UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-4182
Mercury Low Duration Fund
Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President, Mercury Low
Duration Fund, 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: 06/30/03
Date of reporting period: 07/01/02 - 12/31/02
Item 1 - Is shareholder report attached? - Y
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Semi-Annual Report
December 31, 2002
Mercury Low
Duration Fund
OFFICERS AND TRUSTEES
Terry K. Glenn, President and Trustee
James H. Bodurtha, Trustee
Joe Grills, Trustee
Herbert I. London, Trustee
Andre F. Perold, Trustee
Roberta Cooper Ramo, Trustee
Robert S. Salomon, Jr., Trustee
Melvin R. Seiden, Trustee
Stephen B. Swensrud, Trustee
Patrick Maldari, Vice President
James J. Pagano, Vice President
Donald C. Burke, Vice President and Treasurer
Phillip S. Gillespie, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
888-763-2260
- --------------------------------------------------------------------------------
Effective January 1, 2003, Melvin R. Seiden, Trustee of Mercury Low Duration
Fund, retired. The Fund's Board of Trustees wishes Mr. Seiden well in his
retirement.
- --------------------------------------------------------------------------------
December 31, 2002 (2) Mercury Low Duration Fund
DEAR SHAREHOLDER
Economic Environment
We are pleased to provide to you this semi-annual report of Mercury Low Duration
Fund. The U.S. economy grew throughout 2002, although the pace of the growth had
been quite uneven from quarter to quarter. For the year as a whole, the economy
quite likely grew at an annual pace of approximately 3.0% -- modest for sure,
but hardly the source for "double-dip" recessionary concerns that dominated the
headlines from time to time. Inflation remained virtually non-existent, with the
core personal consumption expenditure deflator, the inflation gauge watched by
the Federal Reserve Board, rising by only 1.8%.
In past economic recoveries, businesses have contributed significantly to
growth. However, the continuing corporate profit drought in the face of
significant excess capacity left businesses holding back on capital spending and
achieving productivity gains through paring down payrolls. The consumer sector,
on the other hand, held up remarkably well, despite the weak employment outlook,
declining equity markets, and terrorism and geopolitical concerns adding to the
decline in consumer confidence. Nevertheless, the sharp drop in mortgage rates
during the past year contributed to a healthy housing market and a refinancing
boom, helping out the consumer, while heavy economic incentives (such as
zero-cost financing) helped keep consumption of durable goods, such as
automobiles, robust.
Looking ahead, we anticipate the economy to grow at a sub-par rate of below 3%
in 2003, with risks to the forecast more evenly balanced. While the prospects
for a strong fiscal stimulus package from Washington, D.C. have improved
markedly, the timing of the legislation, its scope and its potential positive
impact on the economy over the near term remain uncertain. At the same time, the
possible end of the mortgage refinancing boom and a murky labor market could
further erode consumer confidence, posing downside risks to the economy. Capital
spending by businesses is also likely to remain somewhat subdued as the sectors
that have contributed historically to capital spending -- telecommunications,
utility and energy -- work out past excesses. Government spending is not likely
to contribute very much, given the potential for the growing fiscal deficits at
state and local government levels somewhat offsetting the spending from
Washington.
December 31, 2002 (3) Mercury Low Duration Fund
Interest Rates
Interest rates essentially followed the economic news through most of the six
months ended December 31, 2002. The Federal Reserve Board started the period
with the Federal Funds rate at 1.75%, with a balanced view of risk. However,
with the economy showing signs of stress in the third quarter, at the Federal
Open Market Committee (FOMC) meeting, the Federal Reserve Board changed its bias
once again toward "weakness" in the economy. Amid growing deflationary concerns,
and the potential for the economy to slip back into a recession, the Federal
Reserve Board surprised the market at the November FOMC meeting, by lowering the
Federal Funds rate by 50 basis points (.50%) to 1.25%, but changing the bias
once again to "balanced."
Most Treasury yields reacted to the changing economic prospects throughout the
period. Sensing a strong recovery, Treasury yields fell sharply from early
April, with most of the declines occurring in the third quarter through October
10, 2002. During this period, two-year note yields declined by 197 basis points,
ten-year notes by 177 basis points and 30-year bonds by 111 basis points.
Although yields have backed up toward year end, for the year as a whole, the
investment-grade sector in general had a solid year.
Going forward, we expect the Federal Reserve Board to remain on hold, at least
through the first half of 2003. While a slow growing economy with little threat
of inflation should keep interest rates range bound, the risks to the fixed
income markets have become somewhat asymmetric. The growing budget deficits at
the Federal and state levels, along with the absolute low levels of current
interest rates, not to mention the stellar performance of the fixed market over
the past three years, give us little reason to hope for a sustained drop in
interest rates. Accordingly, we anticipate interest rates to have an upward bias
and the yield curve to have a bearish steepening bias over the next few months.
Portfolio Matters
For the six months ended December 31, 2002, the Fund's Class I, Class A, Class
B, Class C and Class D Shares had total returns of +3.28%, +3.25%, +2.95%,
+2.57%, 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.) This compares to the
Fund's unmanaged benchmark, the Merrill Lynch 1-3 Year U.S. Treasury Note Index,
which had a return of +3.30% for the same six-month period.
