A LOOK INSIDE
blackrock.com/ema
2 0 14
EMERGING MARKET
ALLOCATION FUND
Institutional: BEEIX • A: BEEAX • C: BEECX • R: MRLOX1
Performance Highlights
C O M M E N TA R Y
} The Fund returned 0.41% (Institutional shares) and 0.31% (Investor A shares,
without sales charge) for the third quarter of 2014. The Fund’s blended
benchmark (60% MSCI Emerging Market Index/40% JP Morgan Emerging Market
Bond Index (“EMBI”) Plus) returned -2.91%.
} The Fund outperformed its blended benchmark during the quarter primarily due
to positioning within the alternatives allocation and a strategic underweight to
lower quality sovereign debt in Venezuela, Argentina and Ukraine.
} Within equities, the strongest returns came from the Fund’s investments in Asia,
especially within South Korea, China, Malaysia and India, while performance
lagged in Latin America and Europe, mostly in Brazil and Russia.
} While equity market volatility remained low, EM debt markets experienced a
spike in volatility in reaction to movements in US Treasury rates. Given its
exposure to EM debt, the Fund’s volatility was elevated during the quarter.
Gerardo Rodriguez
15 years of investment experience
After posting impressive gains in July and August, EM risk assets sold off in
September driven by U.S. dollar strength, increased volatility in U.S. Treasury rates
and renewed fears about an economic slowdown in China. The MSCI Emerging
Market Index returned -3.50% for the quarter.
EMERGING MARKET EQUITY RETURNS WITH LESS RISK
10%
15
9.71
5
8.66
0
0
4Q13
1Q14
The Fund (BEEAX)
2Q14
The Fund (BEEAX)
3Q14
RETURNS
30 DAY ROLLING VOLATILITY
30%
MSCI EM Index
Jeff Shen, PhD
19 years of investment experience
David Dali
24 years of investment experience
Market Overview
3Q13
Portfolio Management
-5
MSCI EM Index
The Fund is expected to underperform the equity index during strong “risk-on” periods due to its high quality fixed income
allocation. The daily estimated 30-day standard deviation of the fund is based on the historic volatility of securities held.
Standard deviation measures the volatility of the fund’s returns. Higher deviation represents higher volatility.
Data represents past performance and is no guarantee of future results. Investment
returns and principal values may fluctuate so that an investor’s shares, when redeemed,
may be worth more or less than their original cost. All returns assume reinvestment
of dividends and capital gains. Current performance may be lower or higher than that
shown. Refer to blackrock.com for most recent month-end performance.
VISIT Your
BLACKROCK.COM
Developing
Portfolio
FOR ADDITIONAL
With Emerging
Markets
INFORMATION OR TO
The developing
world canTO
be QUARTERLY
a land of
SUBSCRIBE
opportunityUPDATES
for investors,
but it PIECE.
also can
TO THIS
be tough terrain to navigate. The
BlackRock Emerging Market Allocation
team discusses an approach that seeks
to cut through the complexity and tap all
that EMs have to offer in their latest
Point of View article, A Single Vehicle
for the Long Haul in Emerging Markets
at blackrock.com.
Allocation Strategies
Debt
The Fund’s fixed income exposure is constructed specifically
to help offset equity risks while providing exposure to
economic growth in emerging markets through exposure to
attractive nominal interest rates.
ASSET CLASS ALLOCATION*
The Fund maintains a strategic underweight to lower-rated
debt versus the benchmark as the performance of these
credits tends to be more highly correlated to EM equities.
This proved advantageous in the third quarter as lowerrated, high yield bonds in the JP Morgan EMBI Plus
significantly underperformed investment grade credits.
Equity 40%
Debt 31%
Alternatives 29%
Equity
The Fund’s equity exposure was comprised largely of
traditional emerging market equities, but also held small
allocations to frontier markets and developed market
companies that derive a significant portion of revenues from
emerging markets (“EM in DM”).
Despite recent fears around a potential economic slowdown
in China, emerging Asian countries have demonstrated the
strongest growth in recent quarters. The Fund maintained an
overweight to several countries in this region, including
Taiwan, Thailand and the Philippines. In Latin America,
markets have been mixed given concerns about the recent
sovereign debt default in Argentina and uncertainty around
the upcoming presidential election in Brazil. The Fund
maintained an underweight position in Brazilian equities
during the quarter.
