“Level 2” and unobservable inputs, including the sub-advisers’ or Pricing Committee’s judgment about the assumptions that a market participant would use in pricing an asset or liability are classified as “Level 3.” The inputs used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. Short-term securities of sufficient credit quality are generally considered to be Level 2 securities under applicable accounting rules. A table summarizing each Portfolio’s investments under these levels of classification is included following the Portfolios of Investments.
U.S. GAAP requires a reconciliation of the beginning to ending balances for reported fair values that presents changes attributable to total realized and unrealized gains or losses, purchases and sales, and transfers in or out of the Level 3 category during the period. The beginning of period timing recognition is used for the transfers between Levels of the Portfolio’s assets and liabilities. A reconciliation of Level 3 investments is presented only when a Portfolio has a significant amount of Level 3 investments.
For the six months ended June 30, 2016, there have been no significant changes to the fair valuation methodologies.
Although the net assets and the market values are presented at the foreign exchange rates at Market Close, the Portfolios do not isolate the portion of their results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gains or losses from investments. For securities, which are subject to foreign withholding tax upon disposition, liabilities are recorded on the Statement of Assets and Liabilities for the estimated tax withholding based on the securities’ current market value. Upon disposition, realized gains or losses on such securities are recorded net of foreign withholding tax.
Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of dividends, interest, and foreign withholding tax reclaims recorded on the Portfolios’ books, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities other than investments in securities, resulting from changes in the exchange rate. Foreign security and currency transactions may involve certain considerations and risks not typically associated with investing in U.S. companies and U.S. government securities. These risks include, but are not limited to, revaluation of currencies and future adverse political and economic developments which could cause securities and their markets to be less liquid and prices more volatile than those of comparable U.S. companies and U.S. government securities. The foregoing risks are even greater with respect to securities of issuers in emerging markets.
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
shall be made until the capital loss carryforwards have been fully utilized or expired.
The Portfolios may utilize equalization accounting for tax purposes, whereby a portion of redemption payments are treated as distributions of income or gain.
F. Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
G. Risk Exposures and the Use of Derivative Instruments. The Portfolios’ investment strategies permit the Portfolios to enter into various types of derivatives contracts, including, but not limited to, futures contracts, forward foreign currency exchange contracts, credit default swaps, interest rate swaps, total return swaps, and purchased and written options. In doing so, a Portfolio will employ strategies in differing combinations to permit it to increase or decrease the level of risk, or change the level or types of exposure to market risk factors. This may allow a Portfolio to pursue its objectives more quickly, and efficiently than if it were to make direct purchases or sales of securities capable of affecting a similar response to market factors.
Market Risk Factors. In pursuit of its investment objectives, a Portfolio may seek to use derivatives to increase or decrease its exposure to the following market risk factors:
Credit Risk. The price of a bond or other debt instrument is likely to fall if the issuer’s actual or perceived financial health deteriorates, whether because of broad economic or issuer-specific reasons. In certain cases, the issuer could be late in paying interest or principal, or could fail to pay its financial obligations altogether.
Equity Risk. Stock prices may be volatile or have reduced liquidity in response to real or perceived impacts of factors including, but not limited to, economic conditions, changes in market interest rates, and political events. Stock markets tend to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. Any given stock market segment may remain out of favor with investors for a short or long period of time, and stocks as an asset class may underperform bonds or other asset classes during some periods. Additionally, legislative, regulatory or tax policies or developments in these areas may adversely impact the investment techniques available to a manager, add to costs and impair the ability of a Portfolio to achieve its investment objectives.
Foreign Exchange Rate Risk. To the extent that a Portfolio invests directly in foreign (non-U.S.) currencies or in securities denominated in, or that trade in, foreign (non-U.S.) currencies, it is subject to the risk that those foreign (non-U.S.) currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency being hedged by a Portfolio through foreign currency exchange transactions.
Currency rates may fluctuate significantly over short periods of time. Currency rates may be affected by changes in market interest rates, intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, by the imposition of currency controls, or other political or economic developments in the United States or abroad.
Interest Rate Risk. With bonds and other fixed rate debt instruments, a rise in market interest rates generally causes values to fall; conversely, values generally rise as market interest rates fall. The higher the credit quality of the instrument, and the longer its maturity or duration, the more sensitive it is likely to be to interest rate risk. In the case of inverse securities, the interest rate paid by the securities is a floating rate, which generally will decrease when the market rate of interest to which the inverse security is indexed increases and will increase when the market rate of interest to which the inverse security is indexed decreases. As of the date of this report, market interest rates in the United States are at or near historic lows, which may increase a Portfolio’s exposure to risks associated with rising market interest rates. Rising market interest rates could have unpredictable effects on the markets and may expose fixed-income and related markets to heightened volatility. For a portfolio that invests in fixed-income securities, an increase in market interest rates may lead to increased redemptions and increased portfolio turnover, which could reduce liquidity for certain investments, adversely affect values, and increase costs. If dealer capacity in fixed-income markets is insufficient for market conditions, it may further inhibit liquidity and increase volatility in the fixed-income markets.
Risks of Investing in Derivatives. A Portfolio’s use of derivatives can result in losses due to unanticipated changes in the market risk factors and the overall market. In instances where a Portfolio is using derivatives to decrease, or hedge, exposures to market risk factors for securities held by a Portfolio, there are also risks that those
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NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
derivatives may not perform as expected resulting in losses for the combined or hedged positions.
Derivative instruments are subject to a number of risks, including the risk of changes in the market price of the underlying securities, credit risk with respect to the counterparty, risk of loss due to changes in market interest rates and liquidity and volatility risk. The amounts required to purchase certain derivatives may be small relative to the magnitude of exposure assumed by a Portfolio. Therefore, the purchase of certain derivatives may have an economic leveraging effect on a Portfolio and exaggerate any increase or decrease in the net asset value. Derivatives may not perform as expected, so a Portfolio may not realize the intended benefits. When used for hedging purposes, the change in value of a derivative may not correlate as expected with the currency, security or other risk being hedged. When used as an alternative or substitute for direct cash investments, the return provided by the derivative may not provide the same return as direct cash investment. In addition, given their complexity, derivatives expose a Portfolio to the risk of improper valuation.
Generally, derivatives are sophisticated financial instruments whose performance is derived, at least in part, from the performance of an underlying asset or assets. Derivatives include, among other things, swap agreements, options, forwards and futures. Investments in derivatives are generally negotiated over-the-counter with a single counterparty and as a result are subject to credit risks related to the counterparty’s ability or willingness to perform its obligations; any deterioration in the counterparty’s creditworthiness could adversely affect the value of the derivative. In addition, derivatives and their underlying securities may experience periods of illiquidity which could cause a Portfolio to hold a security it might otherwise sell, or to sell a security it otherwise might hold at inopportune times or at an unanticipated price. A manager might imperfectly judge the direction of the market. For instance, if a derivative is used as a hedge to offset investment risk in another security, the hedge might not correlate to the market’s movements and may have unexpected or undesired results such as a loss or a reduction in gains.
The U.S. government has enacted legislation that provides for new regulation of the derivatives market, including clearing, margin, reporting, and registration requirements. The European Union (and other countries outside of the European Union) is implementing similar requirements, which will affect a Portfolio when it enters into a derivatives transaction with a counterparty organized in that country or otherwise subject to that country’s derivatives regulations. Because these requirements are new and evolving (and some of the rules are not yet final), their ultimate impact remains unclear. Central clearing is expected to reduce counterparty risk and increase liquidity, however, there is no assurance that it will achieve that result, and in the meantime, central clearing and related requirements expose a Portfolio to new kinds of costs and risks.