The Fund continues to be managed with a focus on the spread sectors, including
corporate bonds, agency mortgage collateral and collateralized mortgage
obligations (CMOs), non-agency CMOs, asset-backed securities, and commercial
mortgage-backed securities. By stress-testing potential purchases using a
combination of fundamental research, prepayment and cash flow vectoring, and
scenario analysis, we have been able to find attractive opportunities in spite
of unprecedented volatility in the markets.
December 31, 2002 (4) Mercury Low Duration Fund
We began the second half of 2002 with more than 65% of the portfolio invested in
spread sector securities, and we have gradually increased that weighting to
almost 80% of assets. As interest rates have steadily fallen, we have reduced
our Treasury and agency holdings, as we believe that the record low interest
rates available in the short end of the yield curve offer little more potential
for price appreciation. The record low yields have also impacted our duration
decision as we have moved from a moderate long position of 107% of the benchmark
duration to a short position of approximately 88%. As noted, this decision is
based both on the absolute level of rates and our view of potential future
changes in curve shape.
Going forward, we expect to maintain a portfolio profile reflective of our
pro-cyclical bias -- spread sector overweights and duration less than that of
the benchmark. Though we believe there is a high probability that there will be
a military confrontation with Iraq during the first quarter of 2003, we
anticipate that this will ultimately result in a decline in volatility as
uncertainty is removed from the markets. We expect this to provide the basis for
solid, if unspectacular, economic growth as the year progresses.
In Conclusion
We appreciate your investment in Mercury Low Duration Fund, and we look forward
to serving your investment needs in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn /s/ Patrick Maldari /s/ James J. Pagano
Terry K. Glenn Patrick Maldari James J. Pagano
President and Trustee Vice President and Vice President and
Portfolio Manager Portfolio Manager
January 29, 2003
December 31, 2002 (5) Mercury Low Duration Fund
FUND PERFORMANCE DATA
ABOUT FUND PERFORMANCE
The Fund offers four classes of shares, each with its own sales charge and
expense structure, allowing you to invest in the way that best suits your needs.
CLASS I SHARES incur a maximum initial sales charge of 3% and bear no ongoing
distribution and account maintenance fees. Class I Shares are available only to
eligible investors.
CLASS A SHARES incur a maximum initial sales charge of 3% and an account
maintenance fee of 0.25% (but no distribution fee).
CLASS B SHARES are subject to a maximum contingent deferred sales charge of 4%
if redeemed during the first two years, decreasing to 3% for each of the next
two years and decreasing 1% each year thereafter to 0% after the sixth year. In
addition, Class B Shares are subject to a distribution fee of 0.65% and an
account maintenance fee of 0.25%. These shares automatically convert to Class A
Shares after approximately 10 years.
CLASS C SHARES are subject to a distribution fee of 0.65% and an account
maintenance fee of 0.25%. In addition, Class C Shares may be subject to a 1%
contingent deferred sales charge if redeemed within one year after purchase.
None of the past results shown should be considered a representation of future
performance. 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 gains distributions at net asset value on the ex-dividend
date. The Portfolio's investment adviser pays annual operating expenses of the
Fund's Class I, Class A, Class B and Class C Shares in excess of .58%, .83%,
1.48% and 1.48%, respectively, of the average net assets of each class. If the
investment adviser did not pay such expenses, net returns would be lower.
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.
December 31, 2002 (6) Mercury Low Duration Fund
FUND PERFORMANCE DATA (CONCLUDED)
RECENT PERFORMANCE RESULTS
================================================================================
6-Month 12-Month Since Inception Standardized
As of December 31, 2002 Total Return Total Return Total Return 30-Day Yield
- -----------------------------------------------------------------------------------------------
Class I* + 3.28% + 4.46% +90.36% 2.64%
- -----------------------------------------------------------------------------------------------
Class A* + 3.25 + 4.20 +20.57 1.88
- -----------------------------------------------------------------------------------------------
Class B* + 2.95 + 3.73 +12.51 1.77
- -----------------------------------------------------------------------------------------------
Class C* + 2.57 + 3.23 +15.59 2.40
- -----------------------------------------------------------------------------------------------
Merrill Lynch 1-3 Year
U.S. Treasury Note Index** + 3.30 + 5.76 +75.23/+24.43/+17.00 --
- -----------------------------------------------------------------------------------------------
* Investment results shown do not reflect sales charges; results shown would
be lower if a sales charge was included. Total investment returns are
based on changes in the Fund's net asset values for the periods shown, and
assume reinvestment of all dividends and capital gains at net asset value
on the ex-dividend date. Class I Shares commenced operations on 5/18/93;
Class A Shares on 9/24/99; and Class B and Class C Shares on 10/06/00.
** This unmanaged Index is comprised of Treasury securities with maturities
of one-to-three years. Since inception total returns are from 5/31/93,
9/30/99 and 10/31/00, respectively.
AVERAGE ANNUAL TOTAL RETURN
================================================================================
% Return % Return
Without Sales With Sales
Class I Shares* Charge Charge**
- --------------------------------------------------------------------------------
One Year Ended
12/31/02 +4.46% +1.33%
- --------------------------------------------------------------------------------
Five Years Ended
12/31/02 +5.60 +4.96
- --------------------------------------------------------------------------------
Inception (5/18/93)
through 12/31/02 +6.92 +6.58
- --------------------------------------------------------------------------------
* Maximum sales charge is 3.00%.
