UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21486
811-21538
Name of Fund: Merrill Lynch Real Investment Fund
Master Real Investment Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch Real Investment Fund and Master Real Investment
Trust, 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address:
P.O. Box 9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 11/30/06
Date of reporting period: 12/01/05 - 05/31/06
Item 1 - Report to Stockholders
Semi-Annual Report
May 31, 2006
Merrill Lynch
Real Investment Fund
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not
be considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com; and
(2) on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Real Investment Fund
Box 9011
Princeton, NJ 08543-9011
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Merrill Lynch Real Investment Fund
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company ("New BlackRock") that will be one of the world's largest
asset management firms with approximately $1 trillion in assets under
management (based on combined assets under management as of March 31, 2006)
(the "Transaction"). The Transaction is expected to close in the third quarter
of 2006, at which time the new company will operate under the BlackRock name.
The Fund's/Trust's Board of Trustees has approved a new investment advisory
agreement with BlackRock Advisors, Inc. or its successor on substantially the
same terms and for the same advisory fee as the current investment advisory
agreement with the Investment Adviser. If the new agreement is approved by the
Fund's/Trust's shareholders, BlackRock Advisors, Inc. or its successor is
expected to become the investment adviser of the Fund/Trust upon the closing
of the Transaction.
Officers and Trustees
Robert C. Doll, Jr., President and Trustee
David O. Beim, Trustee
James T. Flynn, Trustee
W. Carl Kester, Trustee
Karen P. Robards, Trustee
Donald C. Burke, Vice President and Treasurer
Thomas Musmanno, Vice President
Frank Viola, Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). Earlier this year, Merrill Lynch announced plans to combine
its investment advisory business, including MLIM, with another highly regarded
investment manager - BlackRock, Inc. ("BlackRock").
At the completion of the transaction, which is expected at the end of the
third quarter of this year (subject to regulatory and shareholder approvals),
the resultant firm will be a top-10 investment manager worldwide with
approximately $1 trillion in assets under management.* The combined company
will provide a wider selection of high-quality investment solutions across a
range of asset classes and investment styles. MLIM and BlackRock possess
complementary capabilities that together create a well-rounded organization
uniting some of the finest money managers in the industry. At the same time,
the firms share similar values and beliefs - they are focused on delivering
excellence on behalf of clients, and both make investment performance their
single most important mission. In short, the combination only reinforces our
commitment to shareholders.
Most of MLIM's investment products - including mutual funds, separately
managed accounts, annuities and variable insurance funds - eventually will
carry the "BlackRock" name. As a shareholder in one or more MLIM-advised
mutual funds, you recently were mailed a proxy package asking you to vote on
proposed changes that affect those funds. The proposals vary based on the
funds in which you invest. However, all shareholders are asked to vote on a
new investment advisory agreement with BlackRock Advisors, Inc. Your Fund's
Board of Directors has approved, and recommends that you approve, the new
agreement. Your Fund's Board also has approved, and recommends that you
approve, a contingent subadvisory agreement that will serve to ensure that
management services can continue during the course of completing the
transaction.
It is important that you exercise your right as a mutual fund shareholder by
voting on the proposals that are presented to you in your funds' proxy
statements. Your participation - via phone, mail, online or in person - is
critical. (Refer to your proxy card for detailed voting procedures and
deadlines.) You should know that your vote on these proposals will not affect
your brokerage account or change your relationship with your financial
advisor. If you are a client of Merrill Lynch, you will remain a client of
Merrill Lynch.
Should you have any questions or concerns, please do not hesitate to call
1.866.752.6486.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
A Discussion With Your Fund's Portfolio Managers
The Fund provided a positive total return for the period through investment in
commodity-linked notes, while also seeking yield enhancement through exposure
to high-quality, short-duration fixed income assets.
What is the Fund's investment objective?
The Fund seeks positive long-term total return, primarily through investment
in commodity-linked derivative instruments and short-term debt obligations.
The commodity-linked derivative instruments in which the Fund may invest
include hybrid instruments, such as structured notes or commodity-linked
notes, whose principal and/or interest payments are tied to the value of a
real asset or commodity index, such as the Goldman Sachs Commodity Total
Return Index. The debt obligations in which the Fund invests are primarily
investment grade, floating rate debt securities of any maturity.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended May 31, 2006, the Fund's Class A, Class B,
Class C and Class I Shares had total net returns of +6.47%, +6.03%, +6.00%
and +6.62%, respectively. (Fund results shown do not reflect sales charges
and would be lower if sales charges were included. Complete performance
information can be found on pages 6 and 7 of this report to shareholders.) For
the same period, the Goldman Sachs Commodity Total Return Index returned
+7.02%. Importantly, the Index is used to illustrate the performance of the
overall commodities markets, but is not necessarily a comparable measure of
the Fund's results. The Fund is designed to tap into the performance of the
commodities markets and will generally track the markets' trends. However, it
is a fixed income investment and must fund the cost of gaining that commodity
exposure through the creation of commodity-linked notes. This inherent cost
will necessarily impact the Fund's results relative to the Index.
Rising energy and commodity prices contributed to the positive absolute
performance of the benchmark and the Fund. The appreciation was driven
primarily by oil, with the price per barrel rising from $59 to $71 during the
six-month period. U.S. retail gasoline prices increased from an average $2.12
per gallon to $2.78 per gallon, weighing on the minds of summer travelers. In
addition, silver moved from just over $8 per ounce to more than $12 per ounce
and gold from $511 per ounce to $649 per ounce, helping to propel the Index's
returns. Copper also rose from $3,963 per ton to $7,968 per ton. The rise in
energy and industrial metals prices is primarily attributed to increased
demand on the part of developing economies, such as China and India, where
commodities are required to meet growing infrastructure development needs.
The increase in precious metals prices generally may reflect investors'
expectations for growing inflation, as these commodities are considered a
store of value.
Because we use credit-sensitive debt securities to provide yield enhancement
for the portfolio, Fund returns also are influenced by the performance of the
credit markets. During the past six months, global markets entered a period of
risk aversion, which hindered the spread tightening phenomenon that had been
contributing to strong performance in the credit markets for some time. Amid
these conditions, we looked to higher-grade credit product for yield
enhancement, as we felt high-quality securities would be somewhat less
susceptible to the spread widening. Specifically, we focused primarily on
asset-backed securities, which included a significant position in home equity
product. These generated 50 basis points (.50%) in excess return above our
target, the London InterBank Offered Rate (LIBOR), thereby contributing to
Fund performance for the period.
What changes were made to the portfolio during the period?
During the period, our commodity-linked notes issued by JPMorgan Chase Bank
matured from the portfolio, bringing our total exposure relative to the
Goldman Sachs Commodity Total Return Index from 100% to 85%. This reduced the
beta of the portfolio given our lower exposure to the commodities markets. We
actively looked to reinvest the proceeds from these maturing securities into
the notes of a new issuer. In doing so, we were mindful to diversify our
issuer exposure so as to spread out and effectively reduce the risk of
overexposing the Fund's assets to a particular counterparty. A new issuer was
identified and new notes were added to the portfolio shortly after the close
of this period returning the Fund's exposure to the Index to 100%.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
We continued to fund the cost of acquiring the commodity-linked exposure with
income generated from low-duration fixed income investments, such as agency
debt, structured finance securities and other corporate and mortgage products.
However, with spreads at all-time tight levels in nearly every market, it was
increasingly difficult to uncover value in credit product. One area that we
found to offer significant yield pickup relative to the consumer sectors,
particularly autos and credit cards, was home equity product. As such, we
focused our investment in this area of the fixed income market, favoring "off
the run" names that are less liquid and offer better relative value than top-
tier issues. In general, we do not believe credit spreads have much more room
to tighten. At the same time, we do not see a catalyst in the near future for
significant spread widening and, therefore, will continue to purchase credit
product at current levels, focusing on the home equity sector.
Although it does not impact our investment strategy or the portfolio's makeup,
it is worth mentioning a recent ruling by the Internal Revenue Service (IRS)
regarding income earned by commodity-linked funds. In order to retain their
status as registered investment companies (RICs), funds such as ours must
derive their income primarily from commodity-linked notes. According to the
ruling, not more than 10% of a RIC's income may be derived from commodity-
linked swap agreements. Such income is not considered "qualifying income" per
IRS rules. The IRS ruling will take effect for income recognized by the Fund
after September 30, 2006. However, shareholders should be aware that the Fund
has always derived 100% of its income from commodity-linked notes, making all
of its income "qualifying." Any fund that derives more than 10% of its income
from commodity-linked swaps or futures would lose its status as a registered
investment company, making it subject to federal income tax on its net income
at regular corporate rates and making distributions to shareholders taxable as
ordinary dividends. We have always made it our policy to invest in commodity-
linked notes and expect to continue that practice.
How would you characterize the portfolio's position at the close of the
period?
In the fixed income area, which represents 66% of the portfolio's overall
assets, we continue to rotate among high-quality structured products in an
effort to enhance portfolio income. Our commitment to these sectors at period-
end was broken down as follows: 16% in floating rate collateralized mortgage
obligations; 14% in asset-backed securities, including floating rate home
equity loans; 9% in Fannie Mae commercial mortgage product; 8% in floating
rate residential B&C (non-prime) loans; 7% in corporate credit; 6% in U.K.
mortgages denominated in U.S. dollars; and 6% in agency debentures. Most of
these assets are floating rate securities or are structured to be of a
relatively short duration. We favor these types of securities in the current
environment, as they track the movement of short-term interest rates without
the same volatility as fixed rate securities. Therefore, in a rising rate
environment, these securities will not decline in price. This is consistent
with the objective of the Fund, as our investors are seeking exposure to the
commodity markets, but without the downward price pressure associated with
rising interest rates. The portfolio ended the period with a AA credit
profile.
We continue to believe that commodities will be a benefactor of global
economic expansion. Commodities will continue to be necessary to support
developing nations' infrastructure and development needs. In addition, as we
have mentioned in previous reports to shareholders, commodities tend to
perform opposite of traditional asset classes. Thus, the Fund offers an
opportunity to diversify a traditional portfolio of stocks and bonds, thereby
helping investors to prepare for a wider range of market and economic
conditions. Given its unique structure, the Fund also offers shareholders
access to securities that are not available to individual investors on the
open market.
Thomas F. Musmanno
Vice President and Co-Portfolio Manager
Frank Viola
Vice President and Co-Portfolio Manager
June 14, 2006
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Performance Data
About Fund Performance
Investors are able to purchase shares of the Fund through multiple pricing
alternatives:
* Class A Shares incur a maximum initial sales charge (front-end load) of 5.25%
and an account maintenance fee of 0.25% per year (but no distribution fee).
