2009, BGI earned securities lending agent fees as follows:
| Master Portfolio | Securities Lending Agent Fees | ||
| LifePath Retirement |
$ | 24,476 | |
| LifePath 2010 |
65,834 | ||
| LifePath 2020 |
152,420 | ||
| LifePath 2030 |
130,571 | ||
| LifePath 2040 |
122,705 | ||
| LifePath 2050 |
682 | ||
| Active Stock |
786,296 | ||
| CoreAlpha Bond |
66,421 | ||
Cross trades for the six months ended June 30, 2009, if any, were executed by the Master Portfolios pursuant to Rule 17a-7 under the 1940 Act. Cross trading is the buying or selling of portfolio securities between funds to which BGFA (or an affiliate) serves as investment adviser. At its regularly scheduled quarterly meetings, the Board reviews such transactions as of the most recent calendar quarter for compliance with the requirements and restrictions set forth by Rule 17a-7.
The LifePath Master Portfolios may invest in the shares of exchange-traded funds (“ETFs”), including shares of ETFs of which BGI is an affiliate, to obtain exposure to the bond and stock markets while maintaining flexibility to meet the liquidity needs of the LifePath Master Portfolios.
Each Master Portfolio may invest in certain money market funds managed by BGFA, the Master Portfolios’ investment adviser, including the Government Money Market Fund (“GMMF”), Institutional Money Market Fund (“IMMF”), Prime Money Market Fund (“PMMF”) and Treasury Money Market Fund (“TMMF”) of Barclays Global Investors Funds. These money market funds seek to achieve their investment objectives by investing in high-quality, short-term money market instruments that, at the time of investment, have remaining maturities of 397 calendar days or less from the date of acquisition. The GMMF, IMMF, PMMF and TMMF are feeder funds in a master/feeder fund structure that invest substantially all of their assets in the Government Money Market Master Portfolio, Money Market Master Portfolio, Prime Money Market Master Portfolio and Treasury Money Market Master Portfolio (collectively, the “Money Market Master Portfolios”), respectively, which are also managed by BGFA. While the GMMF, IMMF, PMMF and TMMF do not directly charge an investment advisory fee, the Money Market Master Portfolios in which they invest do charge an investment advisory fee. Income distributions from the GMMF, IMMF, PMMF and TMMF are declared daily and paid monthly from net investment income. Income distributions earned by the Master Portfolios from temporary cash investments are recorded as interest from affiliated issuers in the accompanying Statements of Operations. Income distributions earned by the Master Portfolios from the investment of securities lending collateral, if any, are included in securities lending income in the accompanying Statements of Operations.
| 77 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table provides information about the direct investment by each Master Portfolio (exclusive of short-term investments) in issuers of which BGFA is an affiliate, other than the Active Stock and CoreAlpha Bond Master Portfolios, for the six months ended June 30, 2009.
| Master Portfolio and Name of Affiliated Issuer |
Number of Shares Held Beginning of Period (in 000s) |
Gross Additions (in 000s) |
Gross Reductions (in 000s) |
Number of Shares Held End of Period (in 000s) |
Value at End of Period |
Dividend Income |
Net Realized Loss |
|||||||||||
| LifePath Retirement |
||||||||||||||||||
| iShares Barclays TIPS Bond Fund |
229 | 23 | 19 | 233 | $ | 23,681,010 | $ | 319,483 | $ | (140,941 | ) | |||||||
| iShares Cohen & Steers Realty Majors Index Fund |
41 | 4 | 9 | 36 | 1,277,092 | 44,186 | (343,318 | ) | ||||||||||
| iShares FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index Fund |
120 | 13 | 26 | 107 | 2,687,429 | 69,763 | (372,739 | ) | ||||||||||
| iShares MSCI Canada Index Fund |
108 | 4 | 15 | 97 | 2,083,052 | 8,715 | (184,229 | ) | ||||||||||
| iShares MSCI EAFE Index Fund |
444 | 72 | 120 | 396 | 18,151,021 | 357,969 | (3,405,205 | ) | ||||||||||
| iShares MSCI EAFE Small Cap Index Fund |
91 | 3 | 16 | 78 | 2,343,868 | 26,939 | (277,476 | ) | ||||||||||
| iShares MSCI Emerging Markets Index Fund |
210 | 29 | 45 | 194 | 6,241,468 | 44,361 | (997,722 | ) | ||||||||||
| iShares S&P MidCap 400 Index Fund |
224 | 34 | 30 | 228 | 13,203,513 | 85,617 | (826,446 | ) | ||||||||||
| iShares S&P SmallCap 600 Index Fund |
134 | 35 | 20 | 149 | 6,617,981 | 34,585 | (498,572 | ) | ||||||||||
| $ | 76,286,434 | $ | 991,618 | $ | (7,046,648 | ) | ||||||||||||
| LifePath 2010 |
||||||||||||||||||
| iShares Barclays TIPS Bond Fund |
613 | 72 | 64 | 621 | $ | 63,160,504 | $ | 834,531 | $ | (397,599 | ) | |||||||
| iShares Cohen & Steers Realty Majors Index Fund |
136 | — | 11 | 125 | 4,509,464 | 144,640 | (480,409 | ) | ||||||||||
| iShares FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index Fund |
401 | 64 | 106 | 359 | 8,997,197 | 237,206 | (1,612,799 | ) | ||||||||||
| iShares MSCI Canada Index Fund |
334 | — | 57 | 277 | 5,934,604 | 24,828 | (750,489 | ) | ||||||||||
| iShares MSCI EAFE Index Fund |
1,364 | 159 | 380 | 1,143 | 52,380,437 | 1,032,775 | (11,091,876 | ) | ||||||||||
| iShares MSCI EAFE Small Cap Index Fund |
267 | — | 57 | 210 | 6,289,413 | 75,555 | (954,628 | ) | ||||||||||
| iShares MSCI Emerging Markets Index Fund |
626 | 64 | 155 | 535 | 17,247,207 | 128,410 | (3,491,311 | ) | ||||||||||
| iShares S&P MidCap 400 Index Fund |
634 | 75 | 87 | 622 | 35,950,234 | 239,243 | (2,760,089 | ) | ||||||||||
| iShares S&P SmallCap 600 Index Fund |
391 | 63 | 55 | 399 | 17,756,782 | 96,276 | (1,448,938 | ) | ||||||||||
| $ | 212,225,842 | $ | 2,813,464 | $ | (22,988,138 | ) | ||||||||||||
| 78 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Master Portfolio and Name of Affiliated Issuer |
Number of Shares Held Beginning of Period (in 000s) |
Gross Additions (in 000s) |
Gross Reductions (in 000s) |
Number of Shares Held End of Period (in 000s) |
Value at End of Period |
Dividend Income |
Net Realized Loss |
|||||||||||
| LifePath 2020 |
||||||||||||||||||
| iShares Barclays TIPS Bond Fund |
651 | 147 | 63 | 735 | $ | 74,662,581 | $ | 933,272 | $ | (567,385 | ) | |||||||
| iShares Cohen & Steers Realty Majors Index Fund |
468 | 184 | 7 | 645 | 23,198,084 | 665,495 | (314,272 | ) | ||||||||||
| iShares FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index Fund |
1,437 | 763 | 221 | 1,979 | 49,613,831 | 1,094,878 | (2,874,761 | ) | ||||||||||
| iShares MSCI Canada |
864 | 6 | 104 | 766 | 16,409,155 | 68,649 | (1,415,632 | ) | ||||||||||
| iShares MSCI EAFE Index Fund |
3,578 | 386 | 799 | 3,165 | 145,003,492 | 2,892,034 | (24,973,504 | ) | ||||||||||
| iShares MSCI EAFE Small Cap Index Fund |
699 | 21 | 104 | 616 | 18,474,290 | 214,546 | (1,721,118 | ) | ||||||||||
| iShares MSCI Emerging Markets Index Fund |
1,637 | 181 | 270 | 1,548 | 49,893,555 | 359,294 | (6,205,364 | ) | ||||||||||
| iShares S&P MidCap 400 Index Fund |
1,417 | 136 | 125 | 1,428 | 82,514,122 | 525,012 | (4,082,484 | ) | ||||||||||
| iShares S&P SmallCap 600 Index Fund |
796 | 169 | 61 | 904 | 40,216,044 | 208,613 | (1,662,787 | ) | ||||||||||
| $ | 499,985,154 | $ | 6,961,793 | $ | (43,817,307 | ) | ||||||||||||
| LifePath 2030 |
||||||||||||||||||
| iShares Barclays TIPS Bond Fund |
288 | 80 | 35 | 333 | $ | 33,864,640 | $ | 419,482 | $ | (349,446 | ) | |||||||
| iShares Cohen & Steers Realty Majors Index Fund |
481 | 316 | 20 | 777 | 27,920,816 | 753,763 | (1,024,468 | ) | ||||||||||
| iShares FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index Fund |
1,475 | 996 | 213 | 2,258 | 56,603,196 | 1,237,809 | (2,709,435 | ) | ||||||||||
| iShares MSCI Canada Index Fund |
794 | 50 | 104 | 740 | 15,845,809 | 66,207 | (1,415,632 | ) | ||||||||||
| iShares MSCI EAFE Index Fund |
3,371 | 435 | 668 | 3,138 | 143,771,982 | 2,839,972 | (23,040,009 | ) | ||||||||||
| iShares MSCI EAFE Small Cap Index Fund |
643 | 66 | 106 | 603 | 18,090,898 | 208,093 | (2,094,773 | ) | ||||||||||
| iShares MSCI Emerging Markets Index Fund |
1,529 | 190 | 231 | 1,488 | 47,963,300 | 356,241 | (5,487,438 | ) | ||||||||||
| iShares S&P MidCap 400 Index Fund |
1,228 | 119 | 104 | 1,243 | 71,830,890 | 468,630 | (3,710,421 | ) | ||||||||||
| iShares S&P SmallCap 600 Index Fund |