Counterparty Credit Risk and Credit Related Contingent Features. Certain derivative positions are subject to counterparty credit risk, which is the risk that the counterparty will not fulfill its obligation to a Portfolio. Each Portfolio’s derivative counterparties are financial institutions who are subject to market conditions that may weaken their financial position. A Portfolio intends to enter into financial transactions with counterparties that it believes to be creditworthy at the time of the transaction. To reduce this risk, a Portfolio has entered into master netting arrangements, established within each Portfolio’s International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreements (“Master Agreements”). These Master Agreements are with select counterparties and they govern transactions, including certain over-the-counter (“OTC”) derivative and forward foreign currency contracts, entered into by a Portfolio and the counterparty. The Master Agreements maintain provisions for general obligations, representations, agreements, collateral, and events of default or termination. The occurrence of a specified event of termination may give a counterparty the right to terminate all of its contracts and affect settlement of all outstanding transactions under the applicable Master Agreement.
A Portfolio may also enter into collateral agreements with certain counterparties to further mitigate counterparty credit risk on OTC derivative and forward foreign currency contracts. Subject to established minimum levels, collateral is generally determined based on the net aggregate unrealized gain or loss on contracts with a certain counterparty. Collateral pledged to or from a Portfolio is held in a segregated account by a third-party agent and can be in the form of cash or debt securities issued by the U.S. government or related agencies.
At June 30, 2016, the maximum amount of loss that BlackRock Inflation Protected Bond and Goldman Sachs Bond would incur if the counterparties to their derivative transactions failed to perform would be $5,778,992 and $1,120,481, respectively, which represents the gross payments to be received by the Portfolios on purchased options, forward foreign currency contracts, and OTC interest rate and inflation-linked swaps were they to be unwound as of June 30, 2016. At June 30, 2016, certain counterparties had pledged $1,320,000 in cash collateral to BlackRock Inflation Protected Bond . There was no cash
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NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
collateral pledged to Goldman Sachs Bond by any counterparty as June 30, 2016.
Each Portfolio has credit related contingent features that if triggered would allow its derivative counterparties to close out and demand payment or additional collateral to cover their exposure from a Portfolio. Credit related contingent features are established between a Portfolio and its derivatives counterparties to reduce the risk that a Portfolio will not fulfill its payment obligations to its counterparties. These triggering features include, but are not limited to, a percentage decrease in a Portfolio’s net assets and or a percentage decrease in a Portfolio’s NAV, which could cause a Portfolio to accelerate payment of any net liability owed to the counterparty. The contingent features are established within each Portfolio’s Master Agreements.
At June 30, 2016, BlackRock Inflation Protected Bond and Goldman Sachs Bond had a liability position of $4,842,065 and $1,039,208, respectively, on open OTC interest rate and inflation-linked swaps, forward foreign currency contracts and written options with credit related contingent features. If a contingent feature would have been triggered as of June 30, 2016, the Portfolios could have been required to pay this amount in cash to its counterparties. At June 30, 2016, BlackRock Inflation Protected Bond had pledged $810,000 in cash collateral for open OTC derivative transactions. At June 30, 2016, Goldman Sachs Bond did not pledge any cash collateral for its open OTC derivative transactions.
H. Forward Foreign Currency Contracts. A Portfolio may enter into forward foreign currency contracts primarily to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated investment securities. When entering into a forward foreign currency contract, a Portfolio agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. These contracts are valued daily and a Portfolio’s net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the Statements of Assets and Liabilities. Realized and unrealized gains and losses are included in the Statements of Operations. These instruments involve market and/or credit risk in excess of the amount recognized in the Statements of Assets and Liabilities. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in currency and securities values and interest rates. Open forward foreign currency contracts are presented following the Portfolios of Investments.
For the six months ended June 30, 2016, BlackRock Inflation Protected Bond and Goldman Sachs Bond had entered into forward foreign currency contracts with the obligation to buy and sell specified foreign currencies in the future at a currently negotiated forward rate in order to increase or decrease exposure to foreign exchange rate risk. The Portfolios use forward foreign currency contracts primarily to protect its non-U.S. dollar-denominated holdings from adverse currency movements and to gain exposure to currencies for the purposes of risk management or enhanced return.
During the six months ended June 30, 2016, BlackRock Inflation Protected Bond and Goldman Sachs Bond had average contract amounts on forward foreign currency contracts to buy and sell as disclosed below. Please refer to the tables following each respective Summary Portfolio of Investments for open forward foreign currency contracts at June 30, 2016.
| | | | Buy
| | Sell
|
|---|
| BlackRock Inflation Protected Bond | | | | $ | 754,162,600 | | | $ | 69,525,111 | |
| Goldman Sachs Bond | | | | | 138,733,856 | | | | 44,892,722 | |
I. Futures Contracts. Each Portfolio may enter into futures contracts involving foreign currency, interest rates, securities and security indices. A futures contract is a commitment to buy or sell a specific amount of a financial instrument at a negotiated price on a stipulated future date. Each Portfolio may buy and sell futures contracts. Futures contracts traded on a commodities or futures exchange will be valued at the final settlement price or official closing price on the principal exchange as reported by such principal exchange at its trading session ending at, or most recently prior to, the time when a Portfolio’s assets are valued.
Upon entering into a futures contract, a Portfolio is required to deposit either cash or securities (initial margin) in an amount equal to a certain percentage of the contract value. Subsequent payments (variation margin) are made or received by a Portfolio each day. The variation margin payments are equal to the daily changes in the contract value and are recorded as unrealized gains and losses. Open futures contracts are reported on a table following the Portfolios of Investments. Securities held in collateralized accounts to cover initial margin requirements on open futures contracts are footnoted in the Portfolios of Investments. Cash collateral held by the broker to cover initial margin requirements on open futures contracts are noted in the Statements of Assets and Liabilities. The net change in unrealized appreciation and depreciation is reported in the Statements of Operations. Realized gains (losses) are reported in the Statements of Operations at the closing or expiration of futures contracts.
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NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
At June 30, 2016, BlackRock Inflation Protected Bond has pledged U.S. Treasury Inflation Indexed Protected Securities with a original par value of $937,000 with the broker as collateral for open futures contracts. The security has been footnoted as pledged in the Portfolios of Investments.
Futures contracts are exposed to the market risk factor of the underlying financial instrument. Additional associated risks of entering into futures contracts include the possibility that there may be an illiquid market where a Portfolio is unable to liquidate the contract or enter into an offsetting position and, if used for hedging purposes, the risk that the price of the contract will correlate imperfectly with the prices of a Portfolio’s securities. With futures, there is minimal counterparty credit risk to a Portfolio since futures are exchange traded and the exchange’s clearinghouse, as counterparty to all exchange traded futures, guarantees the futures against default. During the six months ended June 30, 2016, BlackRock Inflation Protected Bond and Goldman Sachs Bond had purchased and sold futures contracts on various bonds and notes as part of their duration strategy.