* Class B Shares are subject to a maximum contingent deferred sales charge of
4%, declining to 0% after six years. In addition, Class B Shares are subject
to a distribution fee of 0.75% per year and an account maintenance fee of
0.25% per year. These shares automatically convert to Class A Shares after
approximately 10 years. (There is no initial sales charge for automatic share
conversions.)
* Class C Shares are subject to a distribution fee of 0.75% per year and an
account maintenance fee of 0.25% per year. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within one year
of purchase.
* Effective December 28, 2005, Class I Shares are no longer subject to any
front-end sales charge. Class I Shares bear no ongoing distribution or account
maintenance fees and are available only to eligible investors. Had the sales
charge been included, the Fund's Class I Shares' performance would have been
lower.
None of the past results shown should be considered a representation of future
performance. Current performance may be lower or higher than the performance
data quoted. Refer to www.mlim.ml.com to obtain performance data current to
the most recent month-end. Performance results do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Figures shown in each of the following tables assume reinvestment
of all dividends and capital gain distributions, if any, at net asset value on
the ex-dividend date. Investment return and principal value of shares will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost. Dividends paid to each class of shares will vary because of the
different levels of account maintenance, distribution and transfer agency fees
applicable to each class, which are deducted from the income available to be
paid to shareholders. The Fund's Investment Adviser has voluntarily waived a
portion of its fee. Without such waiver, the Fund's returns would have been
lower.
Recent Performance Results
6-Month 12-Month Since Inception
As of May 31, 2006 Total Return Total Return Total Return
ML Real Investment Fund Class A Shares* +6.47% +16.46% +32.29%
ML Real Investment Fund Class B Shares* +6.03 +15.53 +30.58
ML Real Investment Fund Class C Shares* +6.00 +15.60 +30.60
ML Real Investment Fund Class I Shares* +6.62 +16.81 +32.97
Goldman Sachs Commodity Total Return Index** +7.02 +18.61 +41.30
* Investment results shown do not reflect sales charges; results shown would be lower if a sales charge was included.
Cumulative total investment returns are based on changes in net asset values for the periods shown, and assume
reinvestment of all dividends and capital gains distributions at net asset value on the ex-dividend date. The Fund
commenced operations on 3/26/04.
** This unmanaged Index is calculated primarily on a world production-weighted basis and comprises the principal
physical commodities that are the subject of active, liquid futures markets. Since inception total returns
are from 3/26/04.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Performance Data (concluded)
Average Annual Total Return
Return Without Return With
Sales Charge Sales Charge**
Class A Shares*
One Year Ended 5/31/06 +16.46% +10.35%
Inception (3/26/04)
through 5/31/06 +13.69 +10.91
Return Return
Without CDSC With CDSC++++++
Class B Shares++
One Year Ended 5/31/06 +15.53% +11.57%
Inception (3/26/04)
through 5/31/06 +13.02 +11.82
Return Return
Without CDSC With CDSC++++++
Class C Shares++++
One Year Ended 5/31/06 +15.60% +14.61%
Inception (3/26/04)
through 5/31/06 +13.02 +13.02
Class I Shares Return
One Year Ended 5/31/06 +16.81%
Inception (3/26/04)
through 5/31/06 +13.96
* Maximum sales charge is 5.25%.
** Assuming maximum sales charge.
++ Maximum contingent deferred sales charge is 4% and is reduced
to 0% after six years.
++++ Maximum contingent deferred sales charge is 1% and is reduced
to 0% after one year.
++++++ Assuming payment of applicable contingent deferred sales
charge.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses
related to transactions, including sales charges, redemption fees and exchange
fees; and (b) operating expenses including advisory fees, distribution fees
including 12b-1 fees, and other Fund expenses. The following example (which
is based on a hypothetical investment of $1,000 invested on December 1, 2005
and held through May 31, 2006) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in comparing these
expenses with similar costs of investing in other mutual funds.
The first table below provides 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 in the first line under
the heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the 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 this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders'
ongoing costs only and do not reflect any transactional expenses, such as
sales charges, redemption fees or exchange fees. Therefore, the second table
is 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.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value December 1, 2005
December 1, May 31, to May 31,
2005 2006 2006
Actual
Class A $1,000 $1,064.70 $ 8.08
Class B $1,000 $1,060.30 $12.02
Class C $1,000 $1,060.00 $12.02
Class I $1,000 $1,066.20 $ 6.80
Hypothetical (5% annual return before expenses)**
Class A $1,000 $1,017.07 $ 7.90
Class B $1,000 $1,013.23 $11.75
Class C $1,000 $1,013.23 $11.75
Class I $1,000 $1,018.32 $ 6.64
* For each class of the Fund, expenses are equal to the annualized expense ratio for the class
(1.57% for Class A, 2.34% for Class B, 2.34% for Class C and 1.32% for Class I), multiplied
by 182/365 (to reflect the one-half year period shown). Because the Fund is a feeder fund,
the expense table example reflects the expenses of both the feeder and the master trust in
which it invests.
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in the
most recent fiscal half year divided by 365.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Statement of Assets and Liabilities Merrill Lynch Real Investment Fund
As of May 31, 2006
Assets
Investment in Master Real Investment Trust (the "Trust"), at value
(identified cost--$94,787,545) $ 100,254,436
Prepaid expenses 12,213
---------------
Total assets 100,266,649
---------------
Liabilities
Payables:
Distributor $ 55,629
Investment adviser 25,896
Other affiliates 20,540 102,065
---------------
Accrued expenses 6,062
---------------
Total liabilities 108,127
---------------
Net Assets
Net assets $ 100,158,522
===============
Net Assets Consist of
Class A Shares of beneficial interest, $.01 par value, unlimited number of
shares authorized $ 14,114
Class B Shares of beneficial interest, $.01 par value, unlimited number of
shares authorized 10,623
Class C Shares of beneficial interest, $.01 par value, unlimited number of
shares authorized 44,003
Class I Shares of beneficial interest, $.01 par value, unlimited number of
shares authorized 20,940
Paid-in capital in excess of par 95,213,588
Undistributed investment income--net $ 819,183
Accumulated capital losses allocated from the Trust--net (1,430,820)
Unrealized appreciation allocated from the Trust--net 5,466,891
---------------
Total accumulated earnings--net 4,855,254
---------------
Net Assets $ 100,158,522
===============
Net Asset Value
Class A--Based on net assets of $15,780,694 and 1,411,374 shares of beneficial interest
outstanding $ 11.18
===============
Class B--Based on net assets of $11,860,043 and 1,062,311 shares of beneficial interest
outstanding $ 11.16
===============
Class C--Based on net assets of $49,069,744 and 4,400,279 shares of beneficial interest
outstanding $ 11.15
===============
Class I--Based on net assets of $23,448,041 and 2,093,982 shares of beneficial interest
outstanding $ 11.20
===============
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Statement of Operations Merrill Lynch Real Investment Fund
For the Six Months Ended May 31, 2006
Investment Income
Net investment income allocated from the Trust:
Interest $ 1,758,800
Expenses (336,658)
---------------
Total income 1,422,142
---------------
Expenses
Investment advisory fees $ 465,030
Account maintenance and distribution fees--Class C 231,642
Account maintenance and distribution fees--Class B 57,857
Transfer agent fees--Class C 35,182
Registration fees 33,384
Printing and shareholder reports 27,658
Professional fees 17,724
Account maintenance fees--Class A 16,996
Transfer agent fees--Class I 14,193
Transfer agent fees--Class B 8,911
Transfer agent fees--Class A 8,806
Other 5,439
---------------
Total expenses before waiver 922,822
Waiver of expenses (332,620)
---------------
Total expenses after waiver 590,202
---------------
Investment income--net 831,940
---------------
Realized & Unrealized Gain (Loss) Allocated from the Trust--Net
Realized loss on investments, futures contracts, swaps and options written--net (833,183)
Change in unrealized appreciation/depreciation on investments, futures contracts, swaps and
options written--net 5,588,599
---------------
Total realized and unrealized gain--net 4,755,416
---------------
Net Increase in Net Assets Resulting from Operations $ 5,587,356
===============
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Statements of Changes in Net Assets Merrill Lynch Real Investment Fund
For the Six For the
Months Ended Year Ended
May 31, November 30,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 831,940 $ 899,146
Realized gain (loss)--net (833,183) 12,008,250
Change in unrealized appreciation/depreciation--net 5,588,599 (7,658,589)
--------------- ---------------
Net increase in net assets resulting from operations 5,587,356 5,248,807
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net:
Class A (1,944,127) (62,433)
Class B (1,680,740) (21,074)
Class C (6,489,922) (82,000)
Class I (3,384,545) (96,002)
Realized gain--net:
Class A (8,348) --
Class B (7,565) --
Class C (29,112) --
Class I (14,322) --
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions to shareholders (13,558,681) (261,509)
--------------- ---------------
Beneficial Interest Transactions
Net increase in net assets derived from beneficial interest transactions 17,635,670 15,930,594
--------------- ---------------
Net Assets
Total increase in net assets 9,644,345 20,917,892
Beginning of period 90,494,177 69,576,285
--------------- ---------------
End of period* $ 100,158,522 $ 90,494,177
=============== ===============
* Undistributed investment income--net $ 819,183 $ 13,486,577
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Financial Highlights Merrill Lynch Real Investment Fund
Class A Class B
For the For the
For the For the Period For the For the Period
Six Months Year March 26, Six Months Year March 26,
The following per share data and ratios Ended Ended 2004++ to Ended Ended 2004++ to
have been derived from information May 31, Nov. 30, Nov. 30, May 31, Nov. 30, Nov. 30,
provided in the financial statements. 2006 2005 2004 2006 2005 2004
Per Share Operating Performance
Net asset value, beginning of period $ 12.35 $ 11.57 $ 10.00 $ 12.29 $ 11.55 $ 10.00
----------------------------------- -----------------------------------
Investment income (loss)--net .12++++++ .18 .01 .08++++++ .09 --++++
Realized and unrealized gain--net .58 .67 1.56 .58 .67 1.55
----------------------------------- -----------------------------------
Total from investment operations .70 .85 1.57 .66 .76 1.55
----------------------------------- -----------------------------------
Less dividends and distributions from:
Investment income--net (1.86) (.07) -- (1.78) (.02) --
Realized gain--net (.01) -- -- (.01) -- --
----------------------------------- -----------------------------------
Total dividends and distributions (1.87) (.07) -- (1.79) (.02) --
----------------------------------- -----------------------------------
Net asset value, end of period $ 11.18 $ 12.35 $ 11.57 $ 11.16 $ 12.29 $ 11.55
=================================== ===================================
Total Investment Return**
Based on net asset value per share 6.47%+++ 7.39% 15.70%+++ 6.03%+++ 6.63% 15.50%+++
=================================== ===================================
Ratios to Average Net Assets***
Expenses, net of waiver and reimbursement 1.57%* 1.57% 1.42%* 2.34%* 2.34% 1.65%*
=================================== ===================================
Expenses 2.28%* 2.37% 2.61%* 3.06%* 3.14% 3.37%*
=================================== ===================================
Investment income (loss)--net 2.21%* 1.51% .19%* 1.45%* .73% (.03%)*
=================================== ===================================
Supplemental Data
Net assets, end of period (in thousands) $ 15,781 $ 12,860 $ 10,867 $ 11,860 $ 11,534 $ 10,663
=================================== ===================================
Portfolio turnover of the Trust 18.62% 50.00% 19.40% 18.62% 50.00% 19.40%
=================================== ===================================
* Annualized.