726 | 110 | 41 | 795 | 35,361,121 | 184,518 | (1,167,330 | ) | ||||||||||
| $ | 451,252,652 | $ | 6,534,715 | $ | (40,998,952 | ) | ||||||||||||
| 79 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Master Portfolio and Name of Affiliated Issuer |
Number of Shares Held Beginning of Period (in 000s) |
Gross Additions (in 000s) |
Gross Reductions (in 000s) |
Number of Shares Held End of Period (in 000s) |
Value at End of Period |
Dividend Income |
Net Realized Loss |
|||||||||||
| LifePath 2040 |
||||||||||||||||||
| iShares Barclays TIPS Bond Fund |
81 | 25 | 12 | 94 | $ | 9,521,511 | $ | 119,023 | $ | (121,533 | ) | |||||||
| iShares Cohen & Steers Realty Majors Index Fund |
448 | 323 | 13 | 758 | 27,242,448 | 718,739 | (743,886 | ) | ||||||||||
| iShares FTSE EPRA/NAREIT Developed Real Estate |
1,327 | 996 | 127 | 2,196 | 55,043,391 | 1,208,434 | (1,655,176 | ) | ||||||||||
| iShares MSCI Canada Index Fund |
698 | 91 | 98 | 691 | 14,792,566 | 59,441 | (1,423,817 | ) | ||||||||||
| iShares MSCI EAFE Index Fund |
2,964 | 401 | 517 | 2,848 | 130,444,342 | 2,570,347 | (18,599,765 | ) | ||||||||||
| iShares MSCI EAFE Small Cap Index Fund |
563 | 48 | 61 | 550 | 16,490,181 | 188,275 | (1,159,663 | ) | ||||||||||
| iShares MSCI Emerging Markets Index Fund |
1,332 | 209 | 198 | 1,343 | 43,290,176 | 325,542 | (4,614,107 | ) | ||||||||||
| iShares S&P MidCap 400 Index Fund |
1,014 | 125 | 78 | 1,061 | 61,312,532 | 395,351 | (2,510,801 | ) | ||||||||||
| iShares S&P SmallCap 600 Index Fund |
602 | 115 | 44 | 673 | 29,934,625 | 156,620 | (1,342,529 | ) | ||||||||||
| $ | 388,071,772 | $ | 5,741,772 | $ | (32,171,277 | ) | ||||||||||||
| LifePath 2050 |
||||||||||||||||||
| iShares Cohen & Steers Realty Majors Index Fund |
3 | 15 | 1 | 17 | $ | 621,510 | $ | 10,085 | $ | (16,970 | ) | |||||||
| iShares FTSE EPRA/NAREIT Developed Real Estate |
9 | 44 | 3 | 50 | 1,265,258 | 18,937 | (31,605 | ) | ||||||||||
| iShares MSCI Canada Index Fund |
8 | 10 | 2 | 16 | 351,160 | 1,247 | (22,482 | ) | ||||||||||
| iShares MSCI EAFE Index Fund |
33 | 43 | 9 | 67 | 3,067,850 | 54,120 | (258,394 | ) | ||||||||||
| iShares MSCI EAFE Small Cap Index Fund |
6 | 8 | 1 | 13 | 397,577 | 4,037 | (19,901 | ) | ||||||||||
| iShares MSCI Emerging Markets Index Fund |
15 | 22 | 4 | 33 | 1,047,797 | 6,739 | (70,318 | ) | ||||||||||
| iShares S&P MidCap 400 Index Fund |
14 | 21 | 8 | 27 | 1,588,532 | 9,166 | (157,888 | ) | ||||||||||
| iShares S&P SmallCap 600 Index Fund |
8 | 15 | 6 | 17 | 764,662 | 3,640 | (75,623 | ) | ||||||||||
| $ | 9,104,346 | $ | 107,971 | $ | (653,181 | ) | ||||||||||||
Certain officers and trustees of MIP are also officers of BGI and/or BGFA. As of June 30, 2009, these officers of BGI and/or BGFA collectively owned less than 1% of MIP’s outstanding beneficial interests.
| 80 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| 3. | INVESTMENT PORTFOLIO TRANSACTIONS |
Investment transactions (excluding short-term investments and investments in any underlying Master Portfolios) for the Master Portfolios for the six months ended June 30, 2009 were as follows:
| U.S. Government Obligations | Other Securities | |||||||||||
| Master Portfolio | Purchases | Sales | Purchases | Sales | ||||||||
| LifePath Retirement |
$ | — | $ | — | $ | 9,425,837 | $ | 12,126,020 | ||||
| LifePath 2010 |
— | — | 22,486,533 | 38,171,088 | ||||||||
| LifePath 2020 |
— | — | 69,301,131 | 65,266,976 | ||||||||
| LifePath 2030 |
— | — | 70,982,646 | 53,826,663 | ||||||||
| LifePath 2040 |
— | — | 65,863,002 | 39,669,498 | ||||||||
| LifePath 2050 |
— | — | 5,916,787 | 1,336,815 | ||||||||
| Active Stock |
— | — | 739,173,223 | 590,420,160 | ||||||||
| CoreAlpha Bond |
1,364,292,962 | 1,487,780,026 | 281,800,160 | 258,505,028 | ||||||||
| 4. | PORTFOLIO SECURITIES LOANED |
Each Master Portfolio may lend its investment securities to approved borrowers, such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Master Portfolio collateral consisting of cash, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. government. The initial collateral received by each Master Portfolio is required to have a value of at least 102% of the market value of the loaned securities plus the interest accrued on such securities, if any, for securities traded on U.S. exchanges and a value of at least 105% for all other securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current market value of the securities on loan plus accrued interest, if any. The risks to the Master Portfolios of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. Any securities lending cash collateral may be reinvested in certain short-term instruments either directly on behalf of a Master Portfolio or through one or more joint accounts or money market funds, including those managed by BGFA; such reinvestments are subject to investment risk.
As of June 30, 2009, the Master Portfolios had loaned securities which were collateralized by cash. The cash collateral received was invested in money market funds managed by BGFA. The market value of the securities on loan as of June 30, 2009 and the value of the related collateral are disclosed in the Statements of Assets and Liabilities. Securities lending income, as disclosed in the Master Portfolios’ Statements of Operations, represents the income earned from the investment of the cash collateral, net of rebates paid to, or fees paid by, borrowers and less the fees paid to BGI as securities lending agent.
| 5. | FINANCIAL HIGHLIGHTS |
Financial highlights for the Master Portfolios were as follows:
| Master Portfolio | Six Months Ended June 30, 2009 (Unaudited) |
Year Ended December 31, 2008(a) |
Year Ended December 31, 2007 |
Year Ended December 31, 2006 |
Year Ended December 31, 2005 |
Year Ended December 31, 2004(b) |
||||||||||||
| LifePath Retirement |
||||||||||||||||||
| Ratio of expenses to average net assets(c)(d) |
0.26 | % | 0.27 | % | 0.27 | % | 0.28 | % | 0.31 | % | 0.31 | % | ||||||
| Ratio of expenses to average net assets prior to expense reductions(c)(e) |
0.60 | % | 0.61 | % | 0.61 | % | 0.61 | % | 0.65 | % | 0.60 | % | ||||||
| Ratio of net investment income to average net assets(c)(d) |
3.73 | % | 3.81 | % | 3.87 | % | 3.80 | % | 3.24 | % | 2.46 | % | ||||||
| Portfolio turnover |
4 | % | 11 | % | 6 | % | 10 | % | 11 | % | 138 | %(g) | ||||||
| Total return |
5.29 | %(h) | (14.54 | )% | 5.00 | % | 9.30 | % | 4.82 | % | 6.85 | % |
| 81 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Master Portfolio | Six Months Ended June 30, 2009 (Unaudited) |
Year Ended December 31, 2008(a) |
Year Ended December 31, 2007 |
Year Ended December 31, 2006 |
Year Ended December 31, 2005 |
Year Ended December 31, 2004(b) |
||||||||||||
| LifePath 2010 |
||||||||||||||||||
| Ratio of expenses to average net assets(c)(d) |
0.26 | % | 0.26 | % | 0.27 | % | 0.27 | % | 0.30 | % | 0.30 | % | ||||||
| Ratio of expenses to average net assets prior to expense |
0.59 | % | 0.60 | % | 0.60 | % | 0.60 | % | 0.64 | % | 0.59 | % | ||||||
| Ratio of net investment income to average net assets(c)(d) |
3.69 | % | 3.68 | % | 3.63 | % | 3.49 | % | 2.96 | % | 2.32 | % | ||||||
| Portfolio turnover rate(f) |
3 | % | 12 | % | 7 | % | 12 | % | 12 | % | 130 | %(g) | ||||||
| Total return |
5.32 | %(h) | (16.50 | )% | 4.68 | % | 10.65 | % | 5.70 | % | 7.88 | % | ||||||
| LifePath 2020 |
||||||||||||||||||
| Ratio of expenses to average net assets(c)(d) |
0.22 | % | 0.23 | % | 0.25 | % | 0.25 | % | 0.28 | % | 0.29 | % | ||||||
| Ratio of expenses to average net assets prior to expense |
0.56 | % | 0.57 | % | 0.58 | % | 0.58 | % | 0.62 | % | 0.57 | % | ||||||
| Ratio of net investment income to average net assets(c)(d) |
3.47 | % | 3.18 | % | 3.01 | % | 2.91 | % | 2.53 | % | 2.05 | % | ||||||
| Portfolio turnover rate(f) |
5 | % | 13 | % | 7 | % | 16 | % | 17 | % | 140 | %(g) | ||||||
| Total return |
5.75 | %(h) | (24.92 | )% | 3.84 | % | 13.51 | % | 7.04 | % | 9.77 | % | ||||||
| LifePath 2030 |
||||||||||||||||||
| Ratio of expenses to average net assets(c)(d) |
0.20 | % | 0.21 | % | 0.23 | % | 0.24 | % | 0.26 | % | 0.28 | % | ||||||
| Ratio of expenses to average net assets prior to expense |
0.54 | % | 0.55 | % | 0.57 | % | 0.57 | % | 0.60 | % | 0.56 | % | ||||||
| Ratio of net investment income to average net assets(c)(d) |
