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BlackRock Series Fund II, Inc. – ‘N-CSR’ for 12/31/19

On:  Friday, 2/28/20, at 10:22am ET   ·   Effective:  2/28/20   ·   For:  12/31/19   ·   Accession #:  1193125-20-54893   ·   File #:  811-23345

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 2/28/20  BlackRock Series Fund II, Inc.    N-CSR      12/31/19    3:7.9M                                   Donnelley … Solutions/FA
          → BlackRock High Yield Portfolio
          → BlackRock U.S. Government Bond Portfolio

Document/Exhibit                   Description                      Pages   Size 

 1: N-CSR       Blackrock Series Fund Ii, Inc.                      HTML   4.79M 
 3: EX-99.906 CERT  Certification Pursuant to Section 906           HTML      7K 
 2: EX-99.CERT  Certification Pursuant to Section 302               HTML     13K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number: 811-23345

Name of Fund:  BlackRock Series Fund II, Inc.

BlackRock High Yield Portfolio

BlackRock U.S. Government Bond Portfolio    

Fund Address:    100 Bellevue Parkway, Wilmington, DE 19809

Name and address of agent for service: John M. Perlowski, Chief Executive Officer, BlackRock Series Fund II, Inc., 55 East 52^nd Street, New York, NY 10055

Registrant’s telephone number, including area code: (800) 441-7762

Date of fiscal year end: 12/31/2019

Date of reporting period: 12/31/2019

Item 1 – Report to Stockholders

		DECEMBER 31, 2019

BlackRock Series Fund, Inc.

BlackRock Series Fund II, Inc.

Table of Contents

Investment Objective

BlackRock Advantage Large Cap Core Portfolio’s (the “Fund”) investment objective is to seek long-term capital appreciation.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended December 31, 2019, the Fund underperformed its benchmark, the Russell 1000^® Index.

What factors influenced performance?

The Fund’s relative return was challenged during the latter half of the year, with underperformance driven primarily by the sentiment-based group of insights, which struggled significantly amid increased market volatility. A series of inflection points, largely motivated by shifts in global trade conversations and central bank policy, created a difficult environment for the portfolio’s trend-based insights. Cross-market sentiment insights also struggled throughout much of the period. Of note, identifying the sentiment of informed bond investors was the top individual detractor for the period. The signal’s more defensive properties went unrewarded through much of the year, and a steady decline in interest rates, most pronounced in the third quarter, created a challenging environment for the insight. Broadly speaking, the Fund’s sentiment-based insights were least effective in select cyclical sectors, specifically financials and communication services. Among the fundamental group of insights, signals seeking to identify relative value opportunities were very challenged early in the year as investors sought out speculative growth opportunities at the expense of company fundamentals. Macro thematic insights further detracted from relative returns throughout the period, caused by weakness across several industry timing insights. Of note, while the Fund targets a generally sector- and industry-neutral approach, maintaining a modest overweight in the biotechnology industry was a drag on relative performance, as the industry struggled early in the year and underperformed the broader market in 2019.

Despite detracting modestly in aggregate, insights evaluating company fundamentals provided some ballast to relative performance toward the end of the year. As the market mentality shifted toward the end of the third quarter, insights seeking to identify relative value opportunities were supportive of results. Also, among insights evaluating company fundamentals, quality signals were mixed throughout the year, contributing modestly in aggregate. Of note, alternative measures of company quality were particularly beneficial, including a signal evaluating companies on a series of longer-term sustainability measures and a signal conducting machine- learned text analysis of company news filings. Finally, sentiment insights were successful early in the year, with more trend-based sentiment insights strengthening relative performance during the first quarter and much of the second.

Describe recent portfolio activity.

Over the course of the period, the portfolio maintained a balanced allocation of risk across all major return drivers. However, a number of new stock selection insights were added to the portfolio. Among these is a machine-learned signal that pulls from several alternative data sources in seeking to more accurately gauge consumer transactions. In addition, an insight that evaluates trade volumes to determine broker concentration and identify overcrowded trades was introduced to the portfolio. Finally, the investment adviser improved upon an existing signal, expanding the data sources used to identify trends in company hiring as an indication of future company growth.