** Assuming maximum sales charge.
% Return % Return
Without Sales With Sales
Class A Shares* Charge Charge**
- --------------------------------------------------------------------------------
One Year Ended
12/31/02 +4.20% +1.08%
- -------------------------------------------------------------------------------
Inception (9/24/99)
through 12/31/02 +5.89 +4.91
- -------------------------------------------------------------------------------
* Maximum sales charge is 3.00%.
** Assuming maximum sales charge.
% Return % Return
Without With
Class B Shares* CDSC CDSC**
- -------------------------------------------------------------------------------
One Year Ended
12/31/02 +3.73% -0.27%
- -------------------------------------------------------------------------------
Inception (10/06/00)
through 12/31/02 +5.41 +4.15
- -------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 4% and is reduced to 0% after
six years.
** Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without With
Class C Shares* CDSC CDSC**
- -------------------------------------------------------------------------------
One Year Ended
12/31/02 +3.23% +2.23%
- -------------------------------------------------------------------------------
Inception (10/06/00)
through 12/31/02 +6.70 +6.70
- -------------------------------------------------------------------------------
* Maximum contingent deferred sales charge is 1% and is reduced to 0% after
one year.
** Assuming payment of applicable contingent deferred sales charge.
December 31, 2002 (7) Mercury Low Duration Fund
STATEMENT OF ASSETS
AND LIABILITIES
As of December 31, 2002
- --------------------------------------------------------------------------------
MERCURY LOW DURATION FUND
================================================================================
Assets:
Investment in Low Duration Master Portfolio, at value
(identified cost--$164,290,052) $ 165,561,280
Prepaid registration fees 14,039
-------------
Total assets 165,575,319
-------------
- ---------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends to shareholders $ 134,164
Administrator 36,276
Distributor 5,135 175,575
-----------
Accrued expenses 81,686
-------------
Total liabilities 257,261
-------------
- ---------------------------------------------------------------------------------------
Net Assets:
Net assets $ 165,318,058
=============
- ---------------------------------------------------------------------------------------
Net Assets Consist of:
Paid-in capital $ 174,523,120
Undistributed investment income--net $ 80,153
Accumulated realized capital losses on investments and
foreign currency transactions from the Portfolio--net (10,556,443)
Unrealized appreciation on investments
from the Portfolio--net 1,271,228
-----------
Total accumulated losses--net (9,205,062)
-------------
Net assets $ 165,318,058
=============
- ---------------------------------------------------------------------------------------
Net Asset Value:
Class I+--Based on net assets of $151,174,866 and
15,148,219 shares outstanding $ 9.98
=============
Class A+--Based on net assets of $11,217,319 and
1,121,027 shares outstanding $ 10.01
=============
Class B+--Based on net assets of $1,473,124 and
147,846 shares outstanding $ 9.96
=============
Class C+--Based on net assets of $1,452,749 and
142,369 shares outstanding $ 10.20
=============
- ---------------------------------------------------------------------------------------
+ Unlimited shares of no par value authorized.
See Notes to Financial Statements.
December 31, 2002 (8) Mercury Low Duration Fund
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2002
- --------------------------------------------------------------------------------
MERCURY LOW DURATION FUND
================================================================================
Investment Income from the Portfolio--Net:
Net investment income allocated from the Portfolio:
Interest $ 3,630,559
Dividends 30,762
Expenses (261,079)
------------
Net investment income from the Portfolio 3,400,242
------------
- --------------------------------------------------------------------------------------
Expenses:
Administration fees $229,618
Transfer agent fees--Class I 42,643
Registration fees 20,665
Account maintenance fees--Class A 17,020
Professional fees 16,297
Printing and shareholder reports 11,804
Account maintenance and distribution fees--Class C 4,217
Account maintenance and distribution fees--Class B 4,038
Transfer agent fees--Class A 3,461
Transfer agent fees--Class B 333
Transfer agent fees--Class C 245
Other 4,052
--------
Total expenses 354,393
------------
Investment income--net 3,045,849
------------
- --------------------------------------------------------------------------------------
Realized & Unrealized Gain from the Portfolio--Net:
Realized gain on investments from the Portfolio--net 583,572
Change in unrealized appreciation/depreciation on
investments from the Portfolio--net 2,257,142
------------
Total realized and unrealized gain from the Portfolio--net 2,840,714
------------
Net Increase in Net Assets Resulting from Operations $ 5,886,563
============
- --------------------------------------------------------------------------------------
See Notes to Financial Statements.