EQUITY ALLOCATION BY COUNTRY*
CREDIT QUALITY ALLOCATION* †
12%
AAA
AA
7%
A
7%
INVESTMENT
GRADE
12%
BBB
16%
19%
BB
B
CCC
32%
32%
7%
CC
C
22%
21%
NONINVESTMENT
GRADE
9%
3%
The Fund
JP Morgan EMBI Plus
Alternatives
25%
% OF NET ASSETS
In particular, meaningful underweights to Venezuela,
Argentina, Russia and Ukraine were beneficial to the Fund’s
relative performance, while overweights to high quality issues
in Poland, Chile and Malaysia helped offset equity risks.
In order to further diversify equity risk in the Fund and
opportunistically capture less correlated returns, we leverage
the expertise and incorporate the views of BlackRock
investment teams through the implementation of marketneutral long/short fixed income and equity strategies.
20
15
10
During the quarter, the Fund’s alternative investments
contributed positively to the Fund’s total return and helped
to offset the negative market performance of EM equities.
5
The Fund
Malaysia
Thailand
Russia
Turkey
India
So. Africa
Brazil
So. Korea
Taiwan
China
0
MSCI EM Index
* % of net assets as of 9/30/14. † The fund itself has not been rated by an independent rating agency. Credit quality ratings on underlying securities of the fund are received from S&P,
Moody’s and Fitch and converted to the equivalent S&P major rating category. This breakdown is provided by BlackRock and takes the median rating of the three agencies when all three
agencies rate a security the lower of the two ratings if only two agencies rate a security and one rating if that is all that is provided. Unrated securities do not necessarily indicate low
quality. Below investment-grade is represented by a rating of BB and below. Ratings and portfolio credit quality may change over time.
Outlook
Looking forward, we believe the primary driver of EM risk
assets over the medium term will be monetary policy in
developed markets followed by fundamentals in emerging
economies. Central bank policies are increasingly divergent
as the U.S. Federal Reserve has begun to retract liquidity
while the European Central Bank and the Bank of Japan have
continued to add stimulus.
In the United States, anticipation for the normalization of
interest rates has led to the recent flattening of the U.S.
Treasury yield curve and increased rate volatility. This gave
the U.S. dollar a boost against the euro and Japanese yen,
and ultimately resulted in EM currency weakness and a steep
sell-off in EM equities during the month of September. While
the sell-off was broad-based, the sharpest declines were
seen in Latin American markets, especially in Brazil, where
the local equity index lost nearly 12% and the currency fell
more than 8% in September alone.
Going into the fourth quarter, cheaper valuations resulting
from weaker EM currencies and wider credit spreads should
help support EM risk assets, especially EM equities. We
expect the weakness in EM equities and currencies to be
contained as we believe the uncertainty around U.S. rates
and dollar strength has already been largely factored into
asset prices. EM equity valuations remain cheap relative to
the historical norm at 11.06 times the forward price-toequity ratio and EM policy makers have demonstrated their
willingness to act in the event of external shocks.
OPPORTUNITIES
RISKS
} Reduced financial vulnerabilities.
The countries most vulnerable to changes in global
liquidity—Brazil, India, Turkey, So. Africa and Indonesia
(known as the “Fragile Five”)—have improved their current
accounts and increased their hard currency reserves while
their local currencies have become more competitive.
} U.S. rates reverse sharply upward.
Continued U.S. growth combined with a healthy labor
market could convince the central bank to increase the
federal funds rate sooner than previously anticipated. Such
action could cause another spike in short-term rates and
further strengthen the U.S. dollar against EM currencies.
} Continued abundance of global central bank liquidity.
Even as the U.S. is tapering stimulus, the European Central
Bank and Bank of Japan are likely to continue their
accommodative posture well into 2015.
} China undershoots its GDP growth rate target.
Chinese officials are orchestrating a measured cooling
down of the economy with a lower target annual GDP
growth rate of 7% for 2015. Should GDP growth fall below
that level, commodity prices would be likely to fall, to the
detriment of EM exporters, and expectations for weaker
corporate earnings would drive down EM equity prices.
} Resilience after U.S. curve flattening.
Although initially painful for EM currencies, U.S. Treasury
yield curve flattening has historically been only a
temporary headwind for EM risk assets.
Positioning
As the third quarter came to a close, we increased the Fund’s
exposure to countries where particularly poor performance
in September led to compelling valuations. Specifically, we
added to equity positions in Brazil. We also increased equity
exposure in Korea, where fundamentals continued to
improve. We took profits on Thai stocks on the back of their
recent strong performance, thereby reducing the Fund’s
overweight to Thailand.