3.30 | % | 2.82 | % | 2.57 | % | 2.49 | % | 2.22 | % | 1.93 | % | ||||||
| Portfolio turnover rate(f) |
6 | % | 13 | % | 7 | % | 22 | % | 24 | % | 138 | %(g) | ||||||
| Total return |
5.87 | %(h) | (30.53 | )% | 3.14 | % | 15.62 | % | 8.13 | % | 11.28 | % | ||||||
| LifePath 2040 |
||||||||||||||||||
| Ratio of expenses to average net assets(c)(d) |
0.18 | % | 0.19 | % | 0.22 | % | 0.23 | % | 0.26 | % | 0.28 | % | ||||||
| Ratio of expenses to average net assets prior to expense |
0.52 | % | 0.53 | % | 0.56 | % | 0.56 | % | 0.59 | % | 0.56 | % | ||||||
| Ratio of net investment income to average net assets(c)(d) |
3.17 | % | 2.52 | % | 2.20 | % | 2.17 | % | 1.96 | % | 1.74 | % | ||||||
| Portfolio turnover rate(f) |
5 | % | 14 | % | 8 | % | 29 | % | 38 | % | 147 | %(g) | ||||||
| Total return |
5.83 | %(h) | (34.90 | )% | 2.53 | % | 17.47 | % | 8.74 | % | 11.93 | % | ||||||
| LifePath 2050 |
||||||||||||||||||
| Ratio of expenses to average net assets(c)(d) |
0.16 | % | 0.17 | % | n/a | n/a | n/a | n/a | ||||||||||
| Ratio of expenses to average net assets prior to expense |
0.62 | % | 1.11 | % | n/a | n/a | n/a | n/a | ||||||||||
| Ratio of net investment income to average net assets(c)(d) |
3.27 | % | 3.05 | % | n/a | n/a | n/a | n/a | ||||||||||
| Portfolio turnover rate(f) |
13 | % | 0 | %(i) | n/a | n/a | n/a | n/a | ||||||||||
| Total return(h) |
5.86 | % | (31.93 | )% | n/a | n/a | n/a | n/a | ||||||||||
| 82 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Master Portfolio | Six Months Ended June 30, 2009 (Unaudited) |
Year Ended December 31, 2008(a) |
Year Ended December 31, 2007 |
Year Ended December 31, 2006 |
Year Ended December 31, 2005 |
Year Ended December 31, 2004(b) |
||||||||||||
| Active Stock |
||||||||||||||||||
| Ratio of expenses to average net assets(c) |
0.30 | % | 0.32 | % | 0.34 | % | 0.35 | % | 0.35 | % | 0.35 | % | ||||||
| Ratio of expenses to average net assets prior to expense reductions(c) |
0.35 | % | 0.35 | % | 0.35 | % | 0.35 | % | n/a | n/a | ||||||||
| Ratio of net investment income to average net assets(c) |
2.43 | % | 1.96 | % | 1.70 | % | 1.64 | % | 1.50 | % | 1.57 | % | ||||||
| Portfolio turnover rate(f) |
48 | % | 98 | % | 80 | % | 65 | % | 54 | % | 70 | % | ||||||
| Total return |
2.37 | %(h) | (36.65 | )% | 0.58 | % | 15.65 | % | 8.79 | % | 10.40 | %(h) | ||||||
| CoreAlpha Bond |
||||||||||||||||||
| Ratio of expenses to average net assets(c) |
0.35 | % | 0.36 | % | 0.35 | % | 0.35 | % | 0.35 | % | 0.35 | % | ||||||
| Ratio of expenses to average net assets prior to expense reductions(c) |
0.35 | % | 0.36 | % | 0.36 | % | 0.36 | % | n/a | n/a | ||||||||
| Ratio of net investment income to average net assets(c) |
4.75 | % | 4.47 | % | 5.18 | % | 5.11 | % | 4.19 | % | 3.08 | % | ||||||
| Portfolio turnover rate(f) |
140 | % | 351 | % | 466 | % | 301 | % | 270 | % | 313 | % | ||||||
| Total return |
4.52 | %(h) | 3.62 | % | 5.10 | % | 4.36 | % | 1.98 | % | 1.30 | %(h) | ||||||
| (a) | For the period from June 30, 2008 (commencement of operations) to December 31, 2008 for the LifePath 2050 Master Portfolio. |
| (b) | For the period from March 15, 2004 (commencement of operations) to December 31, 2004 for the Active Stock and CoreAlpha Bond Master Portfolios. |
| (c) | Annualized for periods of less than one year. |
| (d) | The expense ratio includes the LifePath Master Portfolio’s pro rata portion of the advisory and administration fees of the Active Stock and CoreAlpha Bond Master Portfolios. The ratio does not reflect the LifePath Master Portfolio’s pro rata portion of the advisory and administration fees charged to the IMMF and the iShares exchange-traded funds. The expense ratio does reflect BGFA’s/BGI’s waiver/credit of the pro rata advisory and administration fees charged to all the Underlying Funds. (See Note 2 above) |
| (e) | The expense ratio includes the LifePath Master Portfolio’s pro rata portion of the advisory and administration fees of the Active Stock and CoreAlpha Bond Master Portfolios. |
| (f) | Portfolio turnover rates include in-kind transactions, if any. |
| (g) | Portfolio turnover rate reflects the restructure of the LifePath Master Portfolio to a fund-of-funds structure. |
| (h) | Not annualized. |
| (i) | Rounds to less than 1%. |
| 6. | BLACKROCK TRANSACTION |
On June 16, 2009, Barclays PLC, the ultimate parent company of BGI and BGFA, accepted a binding offer and entered into an agreement to sell its interests in BGFA, BGI and certain affiliated companies, to BlackRock, Inc., (the “BlackRock Transaction”). The BlackRock Transaction is subject to certain regulatory approvals, as well as other conditions to closing.
Under the 1940 Act, completion of the BlackRock Transaction will cause the automatic termination of each Master Portfolio’s current investment advisory agreement with BGFA. In order for the investment management of each Master Portfolio to continue uninterrupted, the Board will be asked to approve a new investment advisory agreement for each Master Portfolio. If approved by the Board, the new investment advisory agreements will be submitted for approval by the investors in the Master Portfolios (each, a “Fund”). Each Fund will in turn call a meeting of its shareholders at which shareholders will vote to instruct the Fund how to vote on the applicable Master Portfolio’s new investment advisory agreement.
| 7. | REVIEW OF SUBSEQUENT EVENTS |
In connection with the preparation of the financial statements of the Master Portfolios as of and for the six months ended June 30, 2009, events and transactions subsequent to June 30, 2009 through August 28, 2009, the date the financial statements were issued, have been evaluated by the Master Portfolios’ management for possible adjustment and/or disclosure. No subsequent events requiring financial statement disclosure have been identified.
| 83 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited)
Under Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), the Master Investment Portfolio (“MIP”) Board of Trustees (the “Board”), including a majority of Trustees who are not “interested persons” of MIP, as that term is defined in the 1940 Act (the “Independent Trustees”), is required annually to consider each Investment Advisory Contract between MIP and BGFA (each, an “Advisory Contract” and collectively, the “Advisory Contracts”) on behalf of each LifePath Master Portfolio, CoreAlpha Bond Master Portfolio and Active Stock Master Portfolio (collectively, the “Master Portfolios”). As required by Section 15(c), the Board requested, and BGFA provided, such information as the Board deemed to be reasonably necessary to evaluate the terms of the Advisory Contracts. At a meeting held on March 18-19, 2009, the Board approved the selection of BGFA and the continuance of the Advisory Contracts, based on its review of qualitative and quantitative information provided by BGFA. In selecting BGFA and approving the Advisory Contracts for the Master Portfolios, the Board, including the Independent Trustees, advised by their independent counsel, considered the following factors, none of which was controlling, and made the following conclusions:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY BGFA
The Board anticipated that there would be no diminution in the scope of services required of or provided by BGFA under the Advisory Contracts for the coming year as compared to the scope of services provided by BGFA over the past year. In reviewing the scope of these services, the Board considered BGFA’s investment philosophy and experience, noting that, over the past several years, BGFA and its affiliates have committed significant resources to the support of the Master Portfolios. The Board considered in particular that BGFA’s services for the Master Portfolios capitalize on BGFA’s core competencies, including the effective use of its proprietary investment models analyzing securities market risk, asset class correlations and expected returns. The Board also considered services provided by BGFA and its affiliates in connection with reviewing counterparty and issuer credit risk and securities lending opportunities and overseeing intermediaries that provide BGI feeder fund shareholder support and processing functions.