During the six months ended June 30, 2016, BlackRock Inflation Protected Bond and Goldman Sachs Bond had average notional values on futures contracts purchased and sold as disclosed below. Please refer to the tables following each respective Summary Portfolio of Investments for open futures contracts at June 30, 2016.
| | | | Purchased
| | Sold
|
|---|
| BlackRock Inflation Protected Bond | | | | $ | 160,304,899 | | | $ | 188,678,350 | |
| Goldman Sachs Bond | | | | | 40,206,916 | | | | 10,359,558 | |
J. Options Contracts. The Portfolios may purchase put and call options and may write (sell) put options and covered call options. The Portfolios may engage in option transactions as a hedge against adverse movements in the value of portfolio holdings or to increase market exposure. Option contracts are valued daily and unrealized gains or losses are recorded based upon the last sales price on the principal exchange on which the options are traded. An amount equal to the premium received by the Portfolios upon the writing of a put or call option is included in the Statements of Assets and Liabilities as a liability which is subsequently marked-to-market until it is exercised or closed, or it expires. The Portfolios will realize a gain or loss upon the expiration or closing of the option contract. When an option is exercised, the proceeds on sales of the underlying security for a written call option, the purchase cost of the security for a written put option, or the cost of the security for a purchased put or call option is adjusted by the amount of premium received or paid. Realized and unrealized gains or losses on option contracts are reflected in the accompanying financial statements. The risk in writing a covered call option is that a Portfolio give up the opportunity for profit if the market price of the security increases and the option is exercised. The risk in writing a put option is that a Portfolio may incur a loss if the market price of the security decreases and the option is exercised. The risk in buying an option is that a Portfolio pay a premium whether or not the option is exercised. Risks may also arise from an illiquid secondary market or from the inability of counterparties to meet the terms of the contract.
During the six months ended June 30, 2016, BlackRock Inflation Protected Bond had purchased and written options on exchange-traded futures contracts to manage its duration strategy and to generate income. There were no open or written options on exchange-trade futures contracts at June 30, 2016.
During the six months ended June 30, 2016, BlackRock Inflation Protected Bond had purchased and written options on foreign currencies to manage its foreign exchange exposure and to generate income. Please refer to the Summary Portfolio of Investments and the tables following for open purchased and written foreign currency options at June 30, 2016.
During the six months ended June 30, 2016, BlackRock Inflation Protected Bond had purchased and written interest rate swaptions to manage its duration strategy and to generate income. Please refer to the Summary Portfolio of Investments and the tables following for open purchased and written interest rate swaptions at June 30, 2016.
During the June 30, 2016, BlackRock Inflation Protected Bond had purchased and written inflation rate caps to manage its inflation strategy and to generate income. Please refer to the Portfolios of Investments and the tables following for open purchased and written inflation rate caps at June 30, 2016.
During the six months ended Goldman Sachs Bond had purchased options on foreign currencies to manage its foreign exchange exposure. There were no open purchased foreign currency options at June 30, 2016.
Please refer to Note 9 for the volume of both purchased and written option activity for both BlackRock Inflation Protected Bond and Goldman Sachs Bond during the six months ended June 30, 2016.
K. Swap Agreements. The Portfolios may enter into swap agreements. A swap is an agreement between two parties pursuant to which each party agrees to make one or more payments to the other at specified future intervals based on the return of an asset (such as a stock, bond or currency) or non-asset reference (such as an interest rate or index).
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NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
Swap agreements are privately negotiated in the OTC market and may be executed in a multilateral or other trade facility platform, such as a registered commodities exchange (“centrally cleared swaps”).
The swap agreement will specify the “notional” amount of the asset or non-asset reference to which the contract relates. Subsequent changes in market value, if any, are calculated based upon changes in the performance of the asset or non-asset reference multiplied by the notional value of the contract. The Portfolios may enter into credit default, interest rate, total return and currency swaps to manage its exposure to credit, currency and interest rate risk. All outstanding swap agreements are reported following the Portfolios of Investments.
Swaps are marked to market daily using quotations primarily from third party pricing services, counterparties or brokers. The value of the swap contract is recorded on the Statements of Assets and Liabilities. During the term of the swap, changes in the value of the swap, if any, are recorded as unrealized gains or losses on the Statements of Operations. Upfront payments paid or received by a Portfolio when entering into the agreements are reported on the Statements of Assets and Liabilities and as a component of the changes in unrealized gains or losses on the Statements of Operations. These upfront payments represent the amounts paid or received when initially entering into the swap agreement to compensate for differences between the stated terms of the swap agreement and the prevailing market conditions. The upfront payments are included as a component in the realized gains or losses on the Statements of Operations upon termination or maturity of the swap. A Portfolio also records net periodic payments paid or received on the swap contract as a realized gain or loss on the Statements of Operations.
In a centrally cleared swap, immediately following execution of the swap agreement, the swap agreement is novated to a central counterparty (the “CCP”) and a Portfolio’s counterparty on the swap agreement becomes the CCP. A Portfolio is required to interface with the CCP through a broker. Upon entering into a centrally cleared swap, a Portfolio is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on the size and risk profile of the particular swap. Securities deposited as initial margin are footnoted as pledged on the Portfolios of Investments and cash deposited is recorded on the Statements of Assets and Liabilities as cash pledged for centrally cleared swaps. The daily change in valuation of centrally cleared swaps is recorded as a receivable or payable for variation margin in the Statements of Assets and Liabilities. Payments received from (paid to) the counterparty, including at termination, are recorded as realized gain (loss) on the Statements of Operations.
Entering into swap agreements involves the risk that the maximum potential loss of an investment exceeds the current value of the investment as reported on the Statements of Assets and Liabilities. Other risks involve the possibility that the counterparty to the agreements may default on its obligation to perform, that there will be no liquid market for these investments and that unfavorable changes in the market will have a negative impact on the value of the index or securities underlying the respective swap agreement.
Credit Default Swap Contracts. A credit default swap is a bilateral agreement between counterparties in which the buyer of the protection agrees to make a stream of periodic payments to the seller of protection in exchange for the right to receive a specified return in the event of a default or other credit event for a referenced entity, obligation or index. As a seller of protection on credit default swaps, a Portfolio will generally receive from the buyer a fixed payment stream based on the notional amount of the swap contract. This fixed payment stream will continue until the swap contract expires or a defined credit event occurs. A Portfolio is subject to credit risk in the normal course of pursuing its investment objectives. As a seller of protection in a credit default swap, a Portfolio may execute these contracts to manage its exposure to the market or certain sectors of the market. Certain Portfolios may also enter into credit default swaps to speculate on changes in an issuer’s credit quality, to take advantage of perceived spread advantages, or to offset an existing short equivalent (i.e. buying protection on an equivalent reference entity). Certain Portfolios may sell credit default swaps which expose these Portfolios to the risk of loss from credit risk related events specified in the contract. Although contract specific, credit events are generally defined as bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default or repudiation/ moratorium. If a Portfolio is a seller of protection, and a credit event occurs, as defined under the terms of that particular swap agreement, a Portfolio will generally either (i) pay to the buyer an amount equal to the notional amount of the swap and take delivery of the referenced obligation, other deliverable obligations, or underlying securities comprising a referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising a referenced index. If a Portfolio is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, a Portfolio will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and
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NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
deliver the referenced obligation, other deliverable obligations or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. Recovery values are assumed by market makers considering either industry standard recovery rates or entity specific factors and considerations until a credit event occurs. If a credit event has occurred, the recovery value is determined by a facilitated auction whereby a minimum number of allowable broker bids, together with a specified valuation method, are used to calculate the settlement value. Implied credit spreads, represented in absolute terms, utilized in determining the fair value of credit default swap agreements on corporate issues or sovereign issues are disclosed following the Summary Portfolio of Investments and serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. For credit default swaps on asset-backed securities or credit indices, the quoted market prices and resulting fair values serve as the indicator of the current status of the payment/performance risk. Wider credit spreads and increasing fair values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. The maximum amount of future payments (undiscounted) that a Portfolio as seller of protection could be required to make under a credit default swap agreement would be an amount equal to the notional amount of the agreement. Notional amounts of all credit default swap agreements outstanding as of June 30, 2016, for which a Portfolio is seller of protection are disclosed following the Summary Portfolio of Investments for Goldman Sachs Bond. These potential amounts would be partially offset by any recovery values of the respective referenced obligations, upfront payments received upon entering into the agreements, or net amounts received from the settlement of buy protection credit default swap agreements entered into by a Portfolio for the same referenced entity or entities.