** Total investment returns exclude the effects of sales charges.
*** Includes the Fund's share of the Trust's allocated expenses and/or investment income (loss)--net.
++ Commencement of operations.
++++ Amount is less than $(.01) per share.
++++++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Financial Highlights (concluded) Merrill Lynch Real Investment Fund
Class C Class I
For the For the
For the For the Period For the For the Period
Six Months Year March 26, Six Months Year March 26,
The following per share data and ratios Ended Ended 2004++ to Ended Ended 2004++ to
have been derived from information May 31, Nov. 30, Nov. 30, May 31, Nov. 30, Nov. 30,
provided in the financial statements. 2006 2005 2004 2006 2005 2004
Per Share Operating Performance
Net asset value, beginning of period $ 12.29 $ 11.55 $ 10.00 $ 12.38 $ 11.58 $ 10.00
----------------------------------- -----------------------------------
Investment income (loss)--net .08++++++ .09 --++++ .14++++++ .22 .02
Realized and unrealized gain--net .57 .68 1.55 .58 .66 1.56
----------------------------------- -----------------------------------
Total from investment operations .65 .77 1.55 .72 .88 1.58
----------------------------------- -----------------------------------
Dividends and distributions from:
Investment income--net (1.78) (.03) -- (1.89) (.08) --
Realized gain--net (.01) -- -- (.01) -- --
----------------------------------- -----------------------------------
Total dividends and distributions (1.79) (.03) -- (1.90) (.08) --
----------------------------------- -----------------------------------
Net asset value, end of period $ 11.15 $ 12.29 $ 11.55 $ 11.20 $ 12.38 $ 11.58
=================================== ===================================
Total Investment Return**
Based on net asset value per share 6.00%+++ 6.67% 15.50%+++ 6.62%+++ 7.70% 15.80%+++
=================================== ===================================
Ratios to Average Net Assets***
Expenses, net of waiver and reimbursement 2.34%* 2.34% 1.67%* 1.32%* 1.32% 1.27%*
=================================== ===================================
Expenses 3.06%* 3.14% 3.37%* 2.04%* 2.12% 2.36%*
=================================== ===================================
Investment income (loss)--net 1.44%* .75% (.03%)* 2.46%* 1.79% .35%*
=================================== ===================================
Supplemental Data
Net assets, end of period (in thousands) $ 49,070 $ 44,292 $ 34,403 $ 23,448 $ 21,808 $ 13,643
=================================== ===================================
Portfolio turnover of the Trust 18.62% 50.00% 19.40% 18.62% 50.00% 19.40%
=================================== ===================================
* Annualized.
** Total investment returns exclude the effects of sales charges. Effective December 28, 2005,
Class I Shares are no longer subject to any front-end sales charges.
*** Includes the Fund's share of the Trust's allocated expenses and/or investment income (loss)--net.
++ Commencement of operations.
++++ Amount is less than $(.01) per share.
++++++ Based on average shares outstanding.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Notes to Financial Statements Merrill Lynch Real Investment Fund
1. Significant Accounting Policies:
Merrill Lynch Real Investment Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a non-diversified, open-end
investment company. The Fund seeks to achieve its investment objective by
investing all of its assets in Master Real Investment Trust (the "Trust"),
which has the same investment objective and strategies as the Fund. The value
of the Fund's investment in the Trust reflects the Fund's proportionate
interest in the net assets of the Trust. The performance of the Fund is
directly affected by the performance of the Trust. The financial statements of
the Trust, including the Schedule of Investments, are included elsewhere in
this report and should be read in conjunction with the Fund's financial
statements. The Fund's financial statements are prepared in conformity with
U.S. generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. These unaudited financial statements reflect all adjustments, which
are, in the opinion of management, necessary to present a fair statement of
the results for the interim period. All such adjustments are of a normal,
recurring nature. The percentage of the Trust owned by the Fund at May 31,
2006 was 82.9%. The Fund offers multiple classes of shares. Effective December
28, 2005, Class I Shares are no longer subject to any front-end sales charge.
Shares of Class A are sold with a front-end sales charge. Shares of Class B
and Class C may be subject to a contingent deferred sales charge. Class I
Shares are sold only to certain eligible investors. All classes of shares have
identical voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class A, Class B and Class C Shares bear certain
expenses related to the account maintenance of such shares, and Class B and
Class C Shares also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to matters
relating to its account maintenance and distribution expenditures (except that
Class B shareholders may vote on certain changes to the Class A distribution
plan). Income, expenses (other than expenses attributable to a specific class)
and realized and unrealized gains and losses are allocated daily to each class
based on its relative net assets. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments--The Fund records its investment in the Trust at
fair value. Valuation of securities held by the Trust is discussed in Note
1(a) of the Trust's Notes to Financial Statements, which are included
elsewhere in this report.
(b) Investment income and expenses--The Fund records daily its proportionate
share of the Trust's income, expenses and realized and unrealized gains and
losses. In addition, the Fund accrues its own expenses.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(e) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend dates.
(f) Investment transactions--Investment transactions in the Trust are
accounted for on a trade-date basis.
2. Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch
& Co., Inc. ("ML & Co."), which is the limited partner. MLIM is responsible
for the management of the Fund's portfolio and provides the necessary
personnel, facilities, equipment and certain other services necessary to
the operations of the Fund. For such services, the Fund pays a monthly fee of
1.00%, on an annual basis, of the average daily value of the Fund's net assets.
MLIM has contractually agreed to waive the Fund's investment advisory fee in
the amount of the Fund's share of the investment advisory fee paid by the
Trust. In addition to the contractual waiver, MLIM has agreed to voluntarily
waive the investment advisory fees and/or reimburse expenses in order to cap
total expenses (excluding distribution fee and/or account maintenance fees) at
1.33%. For the six months ended May 31, 2006, MLIM earned fees of $465,030, of
which $332,620 was waived. MLIM has entered into a Sub-Advisory Agreement with
Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM,
pursuant to which MLIM, LLC provides investment advisory services to MLIM with
respect to the Fund. There is no increase in the aggregate fees paid by the
Fund for these services.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Notes to Financial Statements (continued) Merrill Lynch Real Investment Fund
The Fund has also entered into a Distribution Agreement and Distribution Plans
with FAM Distributors, Inc. ("FAMD" or the "Distributor"), an affiliate of
MLIM. Pursuant to the Distribution Plans adopted by the Fund in accordance
with Rule 12b-1 under the Investment Company Act of 1940, the Fund pays the
Distributor ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the average daily
net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class A .25% --
Class B .25% .75%
Class C .25% .75%
Pursuant to a sub-agreement with the Distributor, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of MLIM, also provides
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance services to Class A, Class B and Class C shareholders. The ongoing
distribution fee compensates the Distributor and MLPF&S for providing
shareholder and distribution-related services to Class B and Class C
shareholders.
For the six months ended May 31, 2006, FAMD earned underwriting discounts and
direct commissions and MLPF&S earned dealer concessions on sales of the Fund's
Class A and Class I Shares as follows:
FAMD MLPF&S
Class A $ 8,968 $ 59,385
Class I $ 24,415 $ 4
For the six months ended May 31, 2006, MLPF&S received contingent deferred
sales charges of $15,632 and $8,860 relating to transactions in Class B and
Class C Shares, respectively. Furthermore, MLPF&S received contingent deferred
sales charges of $28 relating to transactions subject to front-end sales
charge waivers in Class A Shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
Certain officers and/or directors of the Fund are officers and/or directors of
MLIM, PSI, ML & Co., FAMD, FDS, and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Beneficial Interest Transactions:
Net increase in net assets derived from beneficial interest transactions were
$17,635,670 and $15,930,594 for the six months ended May 31, 2006 and for the
year ended November 30, 2005, respectively.