The Board also considered BGFA’s compliance program and its compliance record with respect to the Master Portfolios. The Board noted that BGFA reports to the Board about portfolio management and compliance matters on a periodic basis in connection with regularly scheduled meetings of the Board, and has made appropriate officers available as needed to provide further assistance with these matters. The Board also reviewed the background and experience of the senior management and relevant investment and other personnel, including those persons responsible for the day-to-day management of the Master Portfolios and the adequacy of the time and attention that such persons devote to the Master Portfolios. The Board also considered the reputation and overall financial strength of BGFA and its affiliates, as well as the Board’s past experience with BGFA. In addition to the above considerations, the Board reviewed and considered BGFA’s investment processes and strategies, and matters related to BGFA’s portfolio transaction policies and procedures. The Board noted that BGFA does not serve as investment adviser for any other registered investment company with substantially similar investment objectives and strategies as any LifePath Master Portfolio; therefore, no comparative performance information was available with respect to the LifePath Master Portfolios. The Board further noted that BGFA does not serve as investment adviser for any other registered investment company with substantially similar investment objectives and strategies as the Active Stock and CoreAlpha Bond Master Portfolios; therefore, no comparative performance information was available with respect to those Master Portfolios. The Board also noted that all the Master Portfolios had met their investment objectives since their relevant inception dates. Based on this review, the Board concluded that the nature, extent and quality of services to be provided by BGFA to the Master Portfolios under the Advisory Contracts were appropriate and supported the Board’s approval of the Advisory Contracts for the coming year.
MASTER PORTFOLIOS’ EXPENSES AND PERFORMANCE OF THE MASTER PORTFOLIOS
The Board reviewed statistical information prepared by Lipper Inc. (“Lipper”), an independent provider of investment company data, regarding the expense ratio components, including actual advisory fees, waivers/reimbursements, and gross and net total expenses of each Master Portfolio in comparison with the same information for other investment companies registered under the 1940 Act, objectively selected by Lipper as comprising such Master Portfolio’s peer group pursuant to Lipper’s proprietary methodology and registered investment companies that would otherwise have been excluded from Lipper’s comparison groups because of their size or other differentiating factors, but were nonetheless included at the request of BGFA (each, a “Lipper Expense Group”). In addition, the Board reviewed statistical information prepared by Lipper regarding the performance of each Master Portfolio for the one-, three-, five- and ten-year (or since inception) periods ended December 31, 2008, and as compared to the performance of other registered investment companies with similar investment objectives, as selected by Lipper as comprising such Master Portfolio’s peer group pursuant to Lipper’s proprietary methodology and registered investment companies that would otherwise have been
| 84 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited) (Continued)
excluded from Lipper’s comparison groups because of their size or other differentiating factors, but were nonetheless included at the request of BGFA (each, a “Lipper Performance Group,” and collectively with the Lipper Expense Groups, the “Lipper Groups”). The Board considered that the component funds of the Lipper Groups are publicly available funds, more analogous in overall expense structure to the Barclays Global Investors Funds LifePath Portfolios than to underlying Master Portfolios, which are not available for investment except to other investment companies. In support of its review of the statistical information, the Board was provided with a detailed description of the methodology used by Lipper to determine the Lipper Groups and to prepare this information.
The Board noted that, to the extent that sufficient data was available, each LifePath Master Portfolio performed above or in line with the median performance of its Lipper Performance Group over the one-, three-, five- and ten-year periods ended December 31, 2008. The Board noted that the Active Stock Master Portfolio performed slightly above the median performance of its Lipper Performance Group over the one-year period ended December 31, 2008, performed slightly below the median of its Lipper Performance Group over the three-year period ended December 31, 2008, and, to the extent that sufficient data was available, performed slightly above the median of its Lipper Performance Group over the five-year period ended December 31, 2008. The CoreAlpha Bond Master Portfolio performed above the median performance of its Lipper Performance Group over the one- and three-year periods ended December 31, 2008 and the period from inception to December 31, 2008. The Board noted that to the extent that the CoreAlpha Bond Master Portfolio underperformed in relation to relevant benchmarks, such underperformance was in part attributable to the effect of fees, as has been the case historically, and, in particular with respect to the last two years, in part attributable to the market’s liquidity crises, increased volatility, and decreased opportunities for security outperformance relative to market performance during the periods covered. The Board noted the inherent challenges of comparing the performance of the LifePath Master Portfolios to other lifecycle funds, as lifecycle funds can differ significantly in their asset components and mixes. BGFA has developed custom benchmarks for purposes of providing a comparison for the performance of the LifePath Master Portfolios, but the custom benchmarks are composed of indices and do not reflect the fees, expenses and taxes incurred by funds. The Board noted that the LifePath Master Portfolios generally performed in line with their custom benchmarks in 2008, but underperformed their custom benchmarks on an annualized basis over five years. The Board also noted that the advisory fee rates, net of applicable waivers and reimbursements, and overall expenses for the LifePath Master Portfolios were generally lower than the advisory fee rates and overall expenses of the funds in their respective Lipper Expense Groups. The Board noted BGFA’s voluntary waiver of certain advisory fee amounts based on the advisory fees and/or administrative fees received by BGFA and/or BGI from the funds in which the LifePath Master Portfolios invested during the year ended December 31, 2008 and BGFA’s agreement to contractually waive certain advisory fee amounts based on the advisory fees and/or administrative fees received by BGFA and/or BGI from the funds in which the LifePath Master Portfolios will invest for the period May 1, 2009 through April 30, 2011, subject to annual review by the Board. The Board noted that the advisory fee rates, net of applicable waivers and reimbursements, for each of the Active Stock and CoreAlpha Bond Master Portfolios were generally lower than the advisory fee rates of the funds in their respective Lipper Expense Groups, and the overall expenses, net of applicable waivers and reimbursements, for each of the Active Stock and the CoreAlpha Bond Master Portfolios were the lowest of the overall expenses of the funds in their respective Lipper Expense Groups. Based on this review, the Board concluded that the investment advisory fees and expense levels and the historical performance of the Master Portfolios, as managed by BGFA, as compared to the investment advisory fees and expense levels and performance of the funds in the Lipper Groups, were satisfactory for the purposes of approving the Advisory Contracts for the coming year.
COSTS OF SERVICES PROVIDED TO MASTER PORTFOLIOS AND PROFITS REALIZED BY BGFA AND AFFILIATES
The Board reviewed information about the profitability to BGFA of the Master Portfolios and the Barclays Global Investors Funds, separately and together, based on the fees payable to BGFA and its affiliates (including fees under the Advisory Contracts), and all other sources of revenue and expense to BGFA and its affiliates from the operations of the Master Portfolios and the Barclays Global Investors Funds for the last calendar year. The Board discussed the sources of direct and ancillary revenue with management, including the revenues to BGI from securities lending by MIP (including any securities lending by a Master Portfolio), revenues received from transactions for MIP executed through affiliates (including any such transactions for a Master Portfolio), and any fee revenue from any investments by a Master Portfolio in other master portfolios and funds for which BGFA provides advisory services and/or BGI provides administration services. The Board also discussed BGFA’s contractual and voluntary fee waivers for the Master Portfolios and the profitability to BGFA and its affiliates of those Master Portfolios in which the LifePath Master Portfolios invest, as reflected in the materials, and noted the profitability to BGFA and its affiliates of the other funds advised by BGFA in which the
| 85 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited) (Continued)
LifePath Master Portfolios invest, as represented by BGFA during the meetings. The Board also noted that BGFA had provided information relating to management estimates of 2009 profitability from the operations of the Master Portfolios; however, the Board considered these forward-looking estimates to be of limited value, and did not base its conclusions on this information. Based on this review, the Board concluded that the profits realized by BGFA and its affiliates under the Advisory Contracts and from other relationships between the Master Portfolios and BGFA and/or its affiliates were within the range the Board considered reasonable and appropriate.
ECONOMIES OF SCALE
In connection with its review of BGFA’s profitability analysis, the Board received information regarding economies of scale or other efficiencies that may result from increases in the Master Portfolios’ asset levels. The Board noted that the Advisory Contracts do not provide any breakpoints in the investment advisory fee rates as a result of any increases in the asset levels of the Master Portfolios. However, the Board noted that the investment advisory fee rates for the Master Portfolios had been set initially at the lower end of the marketplace so as to afford the Master Portfolios’ interestholders the opportunity to share in anticipated economies of scale from inception. The Board also noted the difficulty of considering the potential for economies of scale based on advisory services independently and separately from any potential for economies of scale based on other services provided by BGFA and its affiliates. Based on the profitability analysis presented to the Board, the Board discussed the potential for future economies of scale as the asset levels of the Master Portfolios increase. In light of this analysis and the relatively low investment advisory fee rates for the Master Portfolios, the Board determined that whether further economies of scale may be realized by the Master Portfolios or reflected in fee levels was not a significant factor at this juncture in its consideration of whether to approve the Advisory Contracts.
FEES AND SERVICES PROVIDED FOR OTHER COMPARABLE FUNDS/ACCOUNTS MANAGED BY BGFA AND ITS AFFILIATES
The Board considered the Master Portfolios’ annual investment advisory fee rates under the Advisory Contracts in comparison to the investment advisory/management fee rates for other funds/accounts with substantially similar investment objectives and strategies for which BGFA (or its affiliate, BGI) provides investment advisory/management services, including collective funds and separate accounts (collectively, the “Other Accounts”). The Board noted that BGFA had provided information distinguishing the level of services provided to the Other Accounts from the level of services provided to the LifePath Master Portfolios and the Active Stock Master Portfolio. In the context of the comparative fee analysis, the Board compared the nature and extent of services provided to the LifePath Master Portfolios and the Active Stock Master Portfolio to the nature and extent of services provided to the Other Accounts, including, among other things, the level of complexity in managing the LifePath Master Portfolios and the Active Stock Master Portfolio and the Other Accounts under differing regulatory requirements and client guidelines. BGFA and its affiliates do not provide investment advisory/management services to other investment companies registered under the 1940 Act, collective funds, or separate accounts with substantially similar investment objectives and strategies as the CoreAlpha Bond Master Portfolio.