December 31, 2002 (9) Mercury Low Duration Fund
STATEMENTS OF CHANGES
IN NET ASSETS
MERCURY LOW DURATION FUND
================================================================================
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets: 2002 2002
- ---------------------------------------------------------------------------------------
Operations:
Investment income--net $ 3,045,849 $ 11,257,591
Realized gain on investments and foreign currency
transactions from the Portfolio--net 583,572 1,746,440
Change in unrealized appreciation/depreciation on
investments from the Portfolio--net 2,257,142 (1,384,458)
-------------------------------
Net increase in net assets resulting from operations 5,886,563 11,619,573
-------------------------------
- ---------------------------------------------------------------------------------------
Dividends to Shareholders:
Investment income--net:
Class I (2,840,323) (10,781,629)
Class A (211,725) (874,516)
Class B (17,791) (24,340)
Class C (11,407) (8,314)
-------------------------------
Net decrease in net assets resulting from dividends
to shareholders (3,081,246) (11,688,799)
-------------------------------
- ---------------------------------------------------------------------------------------
Capital Share Transactions:
Net decrease in net assets derived from capital
share transactions (24,472,397) (106,951,092)
-------------------------------
- ---------------------------------------------------------------------------------------
Net Assets:
Total decrease in net assets (21,667,080) (107,020,318)
Beginning of period 186,985,138 294,005,456
-------------------------------
End of period* $ 165,318,058 $ 186,985,138
===============================
- ---------------------------------------------------------------------------------------
*Undistributed investment income--net $ 80,153 $ 115,550
===============================
- ---------------------------------------------------------------------------------------
See Notes to Financial Statements.
December 31, 2002 (10) Mercury Low Duration Fund
FINANCIAL HIGHLIGHTS
MERCURY LOW DURATION FUND
================================================================================
The following per share data and ratios have been derived from information
provided in the financial statements.
Class I+
--------------------------------------------------------------------------------
For the Six
Months
Ended For the Year Ended June 30,
December 31, --------------------------------------------------------------
Increase (Decrease) in Net Asset Value: 2002 2002 2001*** 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 9.83 $ 9.87 $ 9.78 $ 9.91 $ 10.20
--------------------------------------------------------------------------------
Investment income--net .17@@ .49@@ .67 .65 .60
Realized and unrealized gain (loss) on
investments, foreign currency trans-
actions and from the Portfolio--net .15 (.03) .08 (.13) (.28)
--------------------------------------------------------------------------------
Total from investment operations .32 .46 .75 .52 .32
--------------------------------------------------------------------------------
Less dividends and distributions:
Investment income--net (.17) (.50) (.66) (.65) (.59)
Realized gain on investments--net -- -- -- -- (.02)
--------------------------------------------------------------------------------
Total dividends and distributions (.17) (.50) (.66) (.65) (.61)
--------------------------------------------------------------------------------
Net asset value, end of period $ 9.98 $ 9.83 $ 9.87 $ 9.78 $ 9.91
================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Total Investment Return:**
Based on net asset value per share 3.28%@ 4.74% 7.93% 5.40% 3.15%
================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses, net of reimbursement++ .64%* .58% .58% .58% .58%
================================================================================
Expenses++ .64%* .73% .74% .72% .64%
================================================================================
Investment income--net 3.35%* 4.93% 6.67% 6.43% 5.71%
================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (in thousands) $ 151,175 $ 174,939 $ 260,593 $ 344,734 $ 409,987
================================================================================
Portfolio turnover -- -- -- 182% 201%
================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude the effects of sales charges. If
applicable, the Portfolio's investment adviser reimbursed a portion of the
Fund's expenses. Without such reimbursement, the Fund's performance would
have been lower.
*** On October 6, 2000, the Fund converted from a fund of a stand-alone
investment company to a "feeder" fund that seeks to achieve its investment
objective by investing all of its assets in the Portfolio, a fund of the
Master Trust that has the same investment objective as the Fund. All
investments will be made at the Portfolio level. This structure is
sometimes called a "master/feeder" structure.
+ Prior to October 6, 2000, Class I Shares were designated Investor Class
Shares.
++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
December 31, 2002 (11) Mercury Low Duration Fund
FINANCIAL HIGHLIGHTS
(CONTINUED)
MERCURY LOW DURATION FUND
================================================================================
The following per share data and ratios have been derived from information
provided in the financial statements.
Class A++
-----------------------------------------------------------
For the
For the Six Period
Months For the Year Ended Sept. 24,
Ended June 30, 1999+
December 31, -------------------------- to June 30,
Increase (Decrease) in Net Asset Value: 2002 2002 2001*** 2000
- -----------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 9.84 $ 9.88 $ 9.79 $ 9.95
-----------------------------------------------------------
Investment income--net .16@@ .50@@ .60 .51
Realized and unrealized gain (loss) on
investments, foreign currency transactions
and from the Portfolio--net .17 (.06) .13 (.14)
-----------------------------------------------------------
Total from investment operations .33 .44 .73 .37
-----------------------------------------------------------
Less dividends to shareholders from
investment income--net (.16) (.48) (.64) (.53)
-----------------------------------------------------------
Net asset value, end of period $ 10.01 $ 9.84 $ 9.88 $ 9.79
===========================================================
- -----------------------------------------------------------------------------------------------------------
Total Investment Return:**
Based on net asset value per share 3.25%@ 4.47% 7.68% 3.83%@
===========================================================
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses, net of reimbursement+++ .89%* .83% .83% .83%*
===========================================================
Expenses+++ .89%* .98% 1.02% .98%*
===========================================================
Investment income--net 3.07%* 4.80% 6.09% 6.48%*
===========================================================
- -----------------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (in thousands) $ 11,217 $ 10,576 $ 33,312 $ 16,007
===========================================================
Portfolio turnover -- -- -- 182%
===========================================================
- -----------------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude the effects of sales charges. If
applicable, the Portfolio's investment adviser reimbursed a portion of the
Fund's expenses. Without such reimbursement, the Fund's performance would
have been lower.