Transactions in beneficial interest for each class were as follows:
Class A Shares for the
Six Months Ended Dollar
May 31, 2006 Shares Amount
Shares sold 370,093 $ 4,111,268
Automatic conversion of shares 11,752 125,444
Shares issued to shareholders in
reinvestment of dividends and
distributions 158,581 1,684,129
--------------- ---------------
Total issued 540,426 5,920,841
Shares redeemed (170,011) (1,841,149)
--------------- ---------------
Net increase 370,415 $ 4,079,692
=============== ===============
Class A Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
Shares sold 487,075 $ 5,946,383
Automatic conversion of shares 19,621 237,061
Shares issued to shareholders in
reinvestment of dividends 5,089 55,421
--------------- ---------------
Total issued 511,785 6,238,865
Shares redeemed (410,076) (4,981,361)
--------------- ---------------
Net increase 101,709 $ 1,257,504
=============== ===============
Class B Shares for the
Six Months Ended Dollar
May 31, 2006 Shares Amount
Shares sold 120,361 $ 1,352,136
Shares issued to shareholders in
reinvestment of dividends and
distributions 132,292 1,407,588
--------------- ---------------
Total issued 252,653 2,759,724
--------------- ---------------
Shares redeemed (116,900) (1,290,375)
Automatic conversion of shares (11,751) (125,444)
--------------- ---------------
Total redeemed (128,651) (1,415,819)
--------------- ---------------
Net increase 124,002 $ 1,343,905
=============== ===============
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Notes to Financial Statements (concluded) Merrill Lynch Real Investment Fund
Class B Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
Shares sold 318,856 $ 3,929,559
Shares issued to shareholders in
reinvestment of dividends 1,630 17,783
--------------- ---------------
Total issued 320,486 3,947,342
--------------- ---------------
Shares redeemed (285,334) (3,572,607)
Automatic conversion of shares (19,653) (237,061)
--------------- ---------------
Total redeemed (304,987) (3,809,668)
--------------- ---------------
Net increase 15,499 $ 137,674
=============== ===============
Class C Shares for the
Six Months Ended Dollar
May 31, 2006 Shares Amount
Shares sold 1,014,941 $ 11,212,075
Shares issued to shareholders in
reinvestment of dividends and
distributions 530,170 5,635,706
--------------- ---------------
Total issued 1,545,111 16,847,781
Shares redeemed (749,635) (8,218,765)
--------------- ---------------
Net increase 795,476 $ 8,629,016
=============== ===============
Class C Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
Shares sold 1,673,853 $ 20,280,854
Shares issued to shareholders in
reinvestment of dividends 6,648 72,532
--------------- ---------------
Total issued 1,680,501 20,353,386
Shares redeemed (1,053,157) (13,015,861)
--------------- ---------------
Net increase 627,344 $ 7,337,525
=============== ===============
Class I Shares for the
Six Months Ended Dollar
May 31, 2006 Shares Amount
Shares sold 758,936 $ 8,347,376
Shares issued to shareholders in
reinvestment of dividends and
distributions 226,083 2,403,265
--------------- ---------------
Total issued 985,019 10,750,641
Shares redeemed (652,430) (7,167,584)
--------------- ---------------
Net increase 332,589 $ 3,583,057
=============== ===============
Class I Shares for the Year Dollar
Ended November 30, 2005 Shares Amount
Shares sold 1,159,874 $ 14,285,155
Shares issued to shareholders in
reinvestment of dividends 8,062 87,793
--------------- ---------------
Total issued 1,167,936 14,372,948
Shares redeemed (584,467) (7,175,057)
--------------- ---------------
Net increase 583,469 $ 7,197,891
=============== ===============
Portfolio Information Master Real Investment Trust
As of May 31, 2006
Percent of
Total
Asset Mix Investments
Corporate Bonds & Structured Notes 35.1%
Asset-Backed Securities 21.6
Non-Government Agency
Mortgage-Backed Securities--Collateralized
Mortgage Obligations 15.6
Government Agency Mortgage-Backed
Securities 8.6
Government Agency Mortgage-Backed
Securities--Collateralized Mortgage
Obligations 3.1
Other* 16.0
* Includes portfolio holdings in short-term investments and options.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Schedule of Investments Master Real Investment Trust
Face
Amount Asset-Backed Securities++ Value
$ 1,000,000 ACE Securities Corp. Series 2004-OP1 Class M3, 6.331% due 4/25/2034 (a) $ 1,001,944
3,000,000 Accredited Mortgage Loan Trust Series 2004-3 Class 2A6, 5.661% due 10/25/2034 (a) 3,030,367
488,889 Altius Funding Ltd. Series 2005-2A Class D, 7.879% due 12/05/2040 (a)(b) 488,889
200,000 American Express Credit Account Master Trust Series 2002-1 Class A, 5.191%
due 9/15/2009 (a) 200,164
Ameriquest Mortgage Securities, Inc. (a):
1,000,000 Series 2004-A1 Class M4, 6.581% due 9/25/2034 1,012,957
1,500,000 Series 2004-R1 Class M2, 5.661% due 2/25/2034 1,506,530
545,623 Amortizing Residential Collateral Trust Series 2002-BC3 Class M2, 6.059%
due 6/25/2032 (a) 552,731
200,000 Asset Backed Securities Corp. Home Equity Series 2004-HE9 Class M2, 6.281%
due 12/25/2034 (a) 203,755
200,000 Bank One Issuance Trust Series 2002-A5 Class A5, 5.201% due 6/15/2010 (a) 200,315
1,000,000 Bear Stearns Asset Backed Securities, Inc. Series 2004-FR3 Class M2, 6.251%
due 10/25/2034 (a) 1,017,471
500,000 Buckingham CDO Ltd. Series 2005-2A Class E, 8.129% due 4/05/2041 (a) 499,500
157,243 Capital Auto Receivables Asset Trust Series 2003-2 Class A4B, 4.961% due
1/15/2009 (a) 157,271
61,444 Capital One Auto Finance Trust Series 2003-B Class A3, 5.191% due 1/15/2008 (a) 61,449
200,000 Capital One Master Trust Series 1999-3 Class A, 5.331% due 9/15/2009 (a) 200,067
1,500,000 Capital One Multi-Asset Execution Trust Series 2002-C1 Class C1, 7.831% due
7/15/2010 (a) 1,548,313
2,000,000 Centex Home Equity Series 2004-D Class MV1, 5.701% due 9/25/2034 (a) 2,018,242
Countrywide Asset-Backed Certificates (a):
1,000,000 Series 2003-2 Class M1, 5.781% due 6/26/2033 1,002,667
1,000,000 Series 2004-5 Class M2, 5.751% due 7/25/2034 1,008,569
2,000,000 Series 2004-8 Class M1, 5.781% due 2/25/2035 2,017,387
1,000,000 Series 2005-BC3 Class 2A3, 5.491% due 6/25/2035 1,003,460
500,000 Duke Funding High Grade II-S/EGAM, Ltd. Series 2006-1A Class D, 8.129% due
10/04/2050 (a) 500,000
2,000,000 Fremont Home Loan Trust Series 2004-3 Class M2, 5.781% due 11/25/2034 (a) 2,009,318
117,030 Household Automotive Trust Series 2002-3 Class A4B, 5.421% due 5/18/2009 (a) 117,115
292,302 MSDWCC Heloc Trust Series 2003-2 Class A, 5.341% due 4/25/2016 (a) 292,458
1,000,000 Master Asset Backed Securities Trust Series 2004-HE1 Class M5, 6.431% due
9/25/2034 (a) 1,017,390
Morgan Stanley ABS Capital I Inc. (a):
1,000,000 Series 2003-NC5 Class M2, 7.081% due 4/25/2033 1,004,222
207,605 Series 2004-NC1 Class A2, 5.451% due 12/27/2033 207,765
500,000 Residential Asset Mortgage Products, Inc. Series 2004-RZ4 Class M3, 5.981%
due 12/25/2034 (a) 505,371
Residential Asset Securities Corp. (a):
80,711 Series 2000-KS4 Class AII, 5.541% due 9/25/2031 80,730
1,000,000 Series 2004-KS8 Class MII2, 6.161% due 9/25/2034 999,972
83,567 Wachovia Asset Securitization, Inc. Series 2003-HE1 Class A1, 5.371% due
3/25/2033 (a) 83,680
459,000 Wells Fargo Home Equity Trust Series 2004-2 Class M5, 6.331% due 11/25/2033 (a) 469,122
Total Asset-Backed Securities (Cost--$25,893,367)--21.5% 26,019,191
Industry Corporate Bonds & Structured Notes
Capital 5,000,000 Morgan Stanley & Co., 4.581% due 3/22/2007 6,873,995
Markets--5.7%
Commercial 8,700,000 Barclays Bank Plc (Goldman Sachs Commodity Index Total Return Linked Notes),
Banks--12.5% 5.30% due 9/13/2007 (b)(c) 15,141,378
Diversified Financial AIG-FP Structured Finance (Cayman) Limited (Goldman Sachs Commodity Index
Services--16.5% Total Return Linked Notes) (c):
12,000,000 0% due 5/10/2007 13,338,348
3,000,000 1.50% due 5/14/2007 5,128,115
1,000,000 Links Finance Corp. Series 55, 5.16% due 9/15/2010 (a) 998,451
500,000 Sigma Finance Corp., 5.068% due 3/31/2014 (a)(b)(f) 500,786
---------------
19,965,700
Oil, Gas & 250,000 Pemex Project Funding Master Trust, 6.21% due 6/15/2010 (a)(b) 256,000
Consumable Fuels--0.2%
Total Corporate Bonds & Structured Notes (Cost--$35,518,753)--34.9% 42,237,073
Government Agency Mortgage-Backed Securities++
Fannie Mae Guaranteed Pass-Through Certificates:
1,016,392 4.70% due 12/01/2012 970,271
1,484,215 4.79% due 7/01/2013 1,413,363
635,822 4.825% due 12/01/2013 614,773
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Schedule of Investments (continued) Master Real Investment Trust
Face
Amount Government Agency Mortgage-Backed Securities++ Value
Fannie Mae Guaranteed Pass-Through Certificates (concluded):
$ 3,327,155 5.23% due 12/01/2012 $ 3,284,668
710,940 5.60% due 11/01/2013 707,877
230,279 5.95% due 11/01/2011 231,094
2,324,095 6.33% due 1/01/2029 - 2/01/2029 2,346,534
474,225 6.83% due 1/01/2011 481,965
248,104 7.367% due 10/01/2009 256,532
Total Government Agency Mortgage-Backed Securities (Cost--$10,693,495)--8.5% 10,307,077
Collateralized 2,178,217 Fannie Mae Trust Series 2004-36 Class FJ 5.381% due 3/25/2018 (a) 2,185,216
Mortgage 111,550 Freddie Mac Multiclass Certificates Series 1625 Class FG 4.524% due 12/15/2008 (a) 110,858
Obligations--3.1% Ginnie Mae Trust (g):
9,857,677 Series 2005-9 Class IO, 0.778% due 1/16/2045 520,976
7,946,925 Series 2005-76 Class IO, 0.882% due 9/16/2045 453,263
7,962,368 Series 2005-90 Class IO, 0.912% due 11/16/2045 438,176
Total Government Agency Mortgage-Backed Securities--Collateralized
Mortgage Obligations (Cost--$3,723,030)--3.1% 3,708,489
Non-Government Agency Mortgage-Backed Securities++
Collateralized 1,075,818 ABN AMRO Mortgage Corp. Series 2003-2 Class 2A1, 5.581% due 3/25/2018 (a) 1,074,980
Mortgage 842,987 Countrywide Alternative Loan Trust Series 2004-2CB Class 1A4, 5.481% due
Obligations--15.6% 3/25/2034 (a) 845,447
Countrywide Home Loan Mortgage Pass-Through Trust (a):
672,792 Series 2004-J2 Class A2, 5.581% due 3/25/2034 673,651
1,597,500 Series 2004-J7 Class 1A1, 5.531% due 8/25/2034 1,599,477
610,568 First Horizon Mortgage Pass-Through Trust Series 2003-4 Class 2A2, 5.531% due
6/25/2018 (a) 613,795
1,978,021 GMAC Mortgage Corp. Loan Trust Series 2004-J2 Class A2, 5.581% due 6/25/2034 (a) 1,984,659
Granite Mortgages Plc, Class 1C (a):
275,000 Series 2002-1, 6.38% due 4/20/2042 276,865
500,000 Series 2003-1, 6.53% due 1/20/2043 509,750
1,900,000 Holmes Financing Plc Series 8 Class 2C, 5.788% due 7/15/2040 (a) 1,904,750
3,000,000 Impac Secured Assets CMN Owner Trust Series 2004-3 Class M1, 5.681% due
11/25/2034 (a) 3,012,482
2,000,000 MASTR Asset Securitization Trust Series 2003-7 Class 4A37, 5.481% due 9/25/2033 (a) 1,966,643
Residential Accredit Loans, Inc. (a):
550,944 Series 2004-QS8 Class A4, 5.481% due 6/25/2034 553,251
857,606 Series 2005-QS12 Class A8, 5.431% due 8/25/2035 858,514
Residential Funding Mortgage Securities I (a):
1,164,369 Series 2003-S14 Class A5, 5.481% due 7/25/2018 1,168,484
1,266,251 Series 2003-S14 Class A6, 5.481% due 7/25/2018 1,268,300
498,985 Washington Mutual Series 2005-AR2 Class B5, 5.909% due 1/25/2045 (a) 497,270
Total Non-Government Agency Mortgage-Backed Securities--Collateralized
Mortgage Obligations (Cost--$18,827,865)--15.6% 18,808,318
Beneficial
Interest Short-Term Securities
$ 19,228,432 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I, 4.85% (d)(e) 19,228,432
Total Short-Term Securities (Cost--$19,228,432)--15.9% 19,228,432
Total Investments (Cost--$113,884,942)--99.5% 120,308,580
Number of
Contracts++++ Options Written
Call Options Written 2 Consumer Price Index (CPI) Linked Floor at USD 1, expiring April 2009, Broker
Morgan Stanley Capital Services, Inc. (20)
Total Options Written (Premiums Received--$3,200)--0.0% (20)
Total Investments, Net of Options Written (Cost--$113,881,742*)--99.5% 120,308,560
Other Assets Less Liabilities--0.5% 559,826
---------------
Net Assets--100.0% $ 120,868,386
===============
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Schedule of Investments (concluded) Master Real Investment Trust
* The cost and unrealized appreciation (depreciation) of investments,
net of options written, as of May 31, 2006, as computed for federal
income tax purposes, were as follows:
Aggregate cost $ 113,863,945
=================
Gross unrealized appreciation $ 6,944,727
Gross unrealized depreciation (500,112)
-----------------
Net unrealized appreciation $ 6,444,615
=================
++ Asset-Backed and Mortgage-Backed Securities are subject to principal
paydowns as a result of prepayments or refinancings of the underlying
instruments. As a result, the average life may be substantially less than
the original maturity.