Describe portfolio positioning at period end.

Relative to the Russell 1000^® Index, the Fund was positioned essentially neutrally from a sector perspective. The Fund had slight overweight positions in the financials and industrials sectors and slight underweight positions in the real estate and consumer discretionary sectors.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended December 31, 2019

Past performance is not indicative of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

Expense Example

See “Disclosure of Expenses” on page 24 for further information on how expenses were calculated.

Portfolio Information

Investment Objective

BlackRock Balanced Capital Portfolio’s (the “Fund”) investment objective is to seek high total investment return.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended December 31, 2019, the Fund returned 22.06%, underperforming its blended benchmark (60% Russell 1000^® Index/40% Bloomberg Barclays U.S. Aggregate Bond Index), which returned 22.16% for the period. The Russell 1000^® Index returned 31.43%, while the Bloomberg Barclays U.S. Aggregate Bond Index returned 8.72%.

What factors influenced performance?

From an asset allocation perspective, an overweight position to the euro detracted from performance as the currency weakened throughout the year and lagged the U.S. dollar on the back of weaker manufacturing data and trade tensions.

Within the equity allocation, underperformance was primarily driven by the portfolio’s sentiment-based group of insights, which struggled significantly in the second half of the year amid increased market volatility. A series of inflection points, largely motivated by shifts in global trade conversations and central bank policy, created a difficult environment for the portfolio’s trend-based insights. Cross-market sentiment insights also struggled throughout much of the period. Of note, identifying the sentiment of informed bond investors was the top individual detractor for the period. Meanwhile, in the fixed income allocation, the portfolio’s overweight to agency mortgage-backed securities (“MBS”) and macro-oriented strategies detracted from performance for the period.

From an asset allocation perspective, the investment adviser’s positive view on U.S. equities was the main contributor to Fund performance. The rally was driven by market perceptions of a more dovish Fed and an abatement in concerns over a deceleration in global growth on the back of more positive consumer and growth data. Additionally, the Fund’s tactical overweight to U.S. duration (duration is a measure of interest rate sensitivity) in early 2019 boosted returns as bond prices rebounded from December 2018’s lows.

The portfolio’s quality signals within the Fund’s equity allocation had mixed results and contributed modestly in aggregate. Of note, alternative measures of company quality were particularly beneficial, including a signal evaluating companies on a series of longer-term sustainability measures and a signal conducting machine-learned text analysis of company news filings. In the fixed income allocation, overweight positions to investment grade corporate credit, municipal bonds, collateralized loan obligations and non-agency MBS contributed positively to performance.

Describe recent portfolio activity.

During the first half of the period, the Fund removed its overweight to Japanese equities and trimmed its overweight to U.S. equities and U.S. duration as global growth and inflation data continued to moderate and asset prices moved more in line with expectations. During the second half of the period, the Fund further trimmed its overweight to U.S. equities and moved from an overweight to an underweight position in U.S. duration given favorable moves in pricing and the expectation that market pricing of the Fed was overly dovish amid positive growth data and stable inflationary pressures.

In the equity allocation of the Fund, the portfolio maintained a balanced allocation of risk across all major return drivers. However, a number of new stock selection insights were added to the portfolio. Among these is a machine-learned signal that pulls from several alternative data sources to try to more accurately gauge consumer transactions. In addition, an insight that evaluates trade volumes to determine broker concentration and identify overcrowded trades was introduced to the portfolio. Finally, the portfolio improved upon an existing signal, expanding the data sources used to identify trends in company hiring as an indication of future company growth.

Within the fixed income allocation of the Fund, the portfolio modestly increased its overweight to duration while slightly rotating exposure out on the curve during the first half of the year. The portfolio also added tactically in emerging markets on the view that a dovish Fed would take upward pressure off the dollar and allow for easier local monetary policy. During the third quarter of 2019, the portfolio slightly increased its duration, maintaining a small overweight in duration versus the fixed-income benchmark. During the fourth quarter of 2019, the portfolio reduced its overweight to investment grade corporate credit in favor of adding to agency MBS and inflation-protected bonds given favorable moves in market pricing.