For the six months ended June 30, 2016, Goldman Sachs Bond had purchased and sold credit protection on credit default swap indices (“CDX”). A CDX is a basket of credit instruments or exposures designed to be representative of some part of the credit market as a whole. Goldman Sachs Bond used CDX swaps to gain additional exposure within various sectors and to hedge the credit risk associated with various sectors within the credit and commercial mortgage-backed securities market. For the period ended June 30, 2016, Goldman Sachs Bond had an average notional amount of $9,933,333 on credit default swaps to buy protection and an average notional amount of $9,650,000 on credit default swaps to sell protection. Please refer to the table following the Summary Portfolio of Investments for open credit default swaps to buy protection at June 30, 2016. There were no open credit default swaps to sell protection at June 30, 2016.
Interest Rate Swap Contracts. An interest rate swap involves the agreement between counterparties to exchange periodic payments based on interest rates. One payment will be based on a floating rate of a specified interest rate while the other will be a fixed rate. Risks involve the future fluctuations of interest rates in which a Portfolio may make payments that are greater than what a Portfolio received from the counterparty. Other risks include credit, liquidity and market risk.
For the six months ended June 30, 2016, BlackRock Inflation Protected Bond and Goldman Sachs Bond had entered into interest rate swaps in which they pay a floating interest rate and receive a fixed interest rate (“Long interest rate swap”) in order to increase exposure to interest rate risk. Average notional amounts on long interest rate swaps for BlackRock Inflation Protected Bond and Goldman Sachs Bond were $29,360,000 and $112,827,748, respectively.
For the six months ended June 30, 2016, BlackRock Inflation Protected Bond and Goldman Sachs Bond had entered into interest rate swaps in which they pay a fixed interest rate and receives a floating interest rate (“Short interest rate swap”) in order to decrease exposure to interest rate risk. Average notional amounts on short interest rate swaps for BlackRock Inflation Protected Bond and Goldman Sachs Bond were $42,199,803 and $92,915,139, respectively.
The Portfolios enter into interest rate swaps to adjust interest rate and yield curve exposures and to substitute for physical fixed-income securities. Please refer to the tables following each respective Summary Portfolio of Investments for open interest rate swaps at June 30, 2016.
At June 30, 2016, BlackRock Inflation Protected Bond had posted $799,490 in cash collateral for open centrally cleared interest rate swaps. Goldman Sachs Bond did not post any cash collateral at June 30, 2016.
Inflation-linked Swap Contracts. In an inflation-linked swap, one party pays a fixed interest rate on a notional amount while the other party pays a floating rate linked to
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NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued)
an inflation index on that same notional amount. The party paying the floating rate pays the inflation adjusted rate multiplied by the notional amount.
For the six months ended June 30, 2016, BlackRock Inflation Protected Bond had entered into inflation-linked swaps in which they pay a floating rate linked to an inflation index and receive a fixed interest rate (“Long inflation-linked swap”). During the six months ended June 30, 2016, BlackRock Inflation Protected Bond had an average notional amount of $20,575,000 on long inflation-linked swaps. There were no long inflation-linked swaps at June 30, 2016.
For the six months ended June 30, 2016, BlackRock Inflation Protected Bond had entered into inflation-linked swaps in which they pay a fixed interest rate and receive a floating rate linked to an inflation index (“Short inflation-linked swap”). During the six months ended June 30, 2016, BlackRock Inflation Protected Bond had an average notional amount of $267,827,092 on short inflation-linked swaps.
BlackRock Inflation Protected Bond used inflation-linked swaps as part of its inflation strategy. Please refer to the tables following the Summary Portfolio of Investments for open short inflation-linked swaps at June 30, 2016.
L. Inflation-Indexed Bonds. Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted according to the rate of inflation. If the index measuring inflation rises or falls, the principal value of inflation-indexed bonds will be adjusted upward or downward, and consequently the interest payable on these securities (calculated with respect to a larger or smaller principal amount) will be increased or reduced, respectively. Any upward or downward adjustment in the principal amount of an inflation-indexed bond will be included in interest income in the Statement of Operations, even though investors do not receive their principal until maturity. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of US Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
M. Securities Lending. The Portfolios may temporarily loan up to 33 1/3% of its total assets to brokers, dealers or other financial institutions in exchange for a negotiated lender’s fee. Securities lending involves two primary risks: “investment risk” and “borrower default risk.” When lending securities, the Portfolios will receive cash or U.S. government securities as collateral. Investment risk is the risk that the Portfolios will lose money from the investment of the cash collateral received from the borrower. Borrower default risk is the risk that the Portfolios will lose money due to the failure of a borrower to return a borrowed security. Loans are subject to termination at the option of the borrower or the Portfolios. Securities lending may result in leverage. The use of leverage may exaggerate any increase or decrease in the net asset value, causing the Portfolios to be more volatile. The use of leverage may increase expenses and increase the impact of the Portfolios’ other risks.
N. Offering Costs. Costs incurred with the offering of shares of a Portfolio are deferred and amortized over a twelve month period on a straight-line basis staring at the commencement of operations.
O. Delayed-Delivery Transactions. Goldman Sachs Bond may purchase or sell securities on a when-issued or forward commitment basis. The price of the underlying securities and date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The fair value of such securities is identified in Goldman Sachs Bond’s Summary Portfolio of Investments. Losses may arise due to changes in the fair value of the securities or from the inability of counterparties to meet the terms of the contract. In connection with such purchases, the Portfolio is required to identify liquid assets sufficient to cover the purchase price.
P. Indemnifications. In the normal course of business, the Trusts may enter into contracts that provide certain indemnifications. The Trusts’ maximum exposure under these arrangements is dependent on future claims that may be made against the Portfolios and, therefore, cannot be estimated; however, based on experience, management considers the risk of loss from such claims remote.
NOTE 3 — INVESTMENT TRANSACTIONS
For the six months ended June 30, 2016, the cost of purchases and the proceeds from the sales of securities, excluding U.S. government and short-term securities, were as follows:
| | | | Purchases
| | Sales
|
|---|
| BlackRock Inflation Protected Bond | | | | $ | 66,116,804 | | | $ | 60,552,526 | |
| Goldman Sachs Bond | | | | | 22,503,468 | | | | 36,229,366 | |
U.S. government securities not included above were as follows:
| | | | Purchases
| | Sales
|
|---|
| BlackRock Inflation Protected Bond | | | | $ | 184,883,165 | | | $ | 213,226,523 | |
| Goldman Sachs Bond | | | | | 359,798,373 | | | | 357,789,481 | |
19
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 4 — INVESTMENT MANAGEMENT FEES
The Portfolios have entered into an investment management agreement (“Management Agreement”) with their respective Investment Adviser. The Investment Advisers have overall responsibility for the management of their respective Portfolios. The Investment Advisers oversee all investment management and portfolio management services for their respective Portfolios and assists in managing and supervising all aspects of the general day-to-day business activities and operations of those Portfolios, including custodial, transfer agency, dividend disbursing, accounting, auditing, compliance and related services. Each Management Agreement compensates each Portfolio’s respective Investment Adviser with a management fee, computed daily and payable monthly, based on the average daily net assets of each Portfolio, at the following annual rates:
Portfolio
| | | | Fee
|
|---|
BlackRock Inflation Protected Bond(1) | | | | 0.55% on the first $200 million; |
| | | | 0.50% on the next $800 million; and |
| | | | | 0.40% on the amount in excess of $1 billion |
| Goldman Sachs Bond | | | | 0.50% on the first $750 million; and |
| | | | | 0.48% on assets over $750 million |
(1) | | DSL has contractually agreed to waive 0.04% of the management fee. Any fees waived or reimbursed are not eligible for recoupment. Termination or modification of this obligation requires approval by the Board. |
The Trusts and the Investment Advisers have entered into sub-advisory agreements with each sub-adviser. These sub-advisers provide investment advice for the Portfolios and are paid by the Investment Advisers based on the average daily net assets of each Portfolio. Subject to such policies as the Board or the Investment Advisers may determine, the sub-advisers manage each Portfolio’s assets in accordance with that Portfolio’s investment objectives, policies, and limitations.