*** On October 6, 2000, the Fund converted from a fund of a stand-alone
investment company to a "feeder" fund that seeks to achieve its investment
objective by investing all of its assets in the Portfolio, a fund of the
Master Trust that has the same investment objective as the Fund. All
investments will be made at the Portfolio level. This structure is
sometimes called a "master/feeder" structure.
+ Commencement of operations.
++ Prior to October 6, 2000, Class A Shares were designated Distributor Class
Shares.
+++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
December 31, 2002 (12) Mercury Low Duration Fund
FINANCIAL HIGHLIGHTS
(CONTINUED)
MERCURY LOW DURATION FUND
================================================================================
The following per share data and ratios have been derived from information
provided in the financial statements.
Class B
-------------------------------------------------------
For the Six For the For the Period
Months Ended Year Ended Oct. 6, 2000+
December 31, June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2002 2002 2001
- ---------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 9.81 $ 9.86 $ 9.81
-------------------------------------------------------
Investment income--net .14@@ .39@@ .42
Realized and unrealized gain (loss) on
investments and foreign currency
transactions from the Portfolio--net .15 (.01) .08
-------------------------------------------------------
Total from investment operations .29 .38 .50
-------------------------------------------------------
Less dividends to shareholders from
investment income--net (.14) (.43) (.45)
-------------------------------------------------------
Net asset value, end of period $ 9.96 $ 9.81 $ 9.86
=======================================================
- ---------------------------------------------------------------------------------------------------
Total Investment Return:**
Based on net asset value per share 2.95%@ 3.87% 5.22%@
=======================================================
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses, net of reimbursement++ 1.27%* 1.26% 1.48%*
=======================================================
Expenses++ 1.27%* 1.41% 1.64%*
=======================================================
Investment income--net 2.70%* 3.99% 5.33%*
=======================================================
- ---------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (in thousands) $ 1,473 $ 980 $ 72
=======================================================
- ----------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude the effects of sales charges. If
applicable, the Portfolio's investment adviser reimbursed a portion of the
Fund's expenses. Without such reimbursement, the Fund's performance would
have been lower.
+ Commencement of operations.
++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
December 31, 2002 (13) Mercury Low Duration Fund
FINANCIAL HIGHLIGHTS
(CONCLUDED)
MERCURY LOW DURATION FUND
================================================================================
The following per share data and ratios have been derived from information
provided in the financial statements.
Class C
-------------------------------------------------
For the Six For the For the Period
Months Ended Year Ended Oct. 6, 2000+
December 31, June 30, to June 30,
Increase (Decrease) in Net Asset Value: 2002 2002 2001
- -----------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period $ 10.07 $ 10.12 $ 9.81
-------------------------------------------------
Investment income--net .13@@ .30@@ .44
Realized and unrealized gain on investments
and foreign currency transactions from the
Portfolio--net .13 .10 .36
-------------------------------------------------
Total from investment operations .26 .40 .80
-------------------------------------------------
Less dividends to shareholders from
investment income--net (.13) (.45) (.49)
-------------------------------------------------
Net asset value, end of period $ 10.20 $ 10.07 $ 10.12
=================================================
- -----------------------------------------------------------------------------------------------------
Total Investment Return:**
Based on net asset value per share 2.57%@ 4.05% 8.31%@
=================================================
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses, net of reimbursement++ 1.55%* 1.43% .96%*
=================================================
Expenses++ 1.55%* 1.58% 1.21%*
=================================================
Investment income--net 2.40%* 3.55% 5.50%*
=================================================
- -----------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (in thousands) $ 1,453 $ 490 $ 28
=================================================
- -----------------------------------------------------------------------------------------------------
* Annualized.
** Total investment returns exclude the effects of sales charges. If
applicable, the Portfolio's investment adviser reimbursed a portion of the
Fund's expenses. Without such reimbursement, the Fund's performance would
have been lower.
+ Commencement of operations.
++ Includes the Fund's share of the Portfolio's allocated expenses.
@ Aggregate total investment return.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
December 31, 2002 (14) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
MERCURY LOW DURATION FUND
================================================================================
(1) Significant Accounting Policies:
Mercury Low Duration Fund (the "Fund") is a fund of Mercury Funds II (the
"Trust"). The Trust is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company, which is organized as a
Massachusetts business trust. The Fund seeks to achieve its investment objective
by investing all of its assets in Low Duration Master Portfolio ("the
Portfolio"), of Fund Asset Management Master Trust, which has the same
investment objective as the Fund. The value of the Fund's investment in the
Portfolio reflects the Fund's proportionate interest in the net assets of the
Portfolio. The performance of the Fund is directly affected by the performance
of the Portfolio. The financial statements of the Portfolio, including the
Schedule of Investments, are included elsewhere in this report and should be
read in conjunction with the Fund's financial statements. The percentage of the
Portfolio owned by the Fund at December 31, 2002 was 25.6%. The Fund's financial
statements are prepared in conformity with accounting principles generally
accepted in the United States of America, which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal, recurring nature. The Fund offers four classes of shares. Class
I and Class A Shares are sold with a front-end sales charge. Class B and Class C
Shares may be subject to a contingent deferred sales charge. 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, and the additional incremental transfer agency costs resulting from
the deferred sales charge arrangements. Each class has exclusive voting rights
with respect to matters relating to its account maintenance and distribution
expenditures. Income, expenses (other than expenses attributable to a specific
class) and realized and unrealized gains and losses on investments and foreign
currency transactions 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 Portfolio
at fair value. Valuation of securities held by the Portfolio is discussed in
Note 1a of the Portfolio'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 Portfolio's income, expenses and realized and unrealized gains and
losses. In addition, the Fund accrues its own expenses.