Describe portfolio positioning at period end.

The Fund ended the period with a preference for stocks over bonds given modest improvements in global growth and inflation data. Within equities, the Fund was overweight to the U.S. market on the view that the Fed’s policy shift supports the outlook for further gains. Within fixed income, the Fund ended the period with an underweight duration stance given the scope for yields to move higher from the current low levels.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended December 31, 2019

Past performance is not indicative of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

Expense Example

Portfolio Information

Investment Objective

BlackRock Capital Appreciation Portfolio’s (the “Fund”) investment objective is to seek long term growth of capital.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended December 31, 2019, the Fund underperformed its benchmark, the Russell 1000^® Growth Index, and outperformed the broad market S&P 500^® Index. The following discussion of relative performance pertains to the Russell 1000^® Growth Index.

What factors influenced performance?

Stock selection within the information technology (“IT”) and communication services sectors along with an overweight to health care were the largest detractors from relative performance for the period. In IT, an underweight to the technology hardware, storage and peripherals subsector, specifically to Apple Inc., hurt performance. Within communication services, selection among interactive media & services companies weighed on the Fund’s return, most notably an out-of-benchmark position in Chinese gaming and social media conglomerate Tencent Holdings Ltd. In the health care sector, overweight positions in managed care companies Centene Corp. and UnitedHealth Group, Inc. detracted.

Positive contributions to relative performance were led by stock selection within industrials, real estate and consumer discretionary. In industrials, selection in the professional services industry with an overweight to CoStar Group, Inc. drove Fund performance. In real estate, selection in REITs added to relative performance, highlighted by an overweight position in SBA Communications Corp. In consumer discretionary, selection in the internet & direct marketing retail industry proved advantageous, most notably an out-of-benchmark position in Argentine e-commerce company Mercado Libre, Inc.

Describe recent portfolio activity.

Due to a combination of portfolio trading activity, market movement and sector reclassifications during the 12-month period, the Fund’s weighting in the IT sector increased, particularly within the IT services and the technology hardware, storage & peripherals industries. The Fund’s industrials exposure also increased, namely within professional services and aerospace & defense. Exposure to health care decreased, largely with respect to the health care providers & services segment. The Fund’s communication services exposure also decreased, namely holdings within the entertainment segment.

Describe portfolio positioning at period end.

As of period end, the Fund’s largest overweight relative to the Russell 1000^® Growth Index was to the consumer discretionary sector, followed by materials. Consumer staples was the largest sector underweight, followed by IT.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON $10,000 INVESTMENT

Performance Summary for the Period Ended December 31, 2019

Past performance is not indicative of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.

Expense Example

Portfolio Information

Investment Objective

BlackRock Global Allocation Portfolio’s (the “Fund”) investment objective is to seek high total investment return.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended December 31, 2019, the Fund underperformed both its Reference Benchmark and the broad-based all-equity benchmark, the FTSE World Index. The Reference Benchmark is comprised as follows: 36% S&P 500^® Index; 24% FTSE World (ex U.S.) Index; 24% ICE BofAML Current 5-Year U.S. Treasury Index; and 16% FTSE Non-U.S. Dollar World Government Bond Index. The Fund invests in both equities and bonds, and therefore, Fund management believes that the Reference Benchmark provides a more accurate representation of the Fund’s composition and is a more comparable means for measurement. The following discussion of relative performance pertains to the Reference Benchmark. The following commentary (and referenced allocation percentages) are based on the economic exposures of the Fund, which reflect adjustments for futures, options and swaps, (except with respect to fixed income securities), and convertible bonds, and may vary relative to the market value.

What factors influenced performance?