Portfolio
| | | | Sub-Adviser
|
|---|
| BlackRock Inflation Protected Bond | | | | BlackRock Financial Management, Inc. |
| Goldman Sachs Bond | | | | Goldman Sachs Asset Management, L.P. |
NOTE 5 — DISTRIBUTION AND SERVICE FEE
Voya Investors Trust has entered into a shareholder service plan (the “Plan”) for the Class S shares of BlackRock Inflation Protected Bond. The Plan compensates the Distributor for the provision of shareholder services and/or account maintenance services to direct or indirect beneficial owners of Class S shares. Under the Plan, the Portfolio makes payments to the Distributor at an annual rate of 0.25% of the Portfolio’s average daily net assets attributable to Class S shares.
Class ADV shares of BlackRock Inflation Protected Bond have a Rule 12b-1 shareholder service and distribution plan. The Portfolio pays the Distributor a shareholder service fee of 0.25% and effective May 1, 2016, a distribution fee of 0.35% of the Portfolio’s average daily net assets attributable to Class ADV shares. Prior to May 1, 2016, the distribution fee on Class ADV shares was 0.50% and the Distributor had contractually agreed to waive a portion of the fee equal to 0.15%, so that the actual fee paid by Class ADV shares of the Portfolio was an annual rate of 0.35%.
NOTE 6 — OTHER TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
At June 30, 2016, the following direct or indirect, wholly-owned subsidiaries of Voya Financial, Inc. or affiliated investment companies owned more than 5% of the following Portfolios:
Subsidiary/Affiliated Investment Company
| | | | Portfolio
| | Percentage
|
|---|
| Voya Institutional Trust Company | | | | BlackRock Inflation Protected Bond | | | 9.92 | % |
| Voya Insurance and Annuity Company | | | | BlackRock Inflation Protected Bond | | | 33.60 | |
| Voya Retirement Conservative Portfolio | | | | BlackRock Inflation Protected Bond | | | 15.99 | |
| Voya Retirement Moderate Portfolio | | | | BlackRock Inflation Protected Bond | | | 18.65 | |
| Voya Solution 2025 Portfolio | | | | Goldman Sachs Bond | | | 18.81 | |
| Voya Solution Income Portfolio | | | | BlackRock Inflation Protected Bond | | | 8.45 | |
| | | | | Goldman Sachs Bond | | | 23.48 | |
Under the 1940 Act, the direct or indirect beneficial owner of more than 25% of the voting securities of a company (including a fund) is presumed to control such company. Companies under common control (e.g., companies with a common owner of greater than 25% of their respective voting securities) are affiliates under the 1940 Act.
The Portfolios have adopted a deferred compensation plan (the “Plan”), which allows eligible independent trustees, as described in the Plan, to defer the receipt of all or a portion of the trustees’ fees that they are entitled to receive from the Portfolios. For purposes of determining the amount owed to the trustee under the Plan, the amounts deferred are invested in shares of the funds selected by the trustee (the “Notional Funds”). The Portfolios purchase shares of the Notional Funds, which are all advised by Voya Investments, LLC, in amounts equal to the trustees’ deferred fees, resulting in a Portfolio asset equal to the deferred compensation liability. Such assets are included as a component of “Other assets” on the accompanying Statements of Assets and Liabilities. Deferral of trustees’ fees under the Plan will not affect net assets of a Portfolio, and will not materially affect a Portfolio’s assets, liabilities
20
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 6 — OTHER TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (continued)
or net investment income per share. Amounts will be deferred until distributed in accordance with the Plan.
NOTE 7 — EXPENSE LIMITATION AGREEMENTS
Each Investment Adviser has entered into a written expense limitation agreement (“Expense Limitation Agreement”) with its respective Portfolio, whereby each Investment Adviser has agreed to limit expenses, excluding interest, taxes, investment-related costs, leverage expenses, extraordinary expenses, and acquired fund fees and expenses to the levels listed below:
Portfolio
| | | | Maximum Operating Expense Limit
(as a percentage of net assets)
|
|---|
| BlackRock Inflation Protected Bond | | | | Class ADV: 1.23% |
| | | | Class I: 0.63% |
| | | | | Class S: 0.88% |
| Goldman Sachs Bond | | | | 0.58% |
Each Investment Adviser may, at a later date, recoup from its respective Portfolio for fees waived and/or other expenses assumed by the Investment Adviser during the previous 36 months, but only if, after such recoupment, a Portfolio’s expense ratio does not exceed the percentage described above. Waived and reimbursed fees net of any recoupment by the Investment Adviser of such waived and reimbursed fees are reflected on the accompanying Statements of Operations. Amounts payable by the Investment Adviser are reflected on the accompanying Statements of Assets and Liabilities.
As of June 30, 2016, the amounts of waived and/or reimbursed fees that are subject to possible recoupment by the applicable Investment Adviser, and the related expiration dates, are as follows:
| | | | June 30,
| | | |
|---|
Portfolio
| | | | 2017
| | 2018
| | 2019
| | Total
|
|---|
| Goldman Sachs Bond | | | | $ | — | | | $ | 15,449 | | | $ | 115,335 | | | $ | 130,784 | |
The Expense Limitation Agreement is contractual through May 1, 2017 and shall renew automatically for one-year terms. Termination or modification of this obligation requires approval by the Board.
NOTE 8 — LINE OF CREDIT
Effective May 20, 2016, each Portfolio, in addition to certain other funds managed by the Investment Adviser, has entered into an unsecured committed revolving line of credit agreement (the “Credit Agreement”) with The Bank of New York Mellon (“BNY”) for an aggregate amount of $400,000,000. The proceeds may be used only to: (1) temporarily finance the purchase and sale of securities; or (2) finance the redemption of shares of an investor in the funds. The funds to which the line of credit is available pay a commitment fee equal to 0.15% per annum on the daily unused portion of the committed line amount payable quarterly in arrears. Prior to May 20, 2016, the aggregate amount was $200,000,000 and the commitment fee was equal to 0.10% per annum on the daily unused portion of the committed line amount payable quarterly in arrears.
Borrowings under the Credit Agreement accrue interest at the federal funds rate plus a specified margin. Repayments generally must be made within 60 days after the date of a revolving credit advance.
The Portfolios did not utilize the line of credit during the six months ended June 30, 2016.