December 31, 2002 (15) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
(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 shareholders. Therefore,
no Federal income tax provision is required.
(d) Prepaid registration fees -- Prepaid registration fees are charged to
expenses as the related shares are issued.
(e) Dividends and distributions -- Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
(f) Investment transactions -- Investment transactions in the Portfolio are
accounted for on a trade date basis.
(g) Expenses -- Common expenses incurred by the Trust are allocated among the
funds based upon: (i) relative net assets; (ii) as incurred on a specific
identification basis; or (iii) evenly among the funds, depending on the nature
of the expenditure.
(2) Transactions with Affiliates:
The Trust on behalf of the Fund has entered into an Administration Agreement
with Fund Asset Management, L.P., doing business as Mercury Advisors. The
general partner of Mercury Advisors is Princeton Services, Inc. ("PSI"), an
indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. The Fund pays a monthly fee at an annual rate of
..25% of the Fund's average daily net assets for the performance of
administrative services (other than investment advice and related portfolio
activities) necessary for the operation of the Fund.
The Trust on behalf of the Fund has also entered into a Distribution Agreement
and Distribution Plans with FAM Distributors, Inc. ("FAMD" or the
"Distributor"), an indirect, wholly-owned subsidiary of Merrill Lynch Group,
Inc. Pursuant to the Distribution Plans adopted by the Trust in accordance with
Rule 12b-1 under the Investment Company Act of 1940, the Trust 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 Distribution
Maintenance Fee Fee
================================================================================
Class A .25% --
- --------------------------------------------------------------------------------
Class B .25% .65%
- --------------------------------------------------------------------------------
Class C .25% .65%
- --------------------------------------------------------------------------------
December 31, 2002 (16) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Pursuant to a sub-agreement with the Distributor, selected dealers also provide
account maintenance and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and selected dealers for providing
account maintenance services to Class A, Class B and Class C shareholders. The
ongoing distribution fee compensates the Distributor and selected dealers for
providing shareholder and distribution-related services to Class B and Class C
shareholders. The Fund did not accrue Class B distribution fees for a portion of
the six months ended December 31, 2002.
For the six months ended December 31, 2002, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLPF&S"), a subsidiary of ML & Co., earned dealer
concessions on sales of the Fund's Class A Shares as follows:
MLPF&S
================================================================================
Class A $100
- --------------------------------------------------------------------------------
For the six months ended December 31, 2002, MLPF&S received contingent deferred
sales charges of $734 and $10,941 relating to transactions in Class B and Class
C Shares, respectively.
Financial Data Services, Inc. ("FDS"), an indirect, wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Certain officers and/or trustees of the Trust are officers and/or directors of
Mercury Advisors, PSI, FAMD, FDS, and/or ML & Co.
Certain authorized agents of the Fund charge a fee for accounting and
shareholder services that they provide to the Fund on behalf of certain
shareholders; the portion of this fee paid by the Fund is included within
Transfer agent fees in the Statement of Operations.
(3) Investments:
Increases and decreases in the Fund's investment in the Portfolio for the six
months ended December 31, 2002 were $130,582,012 and $158,663,872, respectively.
(4) Capital Share Transactions:
Net decrease in net assets derived from capital share transactions was
$24,472,397 and $106,951,092 for the six months ended December 31, 2002 and the
year ended June 30, 2002, respectively.