Within equities, an underweight to and security selection within information technology (“IT”) weighed on the Fund’s return, as did security selection within and an overweight to industrials. Stock selection within consumer discretionary and health care also detracted. From a regional perspective, an overweight to Japan weighed on Fund performance. Within fixed income, exposure to select emerging market sovereign bonds negatively impacted the Fund. Exposure to cash and cash equivalents and exposure to gold-related securities also constrained performance.

Within equities, security selection within the communication services and materials sectors, as well as security selection within and underweights to financials and consumer staples, contributed to Fund performance. Stock selection within energy was also additive, although this was largely offset by an overweight to the sector. Portfolio positioning within fixed income, specifically management of duration (and corresponding interest rate sensitivity), positively impacted performance. An underweight to Japanese government bonds was also additive. Exposure to U.S. corporate credit, notably investment grade, also contributed to performance.

Describe recent portfolio activity.

During the period, the Fund’s overall equity allocation increased from 58% to 67% of net assets. Within equities, the Fund increased exposure to the United States and Europe, notably Germany, Italy and France, and decreased exposure to Japan. From a sector perspective, the Fund increased exposure to IT, industrials, consumer discretionary and financials, and decreased exposure to energy, communication services and consumer staples. The Fund’s allocation to fixed income decreased from 33% to 27% of net assets. Within fixed income, the Fund decreased exposure to government bonds and corporate credit. From a duration perspective, the Fund increased total portfolio duration from 1.2 years to 1.7 years. The Fund’s allocation to commodity-related securities remained unchanged at 2% of net assets.

Reflecting the changes in the Fund’s overall allocations to the equity, fixed income and commodity-related asset classes during the period, the Fund’s cash equivalents decreased from 7% to 4% of net assets. During the 12-month period, cash helped mitigate portfolio volatility and served as a source of funds for new investments and redemptions.

Describe portfolio positioning at period end.

Relative to its Reference Benchmark, the Fund was overweight in equities and underweight in fixed income, with modest exposure to commodity-related securities and cash and cash equivalents. Within equities, the Fund was overweight in the United States and Asia, primarily China, and underweight in Europe, specifically the United Kingdom and Switzerland. From a sector perspective, the Fund was overweight in health care, communication services and consumer discretionary, and underweight in consumer staples, financials and real estate. Within fixed income, the Fund was underweight in developed market government bonds and overweight in corporate bonds. With respect to currency exposure, the Fund was overweight in the Hong Kong dollar and Indian rupee, and underweight in the U.S. dollar and British pound sterling.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended December 31, 2019

Expense Example

Overall Asset Exposure

2019 is officially in the books-as the year progressed, investors witnessed a pivot from the Fed hiking rates in 2018 to delivering 0.25% cuts in July, September and October to the Federal Funds target rate, which ended the year in a range of 1.50% — 1.75%. Prompting these cuts, in our view, were concerns about slowing global growth amid uncertainties associated with geopolitical events, including U.S.-China trade tensions, and muted inflation. We believe such concerns were also reflected in the slope of the U.S. Treasury yield curve between three months and 10 years, which was periodically inverted during 2019. However, even as the U.S. economy began to exhibit signs of softness, a strong labor market and rising consumer spending helped keep the economic expansion intact, with the support of the Fed’s more accommodative policy. The future path for the Federal Funds rate looks to be stable for the foreseeable future as the Fed has acknowledged, in our opinion, a relatively high bar for further policy action.

Another notable event this year was the bout of temporary excessive volatility in the repurchase agreement (“repo”) market in mid-September, which was due in part to a prior contraction in excess reserves in the banking system and outsized deposit flow activity related to corporate tax payments and the settlement of Treasury obligations. This situation prompted the Fed to inject a substantial amount of liquidity into the financial system during the balance of the year. Specifically, the Fed conducted regular overnight and term repo operations (known as temporary open market operations), and also began purchasing Treasury bills beginning at a rate of $60 billion per month in order to support the flow of funds and help maintain control over short-term interest rates. The dislocations in the repo market highlighted, in our opinion, the need for the Fed to determine the appropriate level of excess reserves in the post financial crisis regulatory environment.