The Board noted that: (i) the investment advisory fee rates under the LifePath Master Portfolios’ Advisory Contracts were within the ranges of the investment management fee rates for the Other Accounts; and (ii) the investment advisory fee rate under the Advisory Contract for the Active Stock Master Portfolio was within the ranges of the investment management fee rates for the Other Accounts. The Board noted that any differences between the investment advisory fee rates for the Master Portfolios and the investment advisory/management fee rates for the Other Accounts appeared to be attributable to, among other things, the type and level of services provided and/or the asset levels of the Other Accounts. Based on this review, the Board determined that the investment advisory fee rates under the Advisory Contracts do not constitute fees that are so disproportionately large as to bear no reasonable relationship to the services rendered and that could not have been the product of arm’s-length bargaining, and concluded that the investment advisory fee rates under the Advisory Contracts are fair and reasonable.
OTHER BENEFITS TO BGFA AND/OR ITS AFFILIATES
The Board reviewed any ancillary revenue received by BGFA and/or its affiliates in connection with the services provided to MIP and the Master Portfolios by BGFA, such as any payment of revenue to BGI, MIP’s securities lending agent, for loaning any portfolio securities, payment of administration fees to BGI, MIP’s administrator, and payment of advisory fees and/or administration fees to BGFA and BGI in connection with any investments by the Master Portfolios in other funds for which BGFA provides investment advisory services and/or BGI provides administration services, as well as the
| 86 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited) (Continued)
associated voluntary waivers by BGFA and/or its affiliates of these fees, if any. The Board noted that BGFA does not use soft dollars or consider the value of research or other services that may be provided to BGFA (including its affiliates) in selecting brokers for portfolio transactions for the Master Portfolios. The Board further noted that during the past year no portfolio transactions were placed through a BGFA affiliate, as would be required to be reported to and considered by the Board pursuant to Rule 17e-1 under the 1940 Act. The Board concluded that any ancillary benefits would not be disadvantageous to the Master Portfolios’ interestholders.
Based on this analysis, the Board determined that the Advisory Contracts, including the investment advisory fee rates thereunder, are fair and reasonable in light of all relevant circumstances and concluded that it is in the best interest of the Master Portfolios and their interestholders to approve the Advisory Contracts for the coming year.
| 87 |
GOVERNMENT MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 14 |
Schedule of Investments (Unaudited)
June 30, 2009
| 15 |
MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 16 |
MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 17 |
MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 18 |
PRIME MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 19 |
PRIME MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 20 |
PRIME MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 21 |
PRIME MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited) (Continued)
June 30, 2009
| 22 |
TREASURY MONEY MARKET MASTER PORTFOLIO
Schedule of Investments (Unaudited)
June 30, 2009
| 23 |
Portfolio Allocations (Unaudited)
June 30, 2009
| 24 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF ASSETS AND LIABILITIES (Unaudited)
June 30, 2009
| Government Money Market Master Portfolio |
Money Market Master Portfolio |
Prime Money Market Master Portfolio |
Treasury Money Market Master Portfolio | |||||||||
| ASSETS |
||||||||||||
| Investments in securities of unaffiliated issuers, at amortized cost which approximates fair value (Note 1) |
$ | — | $ | 17,589,163,056 | $ | 10,753,596,331 | $ | 349,224,736 | ||||
| Repurchase agreements, at fair value and cost (Note 1) |
501,474,000 | 4,360,000,000 | 4,434,194,000 | 2,160,806,000 | ||||||||
| Total investments |
501,474,000 | 21,949,163,056 | 15,187,790,331 | 2,510,030,736 | ||||||||
| Cash |
991 | 685 | 550 | 662 | ||||||||
| Receivables: |
||||||||||||
| Interest |
1,069 | 9,978,402 | 3,462,278 | 642 | ||||||||
| Due from Feeder Fund(s) |
— | 292,285 | 997,440 | — | ||||||||
| Total Assets |
501,476,060 | 21,959,434,428 | 15,192,250,599 | 2,510,032,040 | ||||||||
| LIABILITIES |
||||||||||||
| Payables: |
||||||||||||
| Investment advisory fees (Note 2) |
29,635 | 1,418,540 | 892,551 | 60,760 | ||||||||
| Accrued expenses: |
||||||||||||
| Professional fees (Note 2) |
6,375 | 28,432 | 17,353 | 6,375 | ||||||||
| Independent trustees’ fees (Note 2) |
— | 31,060 | 4,340 | — | ||||||||
| Total Liabilities |
36,010 | 1,478,032 | 914,244 | 67,135 | ||||||||
| NET ASSETS |
$ | 501,440,050 | $ | 21,957,956,396 | $ | 15,191,336,355 | $ | 2,509,964,905 | ||||
STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, 2009
| Government Money Market Master Portfolio |
Money Market Master Portfolio |
Prime Money Market Master Portfolio |
Treasury Money Market Master Portfolio |
|||||||||||||
| NET INVESTMENT INCOME |
||||||||||||||||
| Interest from unaffiliated issuers |
$ | 862,328 | $ | 91,890,434 | $ | 52,376,758 | $ | 1,825,363 | ||||||||
| Total investment income |
862,328 | 91,890,434 | 52,376,758 | 1,825,363 | ||||||||||||
| EXPENSES (Note 2) |
||||||||||||||||
| Investment advisory fees |
403,096 | 12,072,285 | 8,446,676 | 1,070,894 | ||||||||||||
| Professional fees |
7,160 | 23,463 | 18,904 | 7,644 | ||||||||||||
| Independent trustees’ fees |
3,652 | 112,054 | 64,963 | 6,171 | ||||||||||||
| Total expenses |
413,908 | 12,207,802 | 8,530,543 | 1,084,709 | ||||||||||||
| Less expense reductions (Note 2) |
(176,527 | ) | (3,770,021 | ) | (2,621,413 | ) | (675,820 | ) | ||||||||
| Net expenses |
237,381 | 8,437,781 | 5,909,130 | 408,889 | ||||||||||||
| Net investment income |
624,947 | 83,452,653 | 46,467,628 | 1,416,474 | ||||||||||||
| REALIZED GAIN (LOSS) |
||||||||||||||||
| Net realized gain from sale of investments in unaffiliated issuers |
— | 309,580 | 203,025 | — | ||||||||||||
| Net realized gain |
— | 309,580 | 203,025 | — | ||||||||||||
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 624,947 | $ | 83,762,233 | $ | 46,670,653 | $ | 1,416,474 | ||||||||
The accompanying notes are an integral part of these financial statements.
| 25 |
MASTER INVESTMENT PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
| Government Money Market Master Portfolio | Money Market Master Portfolio | |||||||||||||||
| For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
For the six months ended June 30, 2009 (Unaudited |
For the year ended December 31, 2008 |
|||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||
| Operations: |
||||||||||||||||
| Net investment income |
$ | 624,947 | $ | 4,333,362 | $ | 83,452,653 | $ | 908,661,601 | ||||||||
| Net realized gain (loss) |
— | — | 309,580 | (1,344,806 | ) | |||||||||||
| Net increase in net assets resulting from operations |
624,947 | 4,333,362 | 83,762,233 | 907,316,795 | ||||||||||||
| Interestholder transactions: |
||||||||||||||||
| Contributions |
1,036,475,189 | 2,857,102,909 | 65,150,155,369 | 50,941,712,613 | ||||||||||||
| Withdrawals |
(2,253,596,148 | ) | (1,251,335,484 | ) | (65,764,921,932 | ) | (60,852,472,460 | ) | ||||||||
| Net increase (decrease) in |
(1,217,120,959 | ) | 1,605,767,425 | (614,766,563 | ) | (9,910,759,847 | ) | |||||||||
| Increase (decrease) in net assets |
(1,216,496,012 | ) | 1,610,100,787 | (531,004,330 | ) | (9,003,443,052 | ) | |||||||||
| NET ASSETS: |
||||||||||||||||
| Beginning of period |
1,717,936,062 | 107,835,275 | 22,488,960,726 | 31,492,403,778 | ||||||||||||
| End of period |
$ | 501,440,050 | $ | 1,717,936,062 | $ | 21,957,956,396 | $ | 22,488,960,726 | ||||||||
| Prime Money Market Master Portfolio | Treasury Money Market Master Portfolio | |||||||||||||||
| For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
For the six months ended June 30, 2009 (Unaudited) |
For the year ended December 31, 2008 |
|||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||
| Operations: |
||||||||||||||||
| Net investment income |
$ | 46,467,628 | $ | 429,039,269 | $ | 1,416,474 | $ | 2,856,251 | ||||||||
| Net realized gain (loss) |
203,025 | (6,439,693 | ) | — | — | |||||||||||
| Net increase in net assets resulting from operations |
46,670,653 | 422,599,576 | 1,416,474 | 2,856,251 | ||||||||||||
| Interestholder transactions: |
||||||||||||||||
| Contributions |
60,537,644,560 | 128,185,192,678 | 3,933,595,678 | 5,128,268,021 | ||||||||||||
| Withdrawals |
(61,963,713,982 | ) | (123,059,338,132 | ) | (3,075,850,916 | ) | (3,683,743,024 | ) | ||||||||
| Net increase (decrease) in |
(1,426,069,422 | ) | 5,125,854,546 | 857,744,762 | 1,444,524,997 | |||||||||||
| Increase (decrease) in net assets |
(1,379,398,769 | ) | 5,548,454,122 | 859,161,236 | 1,447,381,248 | |||||||||||
| NET ASSETS: |
||||||||||||||||
| Beginning of period |
16,570,735,124 | 11,022,281,002 | 1,650,803,669 | 203,422,421 | ||||||||||||
| End of period |
$ | 15,191,336,355 | $ | 16,570,735,124 | $ | 2,509,964,905 | $ | 1,650,803,669 | ||||||||
The accompanying notes are an integral part of these financial statements.
| 26 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited)
Master Investment Portfolio (“MIP”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end series management investment company organized as a Delaware statutory trust.