++++ One contract represents a notional amount of $1,000,000.
(a) Floating rate note.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(c) Represents a structured note; the interest rate shown reflects the
effective yield at the time of purchase.
(d) Investments in companies considered to be an affiliate of the Trust,
for purposes of Section 2(a)(3) of the Investment Company Act of
1940, were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $ 8,309,694 $ 258,373
(e) Represents the current yield as of 5/31/2006.
(f) Restricted security as to resale, representing 0.4% of net assets, was
as follows:
Acquisition
Issue Date Cost Value
Sigma Finance Corp.,
5.068% due 3/31/2014 3/26/2004 $500,000 $500,786
(g) Represents the interest only portion of a mortgage-backed obligation.
o For Trust compliance purposes, the Trust's industry classifications refer
to any one or more of the industry sub-classifications used by one
or more widely recognized market indexes or ratings group indexes,
and/or as defined by Trust management. This definition may not
apply for purposes of this report which may combine industry
sub-classifications for reporting ease. Industries are shown as a
percent of net assets.
o Financial futures sold as of May 31, 2006 were as follows:
Unrealized
Number of Expiration Face Appreciation
Contracts Issue Date Value (Depreciation)
43 5-Year
U.S. Treasury September
Bond 2006 $4,472,289 $ 17,086
38 10-Year
U.S. Treasury September
Bond 2006 $3,981,264 (5,767)
----------
Total Unrealized Appreciation--Net $ 11,319
==========
o Swaps outstanding as of May 31, 2006 were as follows:
Unrealized
Notional Appreciation
Amount (Depreciation)
Sold credit default protection on
Dow Jones CDX North America
Investment Grade Index Series 2
and receive 0.60%
Broker, JPMorgan Chase Bank
Expires September 2009 $1,984,000 $ 19,197
Sold credit default protection on
Fannie Mae and receive 0.18%
Broker, Lehman Brothers
Special Finance
Expires March 2010 $1,000,000 3,689
Sold credit default protection on
Freddie Mac and receive 0.15%
Broker, Lehman Brothers
Special Finance
Expires June 2010 $4,000,000 13,200
Sold credit default protection on
Fannie Mae and receive 0.48%
Broker, Deutsche Bank AG, London
Expires June 2010 $2,000,000 24,520
Receive a floating rate based on
1-month LIBOR plus 0.47%, which
is capped at a fixed coupon of 6.0%,
and pay a floating rate based on
1-month LIBOR
Broker, Credit Suisse First Boston
Expires June 2011 $4,500,000 (16,407)
Sold credit default protection on
Holmes Financing Plc Series 8
Class 2C and receive 0.55%
Broker, Deutsche Bank AG
Expires July 2040 $2,000,000 (3,208)
Sold credit default protection on
Permanent Financing Plc Series 4
Class 2C and receive 0.55%
Broker, Deutsche Bank AG
Expires June 2042 $2,000,000 (974)
Sold credit default protection on
Granite Mortgages Plc Series
2004-2 Class 1C and receive 0.45%
Broker, Deutsche Bank AG, London
Expires June 2044 $ 588,580 (706)
---------
Total $ 39,311
=========
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Statement of Assets and Liabilities Master Real Investment Trust
As of May 31, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$94,656,510) $ 101,080,148
Investments in affiliated securities, at value (identified cost--$19,228,432) 19,228,432
Cash on deposit for financial futures contracts 62,500
Unrealized appreciation on swaps 60,606
Receivables:
Contributions $ 384,445
Interest 361,245
Variation margin 23,973
Swaps 11,212 780,875
---------------
Prepaid expenses and other assets 3,798
---------------
Total assets 121,216,359
---------------
Liabilities
Unrealized depreciation on swaps 21,295
Options written, at value (premiums received--$3,200) 20
Swap premiums received 951
Bank overdraft 1,999
Payables:
Withdrawals 235,369
Investment adviser 39,937
Other affiliates 925 276,231
---------------
Accrued expenses and other liabilities 47,477
---------------
Total liabilities 347,973
---------------
Net Assets
Net assets $ 120,868,386
===============
Net Assets Consist of
Investors' capital $ 114,390,938
Unrealized appreciation--net 6,477,448
---------------
Net Assets $ 120,868,386
===============
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Statement of Operations Master Real Investment Trust
For the Six Months Ended May 31, 2006
Investment Income
Interest (including $258,373 from affiliates) $ 2,114,527
---------------
Total income 2,114,527
---------------
Expenses
Investment advisory fees $ 281,887
Accounting services 62,637
Professional fees 22,849
Custodian fees 14,501
Trustees' fees and expenses 9,678
Pricing fees 5,437
Printing and shareholder reports 1,535
Other 6,876
---------------
Total expenses 405,400
---------------
Investment income--net 1,709,127
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (1,202,913)
Futures contracts and swaps--net 268,572
Options written--net (79,910) (1,014,251)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 6,674,424
Futures contracts and swaps--net 13,605
Options written--net 64,942 6,752,971
--------------- ---------------
Total realized and unrealized gain--net 5,738,720
---------------
Net Increase in Net Assets Resulting from Operations $ 7,447,847
===============
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Statements of Changes in Net Assets Master Real Investment Trust
For the Six For the
Months Ended Year Ended
May 31, November 30,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 1,709,127 $ 2,228,733
Realized gain (loss)--net (1,014,251) 13,477,189
Change in unrealized appreciation/depreciation--net 6,752,971 (8,614,688)
--------------- ---------------
Net increase in net assets resulting from operations 7,447,847 7,091,234
--------------- ---------------
Capital Transactions
Proceeds from contributions 35,724,536 64,720,931
Fair value of withdrawals (28,461,075) (41,636,849)
--------------- ---------------
Net increase in net assets derived from capital transactions 7,263,461 23,084,082
--------------- ---------------
Net Assets
Total increase in net assets 14,711,308 30,175,316
Beginning of period 106,157,078 75,981,762
--------------- ---------------
End of period $ 120,868,386 $ 106,157,078
=============== ===============
See Notes to Financial Statements.
Financial Highlights Master Real Investment Trust
For the Six For the For the Period
Months Ended Year Ended March 26, 2004++
The following ratios have been derived from May 31, November 30, to November 30,
information provided in the financial statements. 2006 2005 2004
Total Investment Return
Total investment return 6.91%* 8.26% 16.20%*
=============== =============== ===============
Ratios to Average Net Assets
Expenses, net of waiver .72%** .73% .68%**
=============== =============== ===============
Expenses .72%** .73% .73%**
=============== =============== ===============
Investment income--net 3.03%** 2.37% .95%**
=============== =============== ===============
Supplemental Data
Net assets, end of period (in thousands) $ 120,868 $ 106,157 $ 75,982
=============== =============== ===============
Portfolio turnover 18.62% 50.00% 19.40%
=============== =============== ===============
* Aggregate total investment return.
** Annualized.
++ Commencement of operations.
See Notes to Financial Statements.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Notes to Financial Statements Master Real Investment Trust
1. Significant Accounting Policies:
Master Real Investment Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended, and is organized as a Delaware statutory
trust. The Declaration of Trust permits the Trustees to issue non-transferable
interests in the Trust, subject to certain limitations. The Trust's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the interim period.
All adjustments are of a normal, recurring nature. The following is a summary
of significant accounting policies followed by the Trust.
(a) Valuation of investments--Debt securities are traded primarily in the over-
the-counter ("OTC") markets and are valued at the last available bid price in
the OTC market or on the basis of yield equivalents as obtained by the Trust's
pricing service from one or more dealers that make markets in the securities.
Financial futures contracts and options thereon, which are traded on
exchanges, are valued at their closing prices as of the close of such
exchanges. Options written or purchased are valued at the last sale price in
the case of exchange-traded options. In the case of options traded in the OTC
market, valuation is the last asked price (options written) or the last bid
price (options purchased). Swap agreements are valued based upon quoted fair
valuations received daily by the Trust from a pricing service or counterparty.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value. Valuation of other short-
term investment vehicles is generally based upon the net asset value of the
underlying investment vehicle or amortized cost. Repurchase agreements are
valued at cost plus accrued interest. The Trust employs pricing services to
provide certain securities prices for the Trust. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees of
the Trust, including valuations furnished by the pricing services retained by
the Trust, which may utilize a matrix system for valuations. The procedures of
the pricing service and its valuations are reviewed by the officers of the
Trust under the general direction of the Board of Trustees. Such valuations
and procedures will be reviewed periodically by the Board of Trustees of the
Trust.
Equity securities that are held by the Trust, which are traded on stock
exchanges or the Nasdaq National Market, are valued at the last sale price or
official close price on the exchange, as of the close of business on the day
the securities are being valued or, lacking any sales, at the last available
bid price for long positions, and at the last available asked price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Trustees of the Trust. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price or yield equivalent obtained from one
or more dealers or pricing services approved by the Board of Trustees of the
Trust. Short positions traded in the OTC market are valued at the last
available asked price. Portfolio securities that are traded both in the OTC
market and on a stock exchange are valued according to the broadest and most
representative market.