December 31, 2002 (17) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Transactions in capital shares for each class were as follows:
Class I Shares for the Six Months
Ended December 31, 2002 Shares Dollar Amount
- -------------------------------------------------------------------------------
Shares sold 1,134,999 $ 11,252,688
Shares issued to shareholders in reinvestment
of dividends 262,145 2,598,432
----------------------------
Total issued 1,397,144 13,851,120
Shares redeemed (4,052,536) (40,177,735)
----------------------------
Net decrease (2,655,392) $ (26,326,615)
============================
- -------------------------------------------------------------------------------
Class I Shares for the Year
Ended June 30, 2002 Shares Dollar Amount
- --------------------------------------------------------------------------------
Shares sold 3,027,446 $ 30,012,894
Shares issued to shareholders in reinvestment
of dividends 981,346 9,738,463
----------------------------
Total issued 4,008,792 39,751,357
Shares redeemed (12,603,002) (125,193,316)
----------------------------
Net decrease (8,594,210) $ (85,441,959)
============================
- -------------------------------------------------------------------------------
Class A Shares for the Six Months
Ended December 31, 2002 Shares Dollar Amount
- -------------------------------------------------------------------------------
Shares sold 13,329,291 $ 132,357,102
Shares issued to shareholders in reinvestment
of dividends 2,981 29,622
----------------------------
Total issued 13,332,272 132,386,724
Shares redeemed (13,286,237) (131,954,363)
----------------------------
Net increase 46,035 $ 432,361
============================
- -------------------------------------------------------------------------------
Class A Shares for the Year
Ended June 30, 2002 Shares Dollar Amount
- -------------------------------------------------------------------------------
Shares sold 16,506,665 $ 164,060,841
Shares issued to shareholders in reinvestment
of dividends 22,851 226,912
----------------------------
Total issued 16,529,516 164,287,753
Shares redeemed (18,826,421) (187,181,990)
----------------------------
Net decrease (2,296,905) $ (22,894,237)
============================
- -------------------------------------------------------------------------------
December 31, 2002 (18) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
Class B Shares for the Six Months
Ended December 31, 2002 Shares Dollar Amount
- -------------------------------------------------------------------------------
Shares sold 50,712 $ 500,717
Shares issued to shareholders in reinvestment
of dividends 615 6,087
----------------------------
Total issued 51,327 506,804
Shares redeemed (3,418) (33,869)
----------------------------
Net increase 47,909 $ 472,935
============================
- -------------------------------------------------------------------------------
Class B Shares for the Year
Ended June 30, 2002 Shares Dollar Amount
- -------------------------------------------------------------------------------
Shares sold 92,930 $ 922,889
Shares issued to shareholders in reinvestment
of dividends 561 5,547
----------------------------
Total issued 93,491 928,436
Shares redeemed (835) (8,200)
----------------------------
Net increase 92,656 $ 920,236
============================
- -------------------------------------------------------------------------------
Class C Shares for the Six Months
Ended December 31, 2002 Shares Dollar Amount
- -------------------------------------------------------------------------------
Shares sold 913,531 $ 9,257,894
Shares issued to shareholders in reinvestment
of dividends 569 5,772
----------------------------
Total issued 914,100 9,263,666
Shares redeemed (820,348) (8,314,744)
----------------------------
Net increase 93,752 $ 948,922
============================
- -------------------------------------------------------------------------------
Class C Shares for the Year
Ended June 30, 2002 Shares Dollar Amount
- -------------------------------------------------------------------------------
Shares sold 142,355 $ 1,441,362
Shares issued to shareholders in reinvestment
of dividends 419 4,243
----------------------------
Total issued 142,774 1,445,605
Shares redeemed (96,979) (980,737)
----------------------------
Net increase 45,795 $ 464,868
============================
- -------------------------------------------------------------------------------
(5) Capital Loss Carryforward:
On June 30, 2002, the Fund had a net capital loss carryforward of $11,057,073,
of which $723,707 expires in 2007, $3,033,738 expires in 2008, $6,279,232
expires in 2009 and $1,020,396 expires in 2010. This amount will be available to
offset like amounts of any future taxable gains.
December 31, 2002 (19) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS
LOW DURATION MASTER PORTFOLIO
================================================================================
In U.S. Dollars
Face ---------------
Industries Amount Investments Value
- --------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES--32.2%
==================================================================================================
Aerospace & $ 3,000,000 Lockheed Martin Corp.,
Defense--0.9% 7.25% Due 5/15/2006 $ 3,378,633
2,000,000 Northrop-Grumman Corp.,
8.625% due 10/15/2004 2,173,268
-----------
5,551,901
- --------------------------------------------------------------------------------------------------
Automotive--2.5% 4,200,000 Daimler-Chrysler NA Holdings,
3.40% due 12/15/2004 4,228,753
Ford Motor Credit Company:
2,000,000 7.50% due 3/15/2005 2,040,528
4,400,000 7.60% due 8/01/2005 4,492,598
General Motors Acceptance Corp.:
5,000,000 7.625% due 6/15/2004 5,250,250
250,000 6.85% due 6/17/2004 260,357
-----------
16,272,486
- --------------------------------------------------------------------------------------------------