NOTE 9 — PURCHASED AND WRITTEN OPTIONS
Transactions in purchased foreign currency options for BlackRock Inflation Protected Bond during the period ended June 30, 2016 were as follows:
| | AUD
Notional
| | CAD
Notional
| | CHF
Notional
| | EUR
Notional
| | GBP
Notional
| | NZD
Notional
| | USD
Notional
| | Cost
| |
|---|
| Balance at 12/31/2015 | | | — | | | | 46,350,000 | | | | 20,940,000 | | | | 22,480,000 | | | | 11,425,000 | | | | 8,575,000 | | | | 138,720,000 | | | $ 1,522,756 | |
| Options Purchased | | | 53,860,000 | | | | 15,205,000 | | | | 7,310,000 | | | | 164,650,000 | | | | 94,980,000 | | | | 41,640,000 | | | | 286,925,000 | | | 4,905,350 | |
| Options Terminated in Closing Sell Transactions | | | (7,650,000 | ) | | | (15,450,000 | ) | | | — | | | | — | | | | (38,515,000 | ) | | | — | | | | (17,350,000 | ) | | (999,114) | |
| Options Expired | | | (30,520,000 | ) | | | (46,105,000 | ) | | | (14,620,000 | ) | | | (141,045,000 | ) | | | (55,275,000 | ) | | | (50,215,000 | ) | | | (344,925,000 | ) | | (3,699,995) | |
| Balance at 06/30/2016 | | | 15,690,000 | | | | — | | | | 13,630,000 | | | | 46,085,000 | | | | 12,615,000 | | | | — | | | | 63,370,000 | | | $ 1,728,997 | |
21
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 9 — PURCHASED AND WRITTEN OPTIONS (continued)
Transactions in purchased interest rate swaptions for BlackRock Inflation Protected Bond during the period ended June 30, 2016 were as follows:
| | | | USD
Notional
| | EUR
Notional
| | Cost
|
|---|
| Balance at 12/31/2015 | | | | | 71,852,500 | | | | 10,100,000 | | | $ | 2,127,495 | |
| Options Purchased | | | | | 8,200,000 | | | | — | | | | 1,046,131 | |
| Options Expired | | | | | (66,852,500 | ) | | | — | | | | (625,353 | ) |
| Balance at 06/30/2016 | | | | | 13,200,000 | | | | 10,100,000 | | | $ | 2,548,273 | |
Transactions in purchased inflation rate cap options for BlackRock Inflation Protected Bond period ended June 30, 2016 were as follows:
| | | | USD
Notional
| | Cost
|
|---|
| Balance at 12/31/2015 | | | | | 25,320,000 | | | $ | 24,236 | |
| Balance at 06/30/2016 | | | | | 25,320,000 | | | $ | 24,236 | |
Transactions in purchased options on exchange-traded futures contracts for BlackRock Inflation Protected Bond during the period ended June 30, 2016 were as follows:
| | | | Number of
Contracts
| | Cost
|
|---|
| Balance at 12/31/2015 | | | | | — | | | $ | — | |
| Options Purchased | | | | | 5,493 | | | | 2,840,987 | |
| Options Terminated in Closing Sell Transactions | | | | | (954 | ) | | | (835,020 | ) |
| Options Expired | | | | | (3,033 | ) | | | (1,530,671 | ) |
| Balance at 06/30/2016 | | | | | 1,506 | | | $ | 475,296 | |
Transactions in written foreign currency options for BlackRock Inflation Protected Bond during the period ended June 30, 2016 were as follows:
| | | | AUD
Notional
| | CAD
Notional
| | CHF
Notional
| | EUR
Notional
| | GBP
Notional
| | NZD
Notional
| | USD
Notional
| | Premiums
Received
| |
|---|
| Balance at 12/31/2015 | | | | | — | | | | 46,350,000 | | | | 7,310,000 | | | | 12,010,000 | | | | 3,800,000 | | | | 8,575,000 | | | | 66,040,000 | | | $ 948,737 | |
| Options Written | | | | | 45,470,000 | | | | 30,455,000 | | | | — | | | | 64,445,000 | | | | 38,535,000 | | | | 24,990,000 | | | | 151,815,000 | | | 3,065,097 | |
| Options Terminated in Closing Sell Transactions | | | | | (37,820,000 | ) | | | (15,450,000 | ) | | | — | | | | (10,335,000 | ) | | | (17,555,000 | ) | | | — | | | | (39,970,000 | ) | | (533,312) | |
| Options Expired | | | | | (7,650,000 | ) | | | (61,355,000 | ) | | | (7,310,000 | ) | | | (27,785,000 | ) | | | (16,150,000 | ) | | | (33,565,000 | ) | | | (126,055,000 | ) | | (2,399,099) | |
| Balance at 06/30/2016 | | | | | — | | | | — | | | | — | | | | 38,335,000 | | | | 8,630,000 | | | | — | | | | 51,830,000 | | | $ 1,081,423 | |
Transactions in written interest rate swaptions for BlackRock Inflation Protected Bond during the period ended June 30, 2016 were as follows:
| | | | | EUR
Notional
| | USD
Notional
| | Premiums
Received
|
|---|
| Balance at 12/31/2015 | | | | | 10,100,000 | | | | 106,620,000 | | | $ | 2,393,281 | |
| Options Written | | | | | — | | | | 109,600,000 | | | | 627,202 | |
| Options Terminated in Closing Purchase Transactions | | | | | — | | | | (68,180,000 | ) | | | (1,670,447 | ) |
| Options Expired | | | | | — | | | | (38,440,000 | ) | | | (247,275 | ) |
| Balance at 06/30/2016 | | | | | 10,100,000 | | | | 109,600,000 | | | $ | 1,102,761 | |
Transactions in written inflation rate caps for BlackRock Inflation Protected Bond during the period ended June 30, 2016 were as follows:
| | | | EUR
Notional
| | Premiums
Received
|
|---|
| Balance at 12/31/2015 | | | | | 3,140,000 | | | $ | 217,411 | |
| Balance at 06/30/2016 | | | | | 3,140,000 | | | $ | 217,411 | |
22
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 9 — PURCHASED AND WRITTEN OPTIONS (continued)
Transactions in written options on exchange-traded futures contracts for BlackRock Inflation Protected Bond during the period ended June 30, 2016 were as follows:
| | | | Number of
Contracts
| | Premiums
Received
|
|---|
| Balance at 12/31/2015 | | | | | — | | | $ | — | |
| Options Written | | | | | 2,496 | | | | 328,964 | |
| Options Terminated in Closing Purchase Transactions | | | | | (347 | ) | | | (107,979 | ) |
| Options Expired | | | | | (920 | ) | | | (100,064 | ) |
| Balance at 06/30/2016 | | | | | 1,229 | | | $ | 120,921 | |
Transactions in purchased foreign currency options for Goldman Sachs Bond during the period ended June 30, 2016 were as follows:
| | | | JPY
Notional
| | Cost
|
|---|
| Balance at 12/31/2015 | | | | | | | | $ | — | |
| Options Purchased | | | | | 197,080,000 | | | | 28,141 | |
| Options Terminated in Closing Sell Transactions | | | | | (61,660,000 | ) | | | (10,772 | ) |
| Options Expired | | | | | (135,420,000 | ) | | | (17,369 | ) |
| Balance at 06/30/2016 | | | | | — | | | $ | — | |
NOTE 10 — CAPITAL SHARES
Transactions in capital shares and dollars were as follows:
| | Shares
sold
| | Shares
issued in
merger
| | Reinvestment
of
distributions
| | Shares
redeemed
| | Net increase
(decrease)
in shares
outstanding
| | Shares
sold
| | Proceeds
from shares
issued in
merger
| | Reinvestment
of
distributions
| | Shares
redeemed
| | Net increase
(decrease)
|
|---|
Year or period ended
| | #
| | #
| | #
| | #
| | #
| | ($)
| | ($)
| | ($)
| | ($)
| | ($)
|
|---|
BlackRock Inflation Protected Bond |
Class ADV |
| 6/30/2016 | | | 90,887 | | | | — | | | | — | | | | (492,239 | ) | | | (401,352 | ) | | | 830,967 | | | | — | | | | — | | | | (4,467,248 | ) | | | (3,636,281 | ) |
| 12/31/2015 | | | 362,010 | | | | — | | | | 70,953 | | | | (1,185,810 | ) | | | (752,847 | ) | | | 3,305,470 | | | | — | | | | 662,790 | | | | (10,859,486 | ) | | | (6,891,226 | ) |