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities is
substantially completed each day at various times prior to the close of
business on the New York Stock Exchange ("NYSE"). The values of such
securities used in computing the net assets of the Trust are determined as of
such times. Foreign currency exchange rates also are generally determined
prior to the close of business on the NYSE. Occasionally, events affecting the
values of such securities and such exchange rates may occur between the times
at which they are determined and the close of business on the NYSE that may
not be reflected in the computation of the Trust's net assets. If events (for
example, a company announcement, market volatility or a natural disaster)
occur during such periods that are expected to materially affect the value of
such securities, those securities may be valued at their fair value as
determined in good faith by the Trust's Board of Trustees or by the Investment
Adviser using a pricing service and/or procedures approved by the Trust's
Board of Trustees.
(b) Derivative financial instruments--The Trust may engage in various
portfolio investment strategies both to increase the return of the Trust and
to hedge, or protect, its exposure to interest rate movements and movements in
the securities and commodities markets. Losses may arise due to changes in the
value of the contract or if the counterparty does not perform under the
contract.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Notes to Financial Statements (continued) Master Real Investment Trust
* Hybrid instruments--The Trust may invest in hybrid instruments, including
structured notes and commodity-linked notes. The principal and/or interest
payments on these hybrid instruments are linked to the value of commodities,
commodity futures contracts, or the performance of one or more indexes or
other readily measurable economic variables. The principal value of the hybrid
instruments, and/or the value of the interest that they pay, will rise or fall
in response to changes in the values of the underlying commodities, commodity
futures contracts, or commodity indexes. Although these hybrid instruments are
primarily debt obligations, they indirectly provide exposure to changes in the
value of the underlying commodities.
* Options--The Trust may purchase and write covered call and put options. When
the Trust writes an option, an amount equal to the premium received by the
Trust is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market value
of the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or added
to) the proceeds of the security sold. When an option expires (or the Trust
enters into a closing transaction), the Trust realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss to the
extent the cost of the closing transaction exceeds the premium paid or
received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Trust may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts are
contracts for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Trust deposits
and maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Trust agrees
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Trust as unrealized gains or losses.
When the contract is closed, the Trust records a realized gain or loss equal
to the difference between the value of the contract at the time it was opened
and the value at the time it was closed.
* Swaps--The Trust may enter into swap agreements, which are over-the-counter
contracts in which the Trust and a counterparty agree to make periodic net
payments on a specified notional amount. The net payments can be made for a
set period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate; the
change in market value of a specified security, basket of securities, or
index; or the return generated by a security. These periodic payments received
or made by the Trust are recorded in the accompanying Statement of Operations
as realized gains or losses, respectively. Gains or losses are also realized
upon termination of the swap agreements. Swaps are marked-to-market daily and
changes in value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of the
counterparties to perform under the contracts' terms and the possible lack of
liquidity with respect to the swap agreements.
(c) Income taxes--The Trust is classified as a partnership for federal income
tax purposes. As such, each investor in the Trust is treated as owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Trust. Therefore, no federal income tax
provision is required. It is intended that the Trust's assets will be managed
so an investor in the Trust can satisfy the requirements of Subchapter M of
the Internal Revenue Code.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Notes to Financial Statements (concluded) Master Real Investment Trust
(e) Securities lending--The Trust may lend securities to financial
institutions that provide cash or securities issued or guaranteed by the U.S.
government as collateral, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
The market value of the loaned securities is determined at the close of
business of the Trust and any additional required collateral is delivered to
the Trust on the next business day. Where the Trust receives securities as
collateral for the loaned securities, it collects a fee from the borrower. The
Trust typically receives the income on the loaned securities but does not
receive the income on the collateral. Where the Trust receives cash
collateral, it may invest such collateral and retain the amount earned on such
investment, net of any amount rebated to the borrower. Loans of securities are
terminable at any time and the borrower, after notice, is required to return
borrowed securities within five business days. The Trust may pay reasonable
finder's, lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, the Trust
could experience delays and costs in gaining access to the collateral. The
Trust also could suffer a loss where the value of the collateral falls below
the market value of the borrowed securities, in the event of borrower default
or in the event of losses on investments made with cash collateral.
(f) Bank overdraft--The Trust recorded a bank overdraft, which resulted from
management estimates of available cash.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with Merrill Lynch
Investment Managers, L.P. ("MLIM"). The general partner of MLIM is Princeton
Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch
& Co., Inc. ("ML & Co."), which is the limited partner.
MLIM is responsible for the management of the Trust's investments and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Trust. For such services, the Trust pays a
monthly fee based upon the average daily value of the Trust's net assets at
the annual rate of 0.50%. MLIM has entered into a Sub-Advisory Agreement with
Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM,
pursuant to which MLIM, LLC provides investment advisory services to MLIM with
respect to the Trust. There is no increase in the aggregate fees paid by the
Trust for these services.
The Trust has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of MLIM. Pursuant
to that order, the Trust also has retained MLIM, LLC as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Trust, invest cash collateral
received by the Trust for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by MLIM.
For the six months ended May 31, 2006, the Trust reimbursed MLIM $1,308 for
certain accounting services.
Certain officers and/or trustees of the Trust are officers and/or directors of
MLIM, PSI, ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended May 31, 2006 were $18,747,746 and
$20,538,559, respectively.
Transactions in call options written for the six months ended May 31, 2006
were as follows:
Number of Premiums
Contracts* Received
Outstanding call options written,
beginning of period 12 $ 18,700
Options closed (5) (10,500)
Options expired (5) (5,000)
--------------- ---------------
Outstanding call options written,
end of period 2 $ 3,200
=============== ===============
* One contract represents a notional amount of $1,000,000.
Transactions in put options written for the six months ended
May 31, 2006 were as follows:
Number of Premiums
Contracts* Received
Outstanding put options written,
beginning of period 18 $ 126,675
Options closed (18) (126,675)
--------------- ---------------
Outstanding put options written,
end of period -- $ --
=============== ===============
* One contract represents a notional amount of $1,000,000.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Trustees
All but one member of the Boards of Trustees of the Fund and the Master Real
Investment Trust (the "Trust") is an independent trustee whose only
affiliation with Merrill Lynch Investment Management, L.P. (the "Investment
Adviser") or other Merrill Lynch affiliates is as a trustee of the Fund and
the Trust and as a trustee or director of certain other funds advised by the
Investment Adviser or its affiliates. The Chair of each Board is an
independent trustee. New trustee nominees are chosen by a Nominating Committee
comprised entirely of independent trustees. All independent trustees also are
members of each Board's Audit Committee, and the independent trustees meet in
executive session at each in-person Board meeting. Each Board and each Board's
Audit Committee meet in person for at least two days each quarter and conduct
other in-person and telephone meetings throughout the year, some of which are
formal Board meetings and some of which are informational meetings.
Independent counsel to the independent trustees attends all in-person Board
and Audit Committee meetings and other meetings at the independent trustees'
request.
Investment Advisory Agreements--Matters Considered by the Board
Every year, each Board considers approval of the Trust's investment advisory
agreement (the "Investment Advisory Agreement"). Each Board assesses the
nature, scope and quality of the services provided to the Fund and the Trust
by the personnel of the Investment Adviser and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory
requirements. Each Board also receives and assesses information regarding the
services provided to the Fund and the Trust by certain unaffiliated service
providers.
At various times throughout the year, each Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the Investment Adviser and its
affiliates by the Fund and the Trust, such as transfer agency fees and fees
for marketing and distribution; (b) Fund/Trust operating expenses paid to
third parties; (c) the resources devoted to and compliance reports relating to
the Fund's/Trust's investment objective, policies and restrictions, and the
Fund's/Trust's compliance with its Code of Ethics and the Investment
Adviser's compliance policies and procedures; and (d) the nature, cost and
character of non-investment management services provided by the Investment
Adviser and its affiliates.
Each Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be of high quality. Each Board also believes that
the Investment Adviser is financially sound and well managed and notes that
the Investment Adviser is affiliated with one of America's largest financial
firms. Each Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, each Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Investment Adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Boards of Trustees
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, each Board requests and receives materials specifically
relating to the Investment Advisory Agreement. These materials include (a)
information compiled by Lipper Inc. ("Lipper") on the fees and expenses and
the investment performance of the Fund and the Trust as compared to a
comparable group of funds as classified by Lipper; (b) sales and redemption
data for the Fund; (c) a discussion by the Fund's/Trust's portfolio management
team of investment strategies used by the Fund/Trust during its most recent
fiscal year; (d) information on the profitability to the Investment Adviser
and its affiliates of the Investment Advisory Agreement and other
relationships with the Fund and the Trust; and (e) information provided by the
Investment Adviser concerning investment advisory fees charged to a retail
fund under a similar investment mandate. The Board also considers other
matters it deems important to the approval process, such as payments made to
the Investment Adviser or its affiliates relating to the distribution of Fund
shares, services related to the valuation and pricing of Fund/Trust portfolio
holdings, the Fund's/Trust's portfolio turnover statistics, and direct and
indirect benefits to the Investment Adviser and its affiliates from their
relationship with the Fund and the Trust. Neither Board identified any
particular information as controlling, and each member of each Board
attributed different weights to the various items considered.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of Investment Advisory Agreement (continued)
Certain Specific Renewal Data
In connection with the most recent renewal of the Trust's Investment Advisory
Agreement in May 2006, the independent trustees' and Boards' review included
the following:
Services Provided by the Investment Adviser--Each Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including
the investment advisory services and the resulting performance of the Fund and
the Trust. Each Board focused primarily on the Investment Adviser's investment
advisory services and the Fund's/Trust's investment performance. Each Board
compared Fund/Trust performance - both including and excluding the effects of
the Fund's/Trust's fees and expenses - to the performance of a comparable
group of mutual funds and the performance of a relevant index or combination
of indexes. While each Board reviews performance data at least quarterly,
consistent with the Investment Adviser's investment goals, each Board attaches
more importance to performance over relatively long periods of time, typically
three to five years, or a shorter period in the case of a fund that has been
in existence less than five years. According to Lipper's ranking of all retail
and institutional specialty diversified equity funds, for the periods ended
February 28, 2006, the Fund's/Trust's performance after fees and expenses
ranked in the fourth quintile for one year and in the second quintile for the
period since inception on March 26, 2004. Each Board concluded that the nature
and quality of the services supported the continuation of the Investment
Advisory Agreements.
The Investment Adviser's Personnel and Investment Process--Each Board reviews
at least annually the Fund's/Trust's investment objectives and strategies.