These financial statements relate only to the Government Money Market, Money Market, Prime Money Market and Treasury Money Market Master Portfolios (each, a “Master Portfolio,” collectively, the “Master Portfolios”).
Pursuant to MIP’s organizational documents, the Master Portfolios’ officers and trustees are indemnified against certain liabilities that may arise out of the performance of their duties to the Master Portfolios. Additionally, in the normal course of business, the Master Portfolios enter into contracts with service providers that contain general indemnification clauses. The Master Portfolios’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Master Portfolios that have not yet occurred.
| 1. | SIGNIFICANT ACCOUNTING POLICIES |
The following significant accounting policies are consistently followed by MIP in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
SECURITY VALUATION
The securities and other assets of each Master Portfolio are valued pursuant to the pricing policy and procedures approved by the Board of Trustees of MIP (the “Board”). The Master Portfolios are subject to the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” This standard establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Inputs may be based on independent market data (“observable inputs”) or they may be internally developed (“unobservable inputs”). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FAS 157 are as follows:
| • | Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Master Portfolio has the ability to access at the measurement date (a “Level 1 Price”); |
| • | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (a “Level 2 Price”); |
| • | Level 3 – Inputs that are unobservable for the asset or liability (a “Level 3 Price”). |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3 of the fair value hierarchy.
The level of a value determined for a financial instrument within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement in its entirety. The categorization of a value determined for a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Master Portfolios’ perceived risk of that instrument.
Investments whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 Prices, include active listed equities and certain U.S. government securities. The Master Portfolios do not adjust the quoted price for such instruments, even in situations where the Master Portfolios hold a large position and a sale could reasonably impact the quoted price.
| 27 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
Investments that trade in markets that are not considered to be active, but whose values are based on inputs such as quoted market prices, dealer quotations or valuations provided by alternative pricing sources supported by observable inputs are classified within Level 2. These generally include certain U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage products, less liquid listed equities, and state, municipal and provincial obligations. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.
Investments whose values are classified as Level 3 Prices have significant unobservable inputs, as they may trade infrequently or not at all. Investments whose values are classified as Level 3 Prices may include unlisted securities related to corporate actions, securities whose trading have been suspended or which have been de-listed from their primary trading exchange, less liquid corporate debt securities (including distressed debt instruments), collateralized debt obligations, and less liquid mortgage securities (backed by either commercial or residential real estate). When observable prices are not available for these securities, the Master Portfolios use one or more valuation techniques (e.g., the market approach or the income approach) for which sufficient and reliable data is available. Within Level 3 of the fair value hierarchy, the use of the market approach generally consists of using comparable market transactions, while the use of the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
The inputs used by the Master Portfolios in estimating the value of Level 3 Prices may include the original transaction price, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3 Prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Master Portfolios in the absence of market information. The fair value measurement of Level 3 Prices does not include transaction costs that may have been capitalized as part of the security’s cost basis. Assumptions used by the Master Portfolios due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Master Portfolios’ results of operations.
The Master Portfolios use the amortized cost method of valuation to determine the value of their portfolio securities in accordance with Rule 2a-7 under the 1940 Act. The amortized cost method, which involves valuing a security at its cost and accreting or amortizing any discount or premium, respectively, over the period until maturity, approximates market value. At such intervals as the Board of Trustees (the “Board”) may deem appropriate, a review of the deviation of the Master Portfolios’ net assets calculated by using available market quotations (or an appropriate substitute which reflects current market conditions) and the valuation based on amortized cost will be performed. If the Board determines that the extent of any deviation from the Master Portfolios’ amortized cost valuation will result in material dilution or other unfair results to investors or existing interestholders it will take such action as it deems appropriate.
The following table summarizes the values of each Master Portfolio’s investments according to the fair value hierarchy as of June 30, 2009:
| Investments in Securities | ||||||||||||
| Master Portfolio | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Government Money Market |
$ | — | $ | 501,474,000 | $ | — | $ | 501,474,000 | ||||
| Money Market |
||||||||||||
| Certificates of Deposit |
$ | — | $ | 1,587,002,941 | $ | — | $ | 1,587,002,941 | ||||
| Commercial Paper |
— | 11,096,538,764 | — | 11,096,538,764 | ||||||||
| Medium-Term Notes |
— | 747,496,976 | — | 747,496,976 | ||||||||
| Repurchase Agreements |
— | 4,360,000,000 | — | 4,360,000,000 | ||||||||
| Time Deposits |
— | 930,554,000 | — | 930,554,000 | ||||||||
| U.S. Treasury Obligations |
1,203,570,375 | — | — | 1,203,570,375 | ||||||||
| Variable & Floating Rate Notes |
— | 2,024,000,000 | — | 2,024,000,000 | ||||||||
| $ | 1,203,570,375 | $ | 20,745,592,681 | $ | — | $ | 21,949,163,056 | |||||
| 28 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Investments in Securities | ||||||||||||
| Master Portfolio | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Prime Money Market |
||||||||||||
| Certificates of Deposit |
$ | — | $ | 445,000,791 | $ | — | $ | 445,000,791 | ||||
| Commercial Paper |
— | 6,828,674,685 | — | 6,828,674,685 | ||||||||
| Medium-Term Notes |
— | 842,855,670 | — | 842,855,670 | ||||||||
| Repurchase Agreements |
— | 4,434,194,000 | — | 4,434,194,000 | ||||||||
| Time Deposits |
— | 705,948,000 | — | 705,948,000 | ||||||||
| U.S. Treasury Obligations |
817,052,964 | — | — | 817,052,964 | ||||||||
| Variable & Floating Rate Notes |
— | 1,114,064,221 | — | 1,114,064,221 | ||||||||
| $ | 817,052,964 | $ | 14,370,737,367 | $ | — | $ | 15,187,790,331 | |||||
| Treasury Money Market |
||||||||||||
| Repurchase Agreements |
$ | — | $ | 2,160,806,000 | $ | — | $ | 2,160,806,000 | ||||
| U.S. Treasury Obligations |
349,224,736 | — | — | 349,224,736 | ||||||||
| $ | 349,224,736 | $ | 2,160,806,000 | $ | — | $ | 2,510,030,736 | |||||
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for on trade date. Interest income is accrued daily. Realized gains and losses on investment transactions are determined using the specific identification method. The Master Portfolios amortize premium and accrete discount using a constant yield to maturity method.
FEDERAL INCOME TAXES
In general, MIP believes that each Master Portfolio has and will continue to be operated in a manner so as to qualify it as a non-publicly traded partnership for federal income tax purposes. Provided that each such Master Portfolio so qualifies, it will not be subject to any federal income tax on its income and gains (if any). However, each interestholder in such Master Portfolio will be taxed on its distributive share of the Master Portfolio’s taxable income in determining its federal income tax liability. As a non-publicly traded partnership for federal income tax purposes, each such Master Portfolio will be deemed to have “passed through” to its interestholders any interest, dividends, gains or losses of the Master Portfolio for such purposes. The determination of such share will be made in accordance with the Internal Revenue Code of 1986, as amended (the “Code”), and regulations promulgated thereunder.
In the case of Master Portfolios with only one interestholder, such as the Government Money Market Master Portfolio, MIP believes that such Master Portfolios will not be treated as a separate entity for federal income tax purposes, and, therefore, will not be subject to any federal income tax on their income and gains (if any). Rather, such Master Portfolios’ assets and interest, dividends and gains or losses will be treated as assets and interest, dividends and gains or losses of the interestholders.
It is intended that each Master Portfolio’s assets, income and distributions will be managed in such a way that an entity electing and qualifying as a “regulated investment company” under the Code can continue to so qualify by investing substantially all of its assets through the Master Portfolio, provided that the regulated investment company meets other requirements for such qualifications not within the control of the Master Portfolio (e.g., distributing at least 90% of the regulated investment company’s “investment company taxable income” annually).
As of June 30, 2009, the Master Portfolios’ costs of investments for federal income tax purposes were the same as for financial reporting purposes.
Management has reviewed the tax positions as of June 30, 2009, inclusive of the prior three open tax return years, and has determined that no provision for income tax is required in the Master Portfolios’ financial statements.
REPURCHASE AGREEMENTS
The Master Portfolios may enter into repurchase agreements with banks and securities dealers. These transactions involve the purchase of securities with a simultaneous commitment to resell the securities to the bank or the dealer at an agreed-upon date and price. A repurchase agreement is accounted for as an investment by the Master Portfolio,
| 29 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
collateralized by securities, which are delivered to the Master Portfolio’s custodian or to an agent bank under a tri-party agreement. The securities are marked-to-market daily and additional securities are acquired as needed, to ensure that their value equals or exceeds the repurchase price plus accrued interest.
| 2. | AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES |
Pursuant to an Investment Advisory Contract with the Master Portfolios, Barclays Global Fund Advisors (“BGFA”) provides investment advisory services to each Master Portfolio. BGFA is a California corporation indirectly owned by Barclays Bank PLC. BGFA is entitled to receive an annual investment advisory fee of 0.10% of the average daily net assets of each of the Master Portfolios, as compensation for investment advisory services. BGFA has contractually agreed to waive a portion of its advisory fees through April 30, 2011. After giving effect to such contractual waiver, the advisory fees will be 0.07%. From time to time, BGFA may waive an additional portion of its advisory fees. Any such waivers will reduce the expenses of the Master Portfolio and, accordingly, have a favorable impact on its performance.