Class I |
| 6/30/2016 | | | 4,256,050 | | | | — | | | | — | | | | (4,558,915 | ) | | | (302,865 | ) | | | 39,807,337 | | | | — | | | | — | | | | (42,714,996 | ) | | | (2,907,659 | ) |
| 12/31/2015 | | | 5,658,110 | | | | — | | | | 575,124 | | | | (19,604,285 | ) | | | (13,371,051 | ) | | | 53,298,007 | | | | — | | | | 5,490,950 | | | | (184,626,794 | ) | | | (125,837,837 | ) |
Class S |
| 6/30/2016 | | | 1,099,788 | | | | — | | | | — | | | | (2,440,988 | ) | | | (1,341,200 | ) | | | 10,373,635 | | | | — | | | | — | | | | (22,805,664 | ) | | | (12,432,029 | ) |
| 12/31/2015 | | | 1,412,122 | | | | — | | | | 301,235 | | | | (5,210,546 | ) | | | (3,497,189 | ) | | | 13,267,623 | | | | — | | | | 2,864,688 | | | | (48,970,522 | ) | | | (32,838,211 | ) |
Goldman Sachs Bond
|
| 6/30/2016 | | | 4,619,153 | | | | — | | | | — | | | | (4,011,810 | ) | | | 607,343 | | | | 47,091,470 | | | | — | | | | — | | | | (40,753,539 | ) | | | 6,337,931 | |
2/20/2015(1)–
12/31/2015 | | | 25,889,066 | | | | — | | | | — | | | | (7,151,987 | ) | | | 18,737,079 | | | | 259,113,887 | | | | — | | | | — | | | | (71,740,373 | ) | | | 187,373,514 | |
(1) | | Commencement of operations. |
NOTE 11 — SECURITIES LENDING
Under an agreement with BNY, the Portfolios can lend its securities to approved brokers, dealers and other financial institutions. Loans are collateralized by cash and U.S. government securities. The collateral must be equal to at least 105% of the market value of non-U.S. securities loaned and 102% of the market value of U.S. securities loaned. The market value of the loaned securities is determined at Market Close of a Portfolio at their last sale price or official closing price on the principal exchange or system on which they are traded and any additional collateral is delivered to a Portfolio on the next business day. The cash collateral received is invested in approved investments as defined in the Securities Lending Agreement with BNY (the “Agreement”). The Portfolios bear the risk of loss with respect to the investment of collateral with the following exception: BNY provides the Portfolios indemnification from loss with respect to the investment of collateral provided that the cash collateral is invested solely in overnight repurchase agreements.
The cash collateral is invested in overnight repurchase agreements that are collateralized at 102% with securities issued or fully guaranteed by the U.S. Treasury; U.S. government or any agency, instrumentality or authority of the U.S. government. The securities purchased with cash
23
NOTES TO FINANCIAL STATEMENTS AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED)
NOTE 11 — SECURITIES LENDING (continued)
collateral received are reflected in the Portfolios of Investments under Securities Lending Collateral.
Generally, in the event of counterparty default, a Portfolio has the right to use the collateral to offset losses incurred. The Agreement contains certain guarantees by BNY in the event of counterparty default and/or a borrower’s failure to return a loaned security; however, there would be a potential loss to a Portfolio in the event a Portfolio is delayed or prevented from exercising its right to dispose of the collateral. Engaging in securities lending could have a leveraging effect, which may intensify the credit, market and other risks associated with investing in a Portfolio.
The following is a summary of Goldman Sachs Bond’s securities lending agreements by counterparty which are subject to offset under the Agreement as of June 30, 2016:
Goldman Sachs Bond
Counterparty
| | | | Securities
Loaned at
Value
| | Cash
Collateral
Received(1)
| | Net
Amount
|
|---|
| Citigroup Global Markets Inc. | | | | $ | 866,607 | | | $ | (866,607 | ) | | $ | — | |
| JP Morgan Clearing Corp | | | | | 48,474 | | | | (48,474 | ) | | | — | |
| J.P. Morgan Securities LLC | | | | | 292,193 | | | | (292,193 | ) | | | — | |
| Total | | | | $ | 1,207,273 | | | $ | (1,207,273 | ) | | $ | — | |
(1) | | Collateral with a fair value of $1,232,881 has been received in connection with the above securities lending transactions. Excess collateral received from the individual counterparty is not shown for financial reporting purposes. |
NOTE 12 — FEDERAL INCOME TAXES
The amount of distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP for investment companies. These book/tax differences may be either temporary or permanent. Permanent differences are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences are not reclassified. Key differences include the treatment of short-term capital gains, foreign currency transactions, and wash sale deferrals. Distributions in excess of net investment income and/or net realized capital gains for tax purposes are reported as return of capital.
Dividends paid by the Portfolios from net investment income and distributions of net realized short-term capital gains are, for federal income tax purposes, taxable as ordinary income to shareholders.
No dividends or distributions were made during the six months ended June 30, 2016. The tax composition of dividends and distributions to shareholders during the year ended December 31, 2015 was as follows:
| | | | Ordinary
Income
| | Return
of Capital
|
|---|
| BlackRock Inflation Protected Bond | | | | $ | 6,748,380 | | | $ | 2,270,048 | |
The tax-basis components of distributable earnings as of December 31, 2015 were:
| | | | Undistributed
Ordinary
Income
| | Unrealized
Appreciation/
(Depreciation)
| | Capital Loss Carryforwards
| |
|---|
| | | | | | Amount
| | Character
| | Expiration
|
|---|
| BlackRock Inflation Protected Bond | | | | $ | — | | | $ | (21,121,016 | ) | | $ | (14,925,453 | ) | | | Short-term | | | | None | |
| | | | | | | | | | | | | | (59,596,106 | ) | | | Long-term | | | | None | |
| | | | | | | | | | | | | $ | (74,521,559 | ) | | | | | | | | |
| Goldman Sachs Bond | | | | | 4,527,875 | | | | (3,348,622 | ) | | | (784,736 | ) | | | Short-term | | | | None | |
The Portfolios’ major tax jurisdictions are U.S. federal, Arizona state, and Massachusetts state (BlackRock Inflation Protected Bond).
As of June 30, 2016, no provision for income tax is required in the Portfolios’ financial statements as a result of tax positions taken on federal and state income tax returns for open tax years. The Portfolios’ federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state department of revenue. The earliest tax year that remains subject to examination by these jurisdictions is 2011.
NOTE 13 — SUBSEQUENT EVENTS
The Portfolios have evaluated events occurring after the Statements of Assets and Liabilities date (“subsequent events”) to determine whether any subsequent events necessitated adjustment to or disclosure in the financial statements. No such subsequent events were identified.