Each Board discusses with senior management of the Investment Adviser
responsible for investment operations and the senior management of the
Investment Adviser's fixed-income investing group the strategies being used to
achieve the stated objectives. Among other things, each Board considers the
size, education and experience of the Investment Adviser's investment staff,
its use of technology, and the Investment Adviser's approach to training and
retaining portfolio managers and other research, advisory and management
personnel. Each Board also reviews the Investment Adviser's compensation
policies and practices with respect to the Fund's/Trust's portfolio managers.
Each Board also considered the experience of the Fund's/Trust's portfolio
managers and noted that each of Messrs. Frank Viola and Thomas Musmanno, the
Trust's/Fund's portfolio managers, have over ten years' experience investing
in fixed-income securities and in selecting and managing derivative
investments. Moreover, the Investment Adviser and its investment staff have
extensive experience in analyzing and managing the types of investments used
by the Fund and the Trust. The Board concluded that each of the Fund and the
Trust benefits from that expertise.
Management Fees and Other Expenses--Each Board reviews the Fund's/Trust's
contractual management fee rate and actual management fee rate as a percentage
of total assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds considered comparable by Lipper. It also compares the Fund's/
Trust's total expenses to those of other comparable funds. Each Board
considered the services provided to and the fees charged by the Investment
Adviser to a retail fund with a similar investment mandate. It was noted that
the fees charged by the Investment Adviser to the retail fund were higher than
those being charged to the Fund/Trust. Each Board noted that the Fund's/
Trust's contractual management fee rate was higher than the median management
fee charged by comparable funds, as determined by Lipper, while the Fund's/
Trust's actual management fee rate was below the median actual management fee
rate charged by such comparable funds. The Fund's/Trust's actual total expenses
were equal to the median expenses charged by comparable funds as determined
by Lipper. Each Board concluded that the Fund's/Trust's management fee rate
and overall expense ratio are reasonable when compared to those of other
comparable funds.
Profitability--Each Board considers the cost of the services provided to the
Fund and the Trust by the Investment Adviser, and the Investment Adviser's and
its affiliates' profits relating to the management and distribution of the
Fund and the Trust and the MLIM/FAM-advised funds. As part of its analysis,
each Board reviewed the Investment Adviser's methodology in allocating its
costs to the management of the Fund and the Trust and concluded that there
was a reasonable basis for the allocation. Each Board also considered
federal court decisions discussing an investment adviser's profitability and
profitability levels considered to be reasonable in those decisions. Each
Board concluded that the profits of the Investment Adviser and its affiliates
are acceptable in relation to the nature and quality of services provided and
given the level of fees and expenses overall.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of Investment Advisory Agreement (concluded)
Economies of Scale--Each Board considered the extent to which economies of
scale might be realized as the assets of the Fund and the Trust increase and
whether there should be changes in the management fee rate or structure in
order to enable the Fund and the Trust to participate in these economies of
scale. While there was no evidence to date that the Fund's or the Trust's
assets have reached a level where such economies are effectively available,
each Board will continue to seek information relating to economies of scale.
Each Board determined that the management fee structure was reasonable and
that no changes were currently necessary.
Conclusion
After the independent trustees deliberated in executive session, the entire
Board of each of the Fund and the Trust, including all of the independent
trustees, approved the renewal of the existing Investment Advisory Agreement,
concluding that the advisory fee was reasonable in relation to the services
provided and that a contract renewal was in the best interests of the
shareholders.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement--Matters Considered by each Board
In connection with the Transaction between Merrill Lynch and BlackRock, the
Board of Trustees of Merrill Lynch Real Investment Fund and the Board of
Trustees of Master Real Investment Trust considered a new investment advisory
agreement (the "New Investment Advisory Agreement") between the Trust and
BlackRock Advisors, Inc. or its successor ("BlackRock Advisors"). If the New
Investment Advisory Agreement is approved by the Fund's shareholders, it will
become effective upon the closing of the Transaction, which is expected in the
third quarter of 2006.
The Boards discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Boards, including the
independent trustees, approved the New Investment Advisory Agreement at a
meeting held on May 10, 2006.
To assist each Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent trustees, through their independent legal
counsel, also requested and received additional information from Merrill Lynch
and BlackRock in connection with their consideration of the New Investment
Advisory Agreement. The additional information was provided in advance of the
May 10, 2006 meetings. In addition, the independent trustees consulted with
their counsel and counsel for the Fund and Trust on numerous occasions,
discussing, among other things, the legal standards and certain other
considerations relevant to each Board's deliberations.
At each Board meeting, the trustees discussed with Merrill Lynch management
and certain BlackRock representatives the Transaction, its strategic rationale
and BlackRock's general plans and intentions regarding the Fund and the Trust.
At these Board meetings, representatives of Merrill Lynch and BlackRock made
presentations to and responded to questions from each Board. Each Board also
inquired about the plans for and anticipated roles and responsibilities of
certain employees and officers of the Investment Adviser and certain
affiliates being transferred to BlackRock in connection with the Transaction.
The independent trustees also conferred separately and with their counsel
about the Transaction and other matters related to the Transaction on a number
of occasions, including in connection with the April and May 2006 meetings.
After the presentations and after reviewing the written materials provided,
the independent trustees met in executive sessions with their counsel to
consider the New Investment Advisory Agreement.
In connection with each Board's review of the New Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the Board about a variety of
matters. The advice included the following, among other matters:
* that there is not expected to be any diminution in the nature, quality
and extent of services provided to the Fund and the Trust and their
shareholders by BlackRock Advisors, including compliance services;
* that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented
professionals;
* that the Fund and Trust should benefit from having access to BlackRock's
state of the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions (R) brand name;
* that BlackRock has no present intention to alter any applicable expense
waivers and reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of each Board
before making any changes;
* that BlackRock and Merrill Lynch will enter into an agreement, for an
initial three-year period and automatically renewable from year to year
thereafter, in connection with the Transaction under which Merrill Lynch-
affiliated broker-dealers will continue to offer the Fund as an investment
product;
* that BlackRock Advisors will have substantially the same access to the
Merrill Lynch sales force when distributing shares of the Fund as is
currently provided to the Investment Adviser and that other arrangements
between the Investment Adviser and Merrill Lynch sales channels will be
preserved;
* that the Fund will have access to BlackRock's network of third party
brokers, retirement plan platforms and registered investment advisers;
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of New Investment Advisory Agreement (continued)
* that under the Transaction Agreement, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Investment Adviser (or its affiliates), respectively; and
* that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Fund or Trust
shareholders.
Each Board considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
* the potential benefits to Fund and Trust shareholders from being part of a
combined fund family with BlackRock-sponsored funds, including possible
economies of scale and access to investment opportunities;
* the potential for expanding distribution of Fund shares through improved
access to third party distribution;
* the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
* the compliance policies and procedures of BlackRock Advisors;
* the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's/Trust's total advisory
fees will not increase by virtue of the New Investment Advisory Agreement,
but will remain the same;
* that within the past year each Board performed a full annual review of the
investment advisory agreement under which the Investment Adviser currently
provides advisory services (the "Current Investment Advisory Agreement")
as required by the 1940 Act, and has determined that the Investment
Adviser has the capabilities, resources and personnel necessary to provide
the advisory and administrative services currently provided to the Fund/
Trust; and that the advisory and/or management fees paid by the Fund/Trust,
taking into account any applicable agreed-upon fee waivers and breakpoints,
represent reasonable compensation to the Investment Adviser in light of
the services provided, the costs to the Investment Adviser of providing
those services, economies of scale, the fees and other expenses paid by
similar funds (including information provided by Lipper, Inc. ["Lipper"]),
and such other matters as the trustees have considered relevant in the
exercise of their reasonable judgment (each Board had most recently
performed a full annual review of the Current Investment Advisory Agreement
in May 2005); and
* that Merrill Lynch agreed to pay all expenses of the Fund and Trust in
connection with each Board's consideration of the New Investment Advisory
Agreement and related agreements and all costs of shareholder approval of
the New Investment Advisory Agreement and as a result neither the Fund nor
Trust would bear costs in obtaining shareholder approval of the New
Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, each Board assessed
the nature, scope and quality of the services to be provided to the Fund
and the Trust by the personnel of BlackRock Advisors and its affiliates,
including administrative services, shareholder services, oversight of fund
accounting, marketing services and assistance in meeting legal and regulatory
requirements. In its review of the New Investment Advisory Agreement, each
Board also considered a range of information in connection with its oversight
of the services to be provided by BlackRock Advisors and its affiliates. Among
the matters considered were: (a) fees (in addition to management fees) to be
paid to BlackRock Advisors and its affiliates by the Fund and Trust; (b) Fund
and Trust operating expenses paid to third parties; (c) the resources devoted
to and compliance reports relating to the Fund's and Trust's investment
objectives, policies and restrictions, and their compliance with their Code of
Ethics and BlackRock Advisors' compliance policies and procedures; and (d) the
nature, cost and character of non-investment management services to be
provided by BlackRock Advisors and its affiliates.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
In the period prior to the Board meetings to consider renewal of the Current
Investment Advisory Agreement, each Board had requested and received materials
specifically relating to the agreement. These materials included (a)
information compiled by Lipper on the fees and expenses and the investment
performance of the Fund as compared to a comparable group of funds as
classified by Lipper; (b) a discussion by the Trust's portfolio management
team on investment strategies used by the Trust during its most recent fiscal
year; (c) information on the profitability to the Investment Adviser of the
Current Investment Advisory Agreement and other payments received by the
Investment Adviser and its affiliates from the Fund and the Trust; and (d)
information provided by the Investment Adviser concerning services related to
the valuation and pricing of Trust portfolio holdings, allocation of Trust
brokerage fees, the Trust's portfolio turnover statistics, and direct and
indirect benefits to the Investment Adviser and its affiliates from their
relationship with the Fund and the Trust.
In its deliberations, each Board considered information received in connection
with its most recent continuation of the Current Investment Advisory
Agreement, in addition to information provided by BlackRock and BlackRock
Advisors in connection with its evaluation of the terms and conditions of
the New Investment Advisory Agreement. The trustees did not identify any
particular information that was all-important or controlling, and each trustee
attributed different weights to the various factors. Each Board, including a
majority of the Board's independent trustees, concluded that the terms of the
New Investment Advisory Agreement are appropriate, that the fees to be paid
are reasonable in light of the services to be provided to the Fund/Trust, and
that the New Investment Advisory Agreement should be approved and recommended
to Fund/Trust shareholders.
Nature, Quality and Extent of Services Provided--Each Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of
the Fund and Trust, as well as the nature, quality and extent of services
expected to be provided by BlackRock Advisors. Each Board focused primarily on
the Investment Adviser's investment advisory services and the investment
performance of the Fund and Trust, but also considered certain areas in which
both the Investment Adviser and the Fund/ Trust receive services as part of
the Merrill Lynch complex.