In July, the U.S. debt ceiling was again suspended, and net new Treasury bill issuance exceeded $250 billion in 2019. That said, the expanded footprint by the Fed in the Treasury bill market, in our view, contributed to a reduction in investable supply available to the public and, in part, caused a contraction in the relative value of such instruments during the latter part of the year.

Another important development in 2019 included the government-sponsored agencies, having been guided by regulatory agencies, issuing floating rate notes indexed to the Secured Overnight Financing Rate (“SOFR”), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, and the reference rate generally expected to replace the London Interbank Offered Rate (“LIBOR”). In addition to the agency notes referenced to SOFR, some large financial institutions also issued certificates of deposit and commercial paper linked to this index, and demand for such obligations was generally strong. Sticking on the topic of demand, asset flows into money market mutual funds and short duration bond funds were strong while primary market investment grade issuance was reportedly down rather markedly. This technical backdrop supported spreads in credit instruments during the year, and we believe this dynamic should continue to play out in 2020. Similar to 2018, we witnessed seasonal spread widening of the three-month LIBOR overnight-indexed swap spread, a general proxy for bank funding stress. In our opinion, issuers appeared willing to pay up in terms of additional yield spread to secure their funding needs over stress periods such as corporate tax payment days and balance sheet reporting dates, including most importantly year end, as investors paid close attention to the funding markets for clues to monetary system pressures.

With the market pricing in little action for further interest rate cuts, the Fed providing liquidity to the market during stress periods, assets continuing to flow into money market funds, and tentative optimism over the near-term outlook for global trade, we consider 2019 historic in many ways.

Looking ahead, as of the end of December, futures contracts were priced for less than one rate cut during 2020, with recent Fed comments reinforcing that policy is in a good place. We believe this market pricing to be slightly overdone, and we do not expect a further cut to the federal funds rate at this time–barring any adverse economic events.

In our opinion, we expect publicly available investable Treasury bill supply will remain negative into the first few months of 2020 as the Fed is expected to remain an active buyer of Treasury bills and potentially Treasury coupons in 2020. We also expect that investment grade corporate bond issuance will be flat to down for the year ahead as issuers may have already taken advantage of a flat-to-inverted yield curve in 2019. Finally, we look for the three-month LIBOR overnight-indexed swap spread to return to the historical average range of around 0.19% — 0.25% as credit instruments, in our view, appear more attractive relative to short-dated Treasuries. Furthermore, we expect LIBOR to reset lower over the turn of the new year.

Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Investment Objective

BlackRock Government Money Market Portfolio’s (the “Fund”) investment objective is to seek to preserve capital, to maintain liquidity and achieve the highest possible current income consistent with the foregoing.

Portfolio Information

Expense Example

Investment Objective

BlackRock High Yield Portfolio’s (the “Fund”) investment objective is to seek to maximize total return, consistent with income generation and prudent investment management.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended December 31, 2019, the Fund outperformed the benchmark, the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index.

What factors influenced performance?

High yield bonds performed very well in 2019, as steady economic growth and supportive Fed policy boosted investors’ willingness to search for income in the higher-risk segments of the bond market.

Security selection, particularly in the technology, independent energy, and pharmaceutical industries, was a key contributor to the Fund’s relative performance. Credits rated B were the largest contributors by rating, followed by strong security selection within the CCC rated segment.

The Fund’s underweight positions in the retail, consumer products, and home construction industries were the largest detractors at the sector level. An underweight in BB rated securities also detracted, as this high-quality market segment outperformed in 2019. From an asset allocation perspective, an out-of-benchmark position in floating rate loan interests (“bank loans”)—which underperformed high yield bonds—detracted from relative performance.

The Fund may invest in credit default swaps (“CDS”), index credit default swaps (“CDX”) and currency forward contracts. The Fund intermittently employs currency forwards to manage the currency risk of non-dollar denominated bonds, and it uses CDS and CDX to manage risk, express credit views and put capital to work in moving markets. On occasion, the Fund may use equity index futures to manage the risk of financial-market volatility. In combination, these positions had a positive impact on performance for the Fund’s annual period.