24
VY® BLACKROCK INFLATION
PROTECTED BOND PORTFOLIO | SUMMARY PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2016 (UNAUDITED) |
Investment Type Allocation
as of June 30, 2016
(as a percentage of net assets)
| U.S. Treasury Obligations | | | | | 54.0 | % |
| Corporate Bonds/Notes | | | | | 24.3 | % |
| U.S. Government Agency Obligations | | | | | 13.2 | % |
| Foreign Government Bonds | | | | | 4.6 | % |
| Purchased Options | | | | | 0.6 | % |
| Assets in Excess of Other Liabilities* | | | | | 3.3 | % |
| Net Assets | | | | | 100.0 | % |
| | | | | | | |
| * Includes short-term investments. |
Portfolio holdings are subject to change daily.
Principal
Amount†
|
|
|
|
|
|
|
| Value
|
| Percentage
of Net
Assets
|
|---|
| |
CORPORATE BONDS/NOTES: 24.3% |
| | |
| 2,500,000 | | | | | | Cisco Systems, Inc., 1.400%, 02/28/18 | | $ | 2,523,255 | | | | 0.4 | |
| 2,530,000 | | | | | | Comcast Corp., 5.700%, 05/15/18 | | | 2,749,328 | | | | 0.5 | |
| 4,485,000 | | | | # | | NBCUniversal Enterprise, Inc., 1.662%, 04/15/18 | | | 4,535,165 | | | | 0.8 | |
| | | | | | | | | | 9,807,748 | | | | 1.7 | |
| |
| | |
| 4,350,000 | | | | # | | American Honda Finance Corp., 1.600%, 02/16/18 | | | 4,392,752 | | | | 0.8 | |
| 1,850,000 | | | | # | | BMW US Capital LLC, 1.500%, 04/11/19 | | | 1,859,947 | | | | 0.3 | |
| 290,000 | | | | | | Lowe’s Cos, Inc., 1.150%, 04/15/19 | | | 290,563 | | | | 0.0 | |
| 960,000 | | | | # | | Nissan Motor Acceptance Corp., 2.000%, 03/08/19 | | | 972,011 | | | | 0.2 | |
| 885,000 | | | | | | PACCAR Financial Corp., 1.300%, 05/10/19 | | | 888,902 | | | | 0.2 | |
| 2,900,000 | | | | | | Toyota Motor Credit Corp., 1.550%, 07/13/18 | | | 2,928,748 | | | | 0.5 | |
| | | | | | | | | | 11,332,923 | | | | 2.0 | |
| |
| | Consumer, Non-cyclical: 7.8% |
| 6,320,000 | | | | | | Anheuser-Busch InBev Finance, Inc., 1.900%, 02/01/19 | | | 6,431,188 | | | | 1.1 | |
| 2,000,000 | | | | # | | BAT International Finance PLC, 1.850%, 06/15/18 | | | 2,022,438 | | | | 0.4 | |
| 2,900,000 | | | | | | Coca-Cola Co, 1.650%, 11/01/18 | | | 2,944,654 | | | | 0.5 | |
| 5,700,000 | | | | | | Gilead Sciences, Inc., 1.850%, 09/04/18 | | | 5,802,919 | | | | 1.0 | |
| 1,595,000 | | | | | | Kimberly-Clark Corp., 1.400%, 02/15/19 | | | 1,615,957 | | | | 0.3 | |
| 4,835,000 | | | | | | Medtronic, Inc., 1.375%, 04/01/18 | | | 4,866,848 | | | | 0.8 | |
| 2,900,000 | | | | | | Merck & Co., Inc., 1.100%, 01/31/18 | | | 2,916,684 | | | | 0.5 | |
| 4,250,000 | | | | | | Pfizer, Inc., 1.500%, 06/15/18 | | | 4,293,652 | | | | 0.8 | |
| |
| |
CORPORATE BONDS/NOTES: (continued) |
| | Consumer, Non-cyclical: (continued) |
| 4,300,000 | | | | | | Philip Morris International, Inc., 1.250%, 11/09/17 | | $ | 4,316,525 | | | | 0.8 | |
| 3,690,000 | | | | | | Philip Morris International, Inc., 1.375%, 02/25/19 | | | 3,720,132 | | | | 0.6 | |
| 2,900,000 | | | | | | Procter & Gamble Co, 1.600%, 11/15/18 | | | 2,962,767 | | | | 0.5 | |
| 2,825,000 | | | | | | Sanofi, 1.250%, 04/10/18 | | | 2,844,134 | | | | 0.5 | |
| | | | | | | | | | 44,737,898 | | | | 7.8 | |
| |
| | |
| 2,880,000 | | | | # | | Schlumberger Holdings Corp., 1.900%, 12/21/17 | | | 2,899,290 | | | | 0.5 | |
| |
| | |
| 5,700,000 | | | | # | | AIG Global Funding, 1.650%, 12/15/17 | | | 5,726,169 | | | | 1.0 | |
| 4,250,000 | | | | | | Bank of America NA, 2.050%, 12/07/18 | | | 4,312,407 | | | | 0.8 | |
| 5,800,000 | | | | | | Bank of New York Mellon Corp., 1.350%, 03/06/18 | | | 5,835,438 | | | | 1.0 | |
| 2,500,000 | | | | | | Berkshire Hathaway Finance Corp., 1.300%, 05/15/18 | | | 2,516,420 | | | | 0.4 | |
| 5,700,000 | | | | | | Branch Banking & Trust Co., 2.300%, 10/15/18 | | | 5,844,472 | | | | 1.0 | |
| 2,900,000 | | | | | | HSBC USA, Inc., 1.625%, 01/16/18 | | | 2,895,485 | | | | 0.5 | |
| 5,700,000 | | | | | | JPMorgan Chase & Co., 2.350%, 01/28/19 | | | 5,842,716 | | | | 1.0 | |
| 5,700,000 | | | | # | | Metropolitan Life Global Funding I, 1.500%, 01/10/18 | | | 5,734,143 | | | | 1.0 | |
| 630,000 | | | | # | | Principal Life Global Funding II, 1.500%, 04/18/19 | | | 632,708 | | | | 0.1 | |
| 2,500,000 | | | | | | Toronto-Dominion Bank, 1.950%, 01/22/19 | | | 2,538,800 | | | | 0.4 | |
| 5,700,000 | | | | | | US Bancorp, 1.950%, 11/15/18 | | | 5,814,120 | | | | 1.0 | |
| 2,765,000 | | | | | | Visa, Inc., 1.200%, 12/14/17 | | | 2,782,765 | | | | 0.5 | |
| 1,700,000 | | | | | | Wells Fargo & Co., 2.150%, 01/15/19 | | | 1,736,198 | | | | 0.3 | |
| | | | | | | | | | 52,211,841 | | | | 9.0 | |
| |
| | |
| 1,435,000 | | | | | | Caterpillar Financial Services Corp., 1.350%, 05/18/19 | | | 1,442,253 | | | | 0.3 | |
| 1,300,000 | | | | | | General Electric Co., 1.625%, 04/02/18 | | | 1,318,789 | | | | 0.2 | |
| 1,935,000 | | | | # | | Siemens Financieringsmaatschappij NV, 1.450%, 05/25/18 | | | 1,950,416 | | | | 0.3 | |
| | | | | | | | | | 4,711,458 | | | | 0.8 | |
| |
| | |
| 5,050,000 | | | | | | Apple, Inc., 1.700%, 02/22/19 | | | 5,142,253 | | | | 0.9 | |
See Accompanying Notes to Financial Statements
25
VY® BLACKROCK INFLATION
PROTECTED BOND PORTFOLIO | SUMMARY PORTFOLIO OF INVESTMENTS
AS OF JUNE 30, 2016 (UNAUDITED) (CONTINUED) |