Each Board compared the performance of the Fund - both including and excluding
the effects of the Fund's fees and expenses - to the performance of a
comparable group of mutual funds, and the performance of a relevant index or
combination of indexes. While each Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the
Board will attach more importance to performance over relatively long periods
of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors, each Board considered, among other things, the expected
impact of the Transaction on the operations, facilities, organization and
personnel of BlackRock Advisors and how it would affect the Fund and the
Trust; the ability of BlackRock Advisors to perform its duties after the
Transaction; and any anticipated changes to the current investment and other
practices of the Fund or Trust. Each Board considered BlackRock's advice as to
proposed changes in portfolio management personnel of the Trust after the
closing of the Transaction.
Each Board was given information with respect to the potential benefits to the
Fund and Trust and their shareholders from having access to BlackRock's state
of the art technology and risk management analytic tools, including the
investment tools provided under the BlackRock Solutions brand name.
Each Board was advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund and Trust will continue to be
subject to restrictions concerning certain transactions involving Merrill
Lynch affiliates (for example, transactions with a Merrill Lynch broker-dealer
acting as principal) absent revised or new regulatory relief. Each Board was
advised that a revision of existing regulatory relief with respect to these
restrictions was being sought from the Securities and Exchange Commission
and were advised of the possibility of receipt of such revised regulatory
relief. There can be no assurance that such relief will be obtained.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of New Investment Advisory Agreement (continued)
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the trustees
determined that the nature and quality of services to be provided to the
Fund/Trust under the New Investment Advisory Agreement were expected to be as
good or better than that provided under the Trust's Current Investment
Advisory Agreement. It was noted, however, that it is expected that there will
be changes in personnel following the Transaction and the combination of the
operations of the Investment Adviser and its affiliates with those of
BlackRock. Each Board noted that if current portfolio managers or other
personnel cease to be available, the Board would consider all available
options, which could include seeking the investment advisory or other services
of BlackRock affiliates. Accordingly, each Board concluded that, overall, the
Board was satisfied at the present time with assurances from BlackRock and
BlackRock Advisors as to the expected nature, extent and quality of the
services to be provided to the Fund/Trust under the New Investment Advisory
Agreement.
Costs of Services Provided and Profitability--It was noted that, in
conjunction with the recent review of the Current Investment Advisory
Agreement, each Board had received, among other things, a report from Lipper
comparing the Fund's fees, expenses and performance to those of a peer group
selected by Lipper, and information as to the fees charged by the Investment
Adviser or its affiliates to other registered investment company clients
for investment management services. Each Board reviewed the Fund's/Trust's
contractual management fee rate and actual management fee rate as a percentage
of total assets at common asset levels - the actual rate includes advisory
fees and the effects of any fee waivers - compared to the other funds in the
Fund's Lipper category. They also compared the Fund's total expenses to those
of other comparable funds. The information showed that the Fund had fees and
expenses within the range of fees and expenses of comparable funds. Each Board
considered the services to be provided by and the fees to be charged by
BlackRock Advisors to other funds with similar investment mandates and noted
that the fees charged by BlackRock Advisors in those cases, including fee
waivers and expense reimbursements, were generally comparable to those being
charged to the Fund/Trust. Each Board also noted that, as a general matter,
according to the information provided by BlackRock, fees charged to
institutional clients were lower than the fees charged to the Fund, but
BlackRock Advisors provided less extensive services to such clients. Each
Board concluded that the Fund's/Trust's management fee and fee rate and
overall expense ratio are reasonable compared to those of other comparable
funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, each Board considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on its review of the materials provided and the fact
that the New Investment Advisory Agreement is substantially similar to the
Current Investment Advisory Agreement in all material respects, including the
rate of compensation, each Board determined that the Transaction should not
increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. Each Board noted
that it was not possible to predict with certainty New BlackRock's future
profitability from its relationship with the Fund and Trust.
Each Board discussed with BlackRock Advisors its general methodology to be
used in determining New BlackRock's profitability with respect to its
relationship with the Fund and Trust. Each Board noted that the Board expects
to receive profitability information from New BlackRock on at least an annual
basis and thus be in a position to evaluate whether any adjustments in fees
and/or fee breakpoints would be appropriate.
Fees and Economies of Scale--Each Board considered the extent to which
economies of scale might be realized as the assets of the Fund and Trust
increase and whether there should be changes in the management fee rate or
structure in order to enable the Fund and Trust to participate in these
economies of scale. Each Board determined that changes were not currently
necessary and that the Fund and Trust appropriately participated in these
economies of scale.
In reviewing the Transaction, each Board considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, each Board determined
that as a result of the Transaction, the Fund's/Trust's total advisory fees
would be no higher than the fees under the Current Investment Advisory
Agreement. Each Board noted that in conjunction with the Board's most recent
deliberations concerning the Current Investment Advisory Agreement, the Board
had determined that the total fees for advisory and administrative services
for the Fund and Trust were reasonable in light of the services provided. It
was noted that in conjunction with the recent review of the Current Investment
Advisory Agreement, each Board had received, among other things, a report from
Lipper comparing the Fund's fees, expenses and performance to those of a peer
group selected by Lipper, and information as to the fees charged by the
Investment Adviser to other registered investment company clients for
investment management services. Each Board concluded that, because the rates
for advisory fees for the Fund/Trust would be no higher than current fee
rates, the proposed management fee structure, including any fee waivers, was
reasonable and that no additional changes were currently necessary.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Fall-Out Benefits--In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, each Board
considered whether the Transaction would have an impact on the fall-out
benefits received by the Investment Adviser by virtue of the Current
Investment Advisory Agreement. Based on their review of the materials
provided, including materials received in connection with their most recent
approval or continuance of the Current Investment Advisory Agreement, and
their discussions with management of the Investment Adviser and BlackRock, the
trustees determined that those benefits could include increased ability for
BlackRock to distribute shares of its funds and other investment products and,
where applicable, to obtain research services using the Trust's portfolio
transaction brokerage commissions. The trustees also considered possible
benefits stemming from the proposal that PFPC Financial Services, an affiliate
of BlackRock, serve as transfer agent for the Fund following the Transaction.
Each Board noted that any benefits were difficult to quantify with certainty
at this time, and indicated that the Board would continue to evaluate them
going forward.
Investment Performance--Each Board considered investment performance for the
Fund and Trust. Each Board compared the performance of the Fund and Trust -
both including and excluding the effects of fees and expenses - to the
performance of a comparable group of mutual funds, and the performance of a
relevant index or combination of indexes. The comparative information received
from Lipper showed Fund performance at various levels within the range of
performance of comparable funds over different time periods. While each Board
reviews performance data at least quarterly, consistent with FAM's investment
goals, the Board will attach more importance over relatively long periods of
time, typically three to five years. Each Board believed the Fund's and Trust's
performance was satisfactory. Also, each Board took into account the investment
performance of funds currently advised by BlackRock Advisors. Each Board
considered comparative information from Lipper which showed that the
performance of the funds advised by BlackRock Advisors was within the range of
performance of comparable funds over different time periods. Each Board noted
BlackRock's considerable investment management experience and capabilities, but
were unable to predict what effect, if any, consummation of the Transaction
would have on the future performance of the Fund and Trust.
Conclusion--After the independent trustees of the Fund and independent
trustees of the Trust deliberated in executive session, each entire Board,
including the independent trustees, approved the New Investment Advisory
Agreement, concluding that the advisory fee rate was reasonable in relation
to the services provided and that the New Investment Advisory Agreement was
in the best interests of the shareholders. In approving the New Investment
Advisory Agreement, each Board noted that it anticipated reviewing the
continuance of the agreement in advance of the expiration of the initial
two-year period.
Contingent BlackRock Subadvisory Agreement--Matters Considered by each Board
At the telephonic and in-person meetings held during April and May 2006 at
which the Boards discussed and approved the New Investment Advisory Agreement,
the Trust's Board, including the independent trustees, also considered a
contingent subadvisory agreement (the "Contingent Subadvisory Agreement")
between the Investment Adviser and BlackRock Advisors (the "BlackRock
Subadviser"). The Contingent Subadvisory Agreement is intended to ensure that
the Trust operates with efficient portfolio management services until the
closing of the Transaction, in the event that each Board deems it necessary
and in the best interests of the Fund and Trust and their shareholders that
the BlackRock Subadviser assist in managing the operations of the Trust during
the interim period until the closing of the Transaction. If shareholders
approve the Contingent Subadvisory Agreement, it will take effect only upon
recommendation from the Investment Adviser and upon subsequent approval of
each Board in the period up to the closing of the Transaction. The
effectiveness of the Contingent Subadvisory Agreement, therefore, would be
contingent on further Board approval after shareholders approve it. Pursuant
to the Contingent Subadvisory Agreement, the BlackRock Subadviser would
receive a monthly fee from the Investment Adviser equal to 50% of the advisory
fee received by the Investment Adviser. The Investment Adviser would pay the
BlackRock Subadviser out of its own resources. There would be no increase in
Fund or Trust expenses as a result of the Contingent Subadvisory Agreement.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Disclosure of New Investment Advisory Agreement (concluded)
In making its approval at the May in-person meeting, each Board considered the
Contingent Subadvisory Agreement in conjunction with the New Investment
Advisory Agreement and reviewed the same information and factors discussed
above. Each Board also considered in conjunction with the Contingent
Subadvisory Agreement the necessity of ensuring that the Trust operates with
effective management services until the closing of the Transaction. In
reviewing the subadvisory fee rate provided in the Contingent Subadvisory
Agreement, each Board took note of the fact that both the Investment Adviser
and the BlackRock Subadviser would have significant responsibilities under
their respective advisory agreements. The Investment Adviser would remain
responsible for oversight of the operations and administration of the Fund and
Trust, and the BlackRock Subadviser would provide advisory services to the
Trust under the Contingent Subadvisory Agreement. Each Board also took into
account the expected short duration of the term of any Contingent Subadvisory
Agreement and the fact that total advisory fees paid by the Fund and Trust
would not increase as a result of the Contingent Subadvisory Agreement. Under
all of the circumstances, each Board concluded that it was a reasonable
allocation of fees for the BlackRock Subadviser to receive 50% of the advisory
fee paid by the Trust to the Investment Adviser.
After the independent trustees deliberated in executive session, each entire
Board, including the independent trustees, approved the Contingent Subadvisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Subadvisory Agreement was in the
best interests of shareholders.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH REAL INVESTMENT FUND MAY 31, 2006
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Merrill Lynch Real Investment Fund and Master Real Investment Trust
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Real Investment Fund and Master Real Investment Trust
Date: July 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Real Investment Fund and Master Real Investment Trust
Date: July 21, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Real Investment Fund and Master Real Investment Trust
Date: July 21, 2006