The fees and expenses of the Master Portfolios’ trustees who are not “interested persons” of MIP, as defined in the 1940 Act (“Independent Trustees”), counsel to the Independent Trustees and MIP’s independent registered public accounting firm (the “independent expenses”) are paid directly by the Master Portfolios. BGFA has contractually agreed to cap the expenses of the Master Portfolios at the rate at which the Master Portfolios pay an advisory fee to BGFA by providing an offsetting credit against the investment advisory fees paid by the Master Portfolios in an amount equal to the independent expenses.
For the six months ended June 30, 2009, BGFA waived and/or credited investment advisory fees of $176,527, $3,770,021, $2,621,413 and $675,820 for the Government Money Market, Money Market, Prime Money Market and Treasury Money Market Master Portfolios, respectively.
State Street Bank and Trust Company (“State Street”) serves as the custodian and sub-administrator of the Master Portfolios. State Street will not be entitled to receive fees for its custodial services, so long as it is entitled to receive a separate fee from Barclays Global Investors, N.A. (“BGI”) for its services as sub-administrator of the Master Portfolios.
SEI Investments Distribution Company (“SEI”) is the sponsor and placement agent for the Master Portfolios. SEI does not receive any fee from the Master Portfolios for acting as placement agent.
MIP has entered into an administration services arrangement with BGI, which has agreed to provide general administration services, such as managing and coordinating third-party service relationships (e.g., the Master Portfolios’ custodian, financial printer, legal counsel and independent registered public accounting firm), to the Master Portfolios. BGI is not entitled to compensation for providing administration services to the Master Portfolios, for so long as BGI is entitled to compensation for providing administration services to corresponding feeder funds that invest substantially all of their assets in the Master Portfolios, or BGI (or an affiliate) receives investment advisory fees from the Master Portfolios. BGI may delegate certain of its administration duties to sub-administrators.
Certain officers and trustees of MIP are also officers of BGI and/or BGFA. As of June 30, 2009, these officers of BGI and/or BGFA collectively owned less than 1% of MIP’s outstanding beneficial interests.
| 3. | FINANCIAL HIGHLIGHTS |
Financial highlights for the Master Portfolios were as follows:
| Master Portfolio | Six Months Ended June 30, 2009 (Unaudited) |
Year Ended December 31, 2008 |
Year Ended December 31, 2007 |
Year Ended December 31, 2006 |
Year Ended December 31, 2005 |
Year Ended December 31, 2004 |
||||||||||||
| Government Money Market |
||||||||||||||||||
| Ratio of expenses to average net assets(a) |
0.06 | % | 0.05 | % | 0.07 | % | 0.08 | % | 0.03 | % | 0.00 | %(b) | ||||||
| Ratio of expenses to average net assets prior to expense reductions(a) |
0.10 | % | 0.10 | % | 0.12 | % | 0.11 | % | 0.10 | % | 0.10 | %(b) | ||||||
| Ratio of net investment income to average net assets(a) |
0.16 | % | 0.59 | % | 4.93 | % | 4.90 | % | 3.16 | % | 1.93 | %(b) | ||||||
| Total return |
0.08 | %(c) | 1.99 | % | 5.20 | % | 5.08 | % | 3.28 | % | 0.64 | %(b)(c) |
| 30 |
MASTER INVESTMENT PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)
| Master Portfolio | Six Months Ended June 30, 2009 (Unaudited) |
Year Ended December 31, 2008 |
Year Ended December 31, 2007 |
Year Ended December 31, 2006 |
Year Ended December 31, 2005 |
Year Ended December 31, 2004 |
||||||||||||
| Money Market |
||||||||||||||||||
| Ratio of expenses to average net assets(a) |
0.07 | % | 0.07 | % | 0.07 | % | 0.08 | % | 0.05 | % | 0.05 | % | ||||||
| Ratio of expenses to average net assets prior to expense reductions(a) |
0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | ||||||
| Ratio of net investment income to average net assets(a) |
0.69 | % | 2.88 | % | 5.23 | % | 4.99 | % | 3.27 | % | 1.40 | % | ||||||
| Total return |
0.34 | %(c) | 2.90 | %(d) | 5.40 | % | 5.13 | % | 3.28 | % | 1.39 | % | ||||||
| Prime |
||||||||||||||||||
| Ratio of expenses to average net assets(a) |
0.07 | % | 0.06 | % | 0.07 | % | 0.08 | % | 0.08 | % | 0.03 | % | ||||||
| Ratio of expenses to average net assets prior to expense reductions(a) |
0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | 0.10 | % | ||||||
| Ratio of net investment income to average net assets(a) |
0.55 | % | 2.77 | % | 5.23 | % | 4.95 | % | 3.22 | % | 1.52 | % | ||||||
| Total return |
0.25 | %(c) | 2.88 | %(d) | 5.37 | % | 5.11 | % | 3.26 | % | 1.40 | % | ||||||
| Treasury |
||||||||||||||||||
| Ratio of expenses to average net assets(a) |
0.04 | % | 0.02 | % | 0.01 | % | 0.00 | % | 0.00 | % | 0.00 | %(b) | ||||||
| Ratio of expenses to average net assets prior to expense reductions(a) |
0.10 | % | 0.10 | % | 0.12 | % | 0.13 | % | 0.10 | % | 0.10 | %(b) | ||||||
| Ratio of net investment income to average net assets(a) |
0.13 | % | 0.48 | % | 4.81 | % | 5.03 | % | 3.99 | % | 1.82 | %(b) | ||||||
| Total return |
0.07 | %(c) | 1.64 | % | 4.98 | % | 5.04 | % | 3.20 | % | 0.61 | %(b)(c) | ||||||
| (a) | Annualized for periods of less than one year. |
| (b) | For the period from September 1, 2004 (commencement of operations) to December 31, 2004. |
| (c) | Not annualized. |
| (d) | For the year ended December 31, 2008, 0.01% of the Master Portfolio’s total return consists of purchases of securities by BGFA at prices in excess of the securities’ then current fair value. Excluding these items, total return would have been 2.89% for the Money Market Master Portfolio and 2.87% for the Prime Money Market Master Portfolio. |
| 4. | BLACKROCK TRANSACTION |
On June 16, 2009, Barclays PLC, the ultimate parent company of BGI and BGFA, accepted a binding offer and entered into an agreement to sell its interests in BGFA, BGI and certain affiliated companies, to BlackRock, Inc., (the “BlackRock Transaction”). The BlackRock Transaction is subject to certain regulatory approvals, as well as other conditions to closing.
Under the 1940 Act, completion of the BlackRock Transaction will cause the automatic termination of each Master Portfolio’s current investment advisory agreement with BGFA. In order for the investment management of each Master Portfolio to continue uninterrupted, the Board will be asked to approve a new investment advisory agreement for each Master Portfolio. If approved by the Board, the new investment advisory agreements will be submitted for approval by the investors in the Master Portfolios (each, a “Fund”). Each Fund will in turn call a meeting of its shareholders at which shareholders will vote to instruct the Fund how to vote on the applicable Master Portfolio’s new investment advisory agreement.
| 5. | REVIEW OF SUBSEQUENT EVENTS |
In connection with the preparation of the financial statements of the Master Portfolios as of and for the six months ended June 30, 2009, events and transactions subsequent to June 30, 2009 through August 28, 2009, the date the financial statements were issued, have been evaluated by the Master Portfolios’ management for possible adjustment and/or disclosure. No subsequent events requiring financial statement disclosure have been identified.
| 31 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited)
Under Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), the Master Investment Portfolio (“MIP”) Board of Trustees (the “Board”), including a majority of Trustees who are not “interested persons” of MIP, as that term is defined in the 1940 Act (the “Independent Trustees”), is required annually to consider each Investment Advisory Contract between MIP and BGFA (each, an “Advisory Contract” and collectively, the “Advisory Contracts”) on behalf of the Money Market Master Portfolio, Prime Money Market Master Portfolio, Government Money Market Master Portfolio, and Treasury Money Market Master Portfolio (collectively, the “Master Portfolios”). As required by Section 15(c), the Board requested, and BGFA provided, such information as the Board deemed to be reasonably necessary to evaluate the terms of the Advisory Contracts. At a meeting held on March 18-19, 2009, the Board approved the selection of BGFA and the continuance of the Advisory Contracts, based on its review of qualitative and quantitative information provided by BGFA. In selecting BGFA and approving the Advisory Contracts for the Master Portfolios, the Board, including the Independent Trustees, advised by their independent counsel, considered the following factors, none of which was controlling, and made the following conclusions:
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED BY BGFA
The Board anticipated that there would be no diminution in the scope of services required of or provided by BGFA under the Advisory Contracts for the coming year as compared to the scope of services provided by BGFA over the past year. In reviewing the scope of these services, the Board considered BGFA’s investment philosophy and experience, noting that, over the past several years, BGFA and its affiliates have committed significant resources to the support of the Master Portfolios. The Board considered in particular that BGFA’s services for the Master Portfolios capitalize on BGFA’s core competencies, including the effective use of integrated portfolio management and trading expertise and proprietary technology that provides real-time access to performance, analytics and risk. The Board also considered services provided by BGFA and its affiliates in connection with reviewing counterparty and issuer credit risk and overseeing intermediaries that provide BGI feeder fund shareholder support and processing functions.