Describe recent portfolio activity.

While the Fund’s key investment themes remained broadly consistent, the investment adviser sought to adjust sector- and issuer-level positioning to take advantage of market opportunities. Overall, the Fund continued to favor a measured approach to risk taking.

The Fund maintained an allocation to bank loans, although the investment adviser reduced this position to capitalize on more compelling relative value opportunities in high yield. At the sector level, the Fund decreased its allocation to energy issues during the year.

Describe portfolio positioning at period end.

The Fund was overweight in B rated issues, while underweight in BBs and overweight in select CCCs. The investment adviser’s criteria for owning CCC bonds included the potential for near-term rating upgrade and a specific catalyst for price appreciation.

In addition to holding a core position in high yield bonds and a tactical allocation to loans, the Fund maintained a smaller weighting in common stocks. The Fund’s leading sector overweights were in technology, aerospace & defense, and banking, while midstream energy and consumer cyclicals (primarily retail and home construction) were the largest underweights.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended December 31, 2019

Expense Example

Portfolio Information

Investment Objective

BlackRock U.S. Government Bond Portfolio’s (the “Fund”) investment objective is to seek to maximize total return, consistent with income generation and prudent investment management.

Portfolio Management Commentary

How did the Fund perform?

For the 12-month period ended December 31, 2019, the Fund outperformed its benchmark, the Bloomberg Barclays U.S. Government/Mortgage Index.

What factors influenced performance?

Positive contributors to performance relative to the benchmark included the Fund’s stance with respect to U.S. interest rates. Specifically, an above-benchmark stance with respect to duration (and corresponding interest rate sensitivity) aided the Fund’s return as Treasury yields declined. Within securitized sectors, an allocation to commercial mortgage-backed securities (“CMBS”) contributed positively to performance, as the segment continued to benefit from favorable fundamentals. In addition, the Fund’s exposure to inflation-protected securities and security selection with 30-year agency mortgage-backed securities (“MBS”) proved beneficial.

Detractors from the Fund’s performance relative to the benchmark included the use of swap and swaption strategies to gain tactical interest rate exposures. Positioning with respect to global interest rates and currencies also weighed on the Fund’s return.

Describe recent portfolio activity.

During the reporting period, the Fund’s underweight position to agency MBS was shifted to an overweight as valuations became attractive and the investment adviser’s fundamental outlook remained positive. The Fund maintained an overweight allocation to CMBS overall while trimming exposure to agency CMBS. The Fund shifted from an underweight stance with respect to duration to a duration overweight relative to the benchmark.

The Fund had a modestly elevated cash position at period end due to the investment adviser increasing a preference for using forward contracts to gain MBS exposure as opposed to holding cash bonds. The Fund’s cash position did not have a material impact on performance over the 12 months.

Describe portfolio positioning at period end.

The Fund was overweight in agency MBS relative to the benchmark, with exposures continuing to favor higher coupons relative to lower coupons, given valuations that appeared attractive relative to the underlying fundamentals. The Fund continued to hold a core allocation to CMBS and agency collateralized mortgage obligations for carry (incremental income). The Fund was slightly overweight in duration at the headline level, favoring the front end of the yield curve. The Fund had meaningful exposure to U.S. inflation on the view that the market is underpricing a potential pickup in realized inflation data. Outside the United States, the Fund was marginally positioned on the long end of the yield curve in German, Italian and Canadian interest rates, and positioned short to U.K. rates. Additionally, the Fund had an allocation to local currency emerging market sovereign debt in Asia, Latin America and Central Europe.

The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.

Portfolio Information

TOTAL RETURN BASED ON A $10,000 INVESTMENT

Performance Summary for the Period Ended December 31, 2019

Expense Example

See “Disclosure of Expenses” on page 24 for further information on how expenses were calculated.