In fixed income, the Fund continues to maintain a strategic
bias toward higher quality issues. We believe the benefits of
greater diversification against EM equity risk continue to
outweigh the cost of sacrificing the slightly higher yields
available in lower credit quality tiers. At the end of the
third quarter, the Fund’s fixed income portfolio has an
aggregate credit rating that is materially higher than that
of the benchmark, with over 15% of the portfolio rated
single A or higher.
As we head into the fourth quarter, the Fund’s overall
level of portfolio risk remains similar to that of the
blended benchmark.
% AVERAGE ANNUAL TOTAL RETURNS AS OF 9/30/14
3Q14
YTD
(not annualized) (not annualized)
1 Year
3 Years
5 Years
10 Years
Since
Inception2
Institutional1
0.41
6.11
6.47
—
—
—
-1.33
Investor A (Without Sales Charge)
0.31
5.90
6.19
—
—
—
-1.60
-4.96
0.34
0.61
—
—
—
-5.39
Lipper Emerging Market Funds Avg.
-3.42
2.10
4.80
7.76
4.28
9.81
—
Morningstar Diversified Emerging
Markets Funds Avg.
-3.47
2.08
4.81
7.92
4.28
9.83
—
Blended Benchmark4
-2.91
4.38
5.80
—
—
—
—
Investor A (With Sales Charge)
3
Data represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate
so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment
of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for
most recent month-end performance. Share classes have different sales charges, fees and other features. Returns with sales
charge reflect deduction of current maximum initial sales charge of 5.25% for Investor A shares. Institutional shares have no
front- or back-end load. Minimum initial investment for Institutional shares is $2 million. Institutional shares also are available
to clients of registered investment advisors with $250,000 invested in the fund, and offered to participants in various wrap
fee programs and other sponsored arrangements at various minimums. Expenses for Institutional shares: Total 1.92%; Net,
Including Investment Related Expenses (dividend expense, interest expense, acquired fund fees and expenses and certain other
fund expenses) 1.52%; Net, Excluding Investment Related Expenses 1.40%. For Investor A shares: Total 2.64%; Net, Including
Investment Related Expenses 1.77%; Net, Excluding Investment Related Expenses 1.65%. Institutional and Investor A shares
have contractual waivers with an end date of 3/1/15 terminable upon 90 days’ notice. Expenses stated as of the fund’s most
recent prospectus. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.
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Important Risks: The fund is actively managed and its characteristics will vary. The fund may invest in other funds and therefore
is subject to the risks associated with the underlying BlackRock funds in which it invests. Stock and bond values fluctuate in
price so the value of your investment can go down depending on market conditions. International investing involves special
risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments
in emerging markets. Investments in emerging markets may be considered speculative and are more likely to experience
hyperinflation and currency devaluations, which adversely affect returns. In addition, many emerging securities markets have
lower trading volumes and less liquidity. Fixed income risks include interest-rate and credit risk. Typically, when interest rates
rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to
make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater
market fluctuations, risk of default or loss of income and principal than higher-rated securities. Asset allocation strategies do not
assure profit and do not protect against loss. Non-diversification of investments means that more assets are potentially invested
in fewer securities than if investments were diversified, so risk is increased because each investment has a greater effect on
performance. Short selling entails special risks. If the fund makes short sales in securities that increase in value, the fund will
lose value. Any loss on short positions may or may not be offset by investing short-sale proceeds in other investments. The fund
may use derivatives to hedge its investments or to seek to enhance returns. Derivatives entail risks relating to liquidity, leverage
and credit that may reduce returns and increase volatility.
The opinions expressed are those of the fund’s portfolio management team as of September 30, 2014, and may change as subsequent conditions vary. Information and opinions are
derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee
that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
1 Institutional and Class R shares are not available to all investors. Please see prospectus for details. 2 Fund Inception: 5/16/13. 3 Lipper category is as of 9/30/14 and may not
accurately represent the current composition of the portfolio. 4 The Blended Benchmark represents 60% MSCI Emerging Markets Index/40% JP Morgan Emerging Market Bond Index
Plus. The free float-adjusted, market capitalization-weighted MSCI Emerging Markets Index measures equity market performance of emerging markets. The JP Morgan EMBI Plus tracks
total returns for US dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities including Brady bonds, loans and Eurobonds.
You should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The
prospectus and, if available, the summary prospectus contain this and other information about the fund and are available,
along with information on other BlackRock funds, by calling 800-882-0052 or from your financial professional. The prospectus
should be read carefully before investing.
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those of their respective owners.
Prepared by BlackRock Investments, LLC, member FINRA.
Not FDIC Insured • May Lose Value • No Bank Guarantee
Lit. No. EMA-EXP-COM-0914
OE31403T-1014 / USR-4820