The Board also considered BGFA’s compliance program and its compliance record with respect to the Master Portfolios. The Board noted that BGFA reports to the Board about portfolio management and compliance matters on a periodic basis in connection with regularly scheduled meetings of the Board, and has made appropriate officers available as needed to provide further assistance with these matters. The Board also reviewed the background and experience of the senior management and relevant investment and other personnel, including those persons responsible for the day-to-day management of the Master Portfolios and the adequacy of the time and attention that such persons devote to the Master Portfolios. The Board also considered the reputation and overall financial strength of BGFA and its affiliates, as well as the Board’s past experience with BGFA. In addition to the above considerations, the Board reviewed and considered BGFA’s investment processes and strategies, and matters related to BGFA’s portfolio transaction policies and procedures. The Board further noted that BGFA does not serve as investment adviser for any other registered investment companies with substantially similar investment objectives and strategies as the Master Portfolios; therefore, no comparative performance information was available. The Board also noted that during BGFA’s term as investment adviser, the Master Portfolios have met their investment objectives. Based on this review, the Board concluded that the nature, extent and quality of services to be provided by BGFA to the Master Portfolios under the Advisory Contracts were appropriate and supported the Board’s approval of the Advisory Contracts for the coming year.
MASTER PORTFOLIOS’ EXPENSES AND PERFORMANCE OF THE MASTER PORTFOLIOS
The Board reviewed statistical information prepared by Lipper Inc. (“Lipper”), an independent provider of investment company data, regarding the expense ratio components, including actual advisory fees, waivers/reimbursements, and gross and net total expenses of each Master Portfolio in comparison with the same information for other investment companies registered under the 1940 Act, objectively selected by Lipper as comprising such Master Portfolio’s peer group pursuant to Lipper’s proprietary methodology (each, a “Lipper Expense Group”). In addition, the Board reviewed statistical information prepared by Lipper regarding the performance of each Master Portfolio for the one-, three-, five-, and ten-year (or since inception) periods ended December 31, 2008, and as compared to the performance of other registered investment companies with similar investment objectives, as selected by Lipper as comprising such Master Portfolio’s peer group pursuant to Lipper’s proprietary methodology (each, a “Lipper Performance Group,” and collectively with the Lipper Expense Groups, the “Lipper Groups”). The Board considered that the component funds of the Lipper Groups are publicly available funds, more analogous in overall expense structure to the Barclays Global Investors Funds Money Market Funds than to the underlying Master Portfolios, which are not available for investment except to other investment companies. In support of its review of the statistical information, the Board was provided with a detailed description of the methodology used by Lipper to determine the Lipper Groups and to prepare this information.
| 32 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited) (Continued)
The Board noted that each Master Portfolio outperformed the median performance of the funds in its Lipper Performance Group over relevant periods, except that the Government Money Market Master Portfolio slightly underperformed its median for the one-year period ended December 31, 2008. The Board noted that the advisory fee rate for each Master Portfolio was generally lower than the median of the advisory fee rates of the funds in its Lipper Expense Group. The Board also noted that overall expenses for each Master Portfolio were generally lower than the median of the overall expenses for the funds in its Lipper Expense Group, both net and gross of BGFA’s voluntary waiver of certain advisory and administration fee amounts for certain of the Master Portfolios during the year ended December 31, 2008 and BGFA’s agreement to contractually waive a portion of its advisory fee for each of the Master Portfolios, from May 1, 2008 through April 30, 2011, subject to annual review by the Board. The Board also noted that, as a result of relatively higher administrative fees, certain of the BGI feeder funds investing in the Master Portfolios had higher overall expenses than other funds in their respective Lipper Expense Groups; however, the Board considered such differences to be minor and the Board did not find such fees to be excessive. Based on this review, the Board concluded that the investment advisory fees and expense levels and the historical performance of the Master Portfolios, as managed by BGFA, as compared to the investment advisory fees and expense levels and performance of the funds in the Lipper Groups, were satisfactory for the purposes of approving the Advisory Contracts for the coming year.
COSTS OF SERVICES PROVIDED TO MASTER PORTFOLIOS AND PROFITS REALIZED BY BGFA AND AFFILIATES
The Board reviewed information about the profitability to BGFA of the Master Portfolios and the Barclays Global Investors Funds, separately and together, based on the fees payable to BGFA and its affiliates (including fees under the Advisory Contracts), and all other sources of revenue and expense to BGFA and its affiliates from the Master Portfolios’ operations for the last calendar year. The Board discussed the sources of direct and ancillary revenue with management, including the revenues to BGI from securities lending by MIP (including any securities lending by a Master Portfolio), revenues received from transactions for MIP executed through affiliates (including any such transactions for a Master Portfolio), and any fee revenue from any investments by a Master Portfolio in other funds for which BGFA provides advisory services and/or BGI provides administration services. The Board also discussed BGFA’s contractual and voluntary fee waivers for the Master Portfolios. The Board also noted that BGFA had provided information relating to management estimates of 2009 profitability from the operations of the Master Portfolios; however, the Board considered these forward-looking estimates to be of limited value, and did not base its conclusions on this information. Based on this review, the Board concluded that the profits realized by BGFA and its affiliates under the Advisory Contracts and from other relationships between the Master Portfolios and BGFA and/or its affiliates were within the range the Board considered reasonable and appropriate.
ECONOMIES OF SCALE
In connection with its review of BGFA’s profitability analysis, the Board received information regarding economies of scale or other efficiencies that may result from increases in the Master Portfolios’ asset levels. The Board noted that the Advisory Contracts do not provide any breakpoints in the investment advisory fee rates as a result of any increases in the asset levels of the Master Portfolios. However, the Board noted that the investment advisory fee rates for the Master Portfolios had been set initially at the lower end of the marketplace so as to afford the Master Portfolios’ interestholders the opportunity to share in anticipated economies of scale from inception and noted BGFA’s agreement to contractually waive a portion of its advisory fee for each Master Portfolio, as discussed above. The Board also noted the difficulty of considering the potential for economies of scale based on advisory services independently and separately from any potential for economies of scale based on other services provided by BGFA and its affiliates. Based on the profitability analysis presented to the Board, the Board discussed the potential for future economies of scale as the asset levels of the Master Portfolios increase. In light of this analysis and the relatively low investment advisory fee rates for the Master Portfolios, the Board determined that whether further economies of scale may be realized by the Master Portfolios or reflected in fee levels was not a significant factor at this juncture in its consideration of whether to approve the Advisory Contracts.
FEES AND SERVICES PROVIDED FOR OTHER COMPARABLE FUNDS/ACCOUNTS MANAGED BY BGFA AND ITS AFFILIATES
The Board had requested that BGFA provide comparative fee analysis relating to the Master Portfolios’annual investment advisory fee rates under the Advisory Contracts in comparison to the investment advisory/management fee rates for any other funds or accounts with substantially similar investment objectives and strategies for which BGFA or any of its
| 33 |
MASTER INVESTMENT PORTFOLIO
BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACTS (Unaudited) (Continued)
affiliates provides investment advisory/management services. BGFA and its affiliates do not provide investment advisory/management services to other investment companies registered under the 1940 Act, collective funds, or separate accounts with substantially similar investment objectives and strategies as the Master Portfolios. However, the Board noted that it would continue to request and review such comparative fee information in the future in connection with its annual review of the investment advisory fee rates under the Advisory Contracts.
OTHER BENEFITS TO BGFA AND/OR ITS AFFILIATES
The Board reviewed any ancillary revenue received by BGFA and/or its affiliates in connection with the services provided to MIP and the Master Portfolios by BGFA, such as payment of administration fees to BGI, MIP’s administrator. The Board noted that BGFA does not use soft dollars or consider the value of research or other services that may be provided to BGFA (including its affiliates) in selecting brokers for portfolio transactions for the Master Portfolios. The Board further noted that the Master Portfolios may, but generally do not, participate in securities lending activities and generally do not execute transactions with affiliated brokers, as do other series of MIP. The Board concluded that any ancillary benefits would not be disadvantageous to the Master Portfolios’ interestholders.
Based on this analysis, the Board determined that the Advisory Contracts, including the investment advisory fee rates thereunder, are fair and reasonable in light of all relevant circumstances and concluded that it is in the best interest of the Master Portfolios and their interestholders to approve the Advisory Contracts for the coming year.
| 34 |
Item 2. Code of Ethics.
Not applicable to this semi-annual filing.
Item 3. Audit Committee Financial Expert.
Not applicable to this semi-annual filing.
Item 4. Principal Accountant Fees and Services.
Not applicable to this semi-annual filing.
Item 5. Audit Committee of Listed Registrants.
Not applicable to the Registrant.
Item 6. Investments.
(a) Schedules of investments are included as part of the reports to shareholders filed under Item 1 of this Form.
(b) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to the Registrant.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to the Registrant.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to the Registrant.
Item 10. Submission of Matters to a Vote of Security Holders.
There are no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Trustees.
Item 11. Controls and Procedures.
(a) The President (the Registrant’s Principal Executive Officer) and Chief Financial Officer (the Registrant’s Principal Financial Officer) have concluded that, based on their evaluation as of a date within 90 days of the filing date of this report, the disclosure controls and procedures of the Registrant (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) are reasonably designed to achieve the purposes described in Section 4(a) of the attached certification.
(b) There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant’s second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a) (1) Not applicable to this semi-annual filing.
(a) (2) Section 302 Certifications are attached.
(a) (3) Not applicable to the Registrant.
(b) Section 906 Certifications are attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Master Investment Portfolio
| By: | /s/ H. Michael Williams | |
| H. Michael Williams, President (Principal Executive Officer) | ||
| Date: August 24, 2009 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| By: | /s/ H. Michael Williams | |
| H. Michael Williams, President (Principal Executive Officer) | ||
| Date: August 24, 2009 | ||
| By: | /s/ Jack Gee | |
| Jack Gee, Treasurer and Chief Financial Officer (Principal Financial Officer) | ||
| Date: August 24, 2009 | ||