The Benefits and Risks of Leveraging

The Funds may utilize leverage to seek to enhance returns and net asset value (“NAV”). However, there is no guarantee that these objectives can be achieved in all interest rate environments.

The Funds may utilize leverage by entering into reverse repurchase agreements.

In general, the concept of leveraging is based on the premise that the financing cost of leverage, which is based on short-term interest rates, is normally lower than the income earned by each Fund on its longer-term portfolio investments purchased with the proceeds from leverage. To the extent that the total assets of each Fund (including the assets obtained from leverage) are invested in higher-yielding portfolio investments, the Funds’ shareholders benefit from the incremental net income.

The interest earned on securities purchased with the proceeds from leverage is distributed to the Funds’ shareholders, and the value of these portfolio holdings is reflected in the Funds’ per share NAV. However, in order to benefit shareholders, the return on assets purchased with leverage proceeds must exceed the ongoing costs associated with the leverage. If interest and other ongoing costs of leverage exceed a Fund’s return on assets purchased with leverage proceeds, income to shareholders is lower than if the Funds had not used leverage.

Furthermore, the value of each Fund’s portfolio investments generally varies inversely with the direction of long-term interest rates, although other factors can also influence the value of portfolio investments. As a result, changes in interest rates can influence each Fund’s NAV positively or negatively in addition to the impact on each Fund’s performance from leverage. Changes in the direction of interest rates are difficult to predict accurately, and there is no assurance that a Fund’s leveraging strategy will be successful.

The use of leverage also generally causes greater changes in each Fund’s NAV and dividend rates than comparable portfolios without leverage. In a declining market, leverage is likely to cause a greater decline in the NAV of a Fund’s shares than if the Fund were not leveraged. In addition, each Fund may be required to sell portfolio securities at inopportune times or at distressed values in order to comply with regulatory requirements applicable to the use of leverage or as required by the terms of the leverage instruments, which may cause the Fund to incur losses. The use of leverage may limit a Fund’s ability to invest in certain types of securities or use certain types of hedging strategies. Each Fund incurs expenses in connection with the use of leverage, all of which are borne by each Fund’s shareholders and may reduce income.

Disclosure of Expenses

Shareholders of the Funds may incur the following charges: (a) transactional expenses; and (b) operating expenses, including investment advisory fees, service and distribution fees, including 12b-1 fees, acquired fund fees and expenses, and other fund expenses. The expense examples on the previous pages (which are based on a hypothetical investment of $1,000 invested on July 1, 2019 and held through December 31, 2019) are intended to assist shareholders both in calculating expenses based on an investment in each Fund and in comparing these expenses with similar costs of investing in other mutual funds.

The expense examples provide information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number corresponding to their Fund under the heading entitled “Expenses Paid During the Period.”

The expense examples also provide information about hypothetical account values and hypothetical expenses based on a Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in these Funds and other funds, compare the 5% hypothetical examples with the 5% hypothetical examples that appear in shareholder reports of other funds.

The expenses shown in the expense examples are intended to highlight shareholders’ ongoing costs only and do not reflect transactional expenses, such as sales charges, if any. Therefore, the hypothetical examples are useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.

Derivative Financial Instruments

The Funds may invest in various derivative financial instruments. These instruments are used to obtain exposure to a security, commodity, index, market, and/or other assets without owning or taking physical custody of securities, commodities and/or other referenced assets or to manage market, equity, credit, interest rate, foreign currency exchange rate, commodity and/or other risks. Derivative financial instruments may give rise to a form of economic leverage and involve risks, including the imperfect correlation between the value of a derivative financial instrument and the underlying asset, possible default of the counterparty to the transaction or illiquidity of the instrument. The Funds’ successful use of a derivative financial instrument depends on the investment adviser’s ability to predict pertinent market movements accurately, which cannot be assured. The use of these instruments may result in losses greater than if they had not been used, may limit the amount of appreciation a Fund can realize on an investment and/or may result in lower distributions paid to shareholders. The Funds’ investments in these instruments, if any, are discussed in detail in the Notes to Financial Statements.