Banking--3.7% 5,000,000 Bank of America Corporation,
4.75% due 10/15/2006 5,291,375
5,000,000 First Security Corporation--Delaware,
5.875% due 11/01/2003 5,165,255
1,000,000 FleetBoston Financial Corp.,
7.25% due 9/15/2005 1,107,278
5,000,000 US Bancorp, 6.875% due 12/01/2004 5,451,315
6,500,000 Wells Fargo Company, 6.625%
due 7/15/2004 6,953,414
-----------
23,968,637
- --------------------------------------------------------------------------------------------------
Cable & Media-- Clear Channel Communications:
2.4% 4,000,000 7.25% due 9/15/2003 4,080,724
1,800,000 7.875% due 6/15/2005 1,970,672
2,940,000 Comcast Cable Communications,
6.375% due 1/30/2006 3,076,096
4,500,000 TCI Communications Inc.,
2.11% due 3/11/2003 (a) 4,500,225
1,000,000 Turner Broadcasting, 7.40% due 2/01/2004 1,024,534
1,000,000 USA Interactive, 6.75% due 11/15/2005 1,047,215
-----------
15,699,466
- --------------------------------------------------------------------------------------------------
Commercial 1,100,000 Cendant Corporation, 1,141,428
Services & 6.875% due 8/15/2006
Supplies--0.2%
- --------------------------------------------------------------------------------------------------
Electric--0.4% 2,500,000 PSE&G Power LLC, 6.875% due 4/15/2006 2,621,050
- --------------------------------------------------------------------------------------------------
December 31, 2002 (20) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS (CONTINUED)
In U.S. Dollars
Face ---------------
Industries Amount Investments Value
- --------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (continued)
==================================================================================================
Electric Utilities-- $ 6,000,000 Boston Edison Company,
2.7% 2.275% due 10/15/2005 (a) $ 5,998,638
4,450,000 Conectiv Inc., 5.30% due 6/01/2005 4,633,211
2,000,000 Detroit Edison Company,
5.05% due 10/01/2005 2,118,430
2,500,000 Dominion Resources Inc.,
7.625% due 7/15/2005 2,742,542
2,000,000 FirstEnergy Corporation,
5.50% due 11/15/2006 2,011,294
-----------
17,504,115
- --------------------------------------------------------------------------------------------------
Financial 5,000,000 Associates Corp. NA, 6% due 7/15/2005 5,392,785
Services--7.3% 4,475,000 Bear Stearns Companies Inc.,
6.15% due 3/02/2004 4,681,333
1,425,000 Citigroup Inc., 5.70% due 2/06/2004 1,482,224
Countrywide Home Loan:
1,600,000 5.25% due 5/22/2003 1,621,357
2,400,000 5.25% due 6/15/2004 2,496,151
1,450,000 Donaldson, Lufkin & Jenrette Inc.,
6.875% due 11/01/2005 1,584,501
2,000,000 Goldman Sachs Group Inc.,
7.50% due 1/28/2005 2,197,718
Household Finance Corporation:
4,000,000 6.50% due 1/24/2006 4,259,688
470,000 5.875% due 2/01/2009 482,411
325,000 7% due 5/15/2012 355,969
International Lease Finance Corporation:
5,000,000 5.50% due 6/07/2004 5,165,910
1,900,000 4.375% due 12/15/2005 1,922,711
5,000,000 Lehman Brothers Holdings, Inc.,
6.625% due 4/01/2004 5,271,175
3,060,000 MBNA Corporation, 5.625% due 11/30/2007 3,125,245
Pemex Finance Ltd.:
252,000 9.14% due 8/15/2004 267,589
2,769,583 8.45% due 2/15/2007 3,097,391
3,350,000 Salomon Inc., 6.75% due 8/15/2003 3,454,178
-----------
46,858,336
- --------------------------------------------------------------------------------------------------
Food Distribution-- 5,000,000 Pepsi Bottling Holdings Inc.,
0.8% 5.375% due 2/17/2004 (c) 5,204,580
- --------------------------------------------------------------------------------------------------
Foods--0.2% 1,200,000 Conagra Inc., 7.40% due 9/15/2004 1,300,303
- --------------------------------------------------------------------------------------------------
Gaming & 230,000 Circus Circus Enterprises, Inc.,
Lodging--0.0% 6.70% due 11/15/2096 231,076
- --------------------------------------------------------------------------------------------------
Hospitals--0.7% 4,000,000 HCA Healthcare Inc., 7.125% due 6/01/2006 4,238,948
- --------------------------------------------------------------------------------------------------
December 31, 2002 (21) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS (CONTINUED)
In U.S. Dollars
Face ---------------
Industries Amount Investments Value
- --------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (concluded)
==================================================================================================
Industrials--0.7% $ 2,000,000 Tyson Foods, Inc., 6.625% due 10/01/2004 $ 2,126,520
2,500,000 Waste Management Inc.,
6.50% due 5/15/2004 2,578,008
------------
4,704,528
- --------------------------------------------------------------------------------------------------
Insurance--0.6% 3,500,000 Marsh & McLennan Companies Inc.,
6.625% due 6/15/2004 3,738,291
- --------------------------------------------------------------------------------------------------
Multi-Sector 1,579,200 Lehman Brothers, TRAINS,
Holdings--0.2% 6.259% due 8/15/2008 (a)(c)(f) 1,626,197
- --------------------------------------------------------------------------------------------------
Oil--Integrated-- 2,400,000 Ashland Inc., 2.02% due 3/07/2003 (a) 2,399,136
0.9% 3,000,000 Conoco Funding Company,
5.45% due 10/15/2006 3,238,098
------------
5,637,234
- --------------------------------------------------------------------------------------------------
Paper Products-- 1,700,000 Abitibi-Consolidated Inc.,
0.3% 6.95% due 12/15/2006 1,765,866
- --------------------------------------------------------------------------------------------------
Real Estate 1,000,000 Avalonbay Communities,
Investment 6.58% due 2/15/2004 1,048,651
Trust--4.7% 5,000,000 Developers Divers Realty,
6.95% due 7/23/2004 5,228,075
Health Care Properties Inc.:
900,000 9% due 3/01/2004 961,807
3,000,000 7.48% due 4/05/2004 3,165,939
3,500,000 Highwoods Realty LP, 8% due 12/01/2003 3,661,276
Nationwide Health Properties:
1,400,000 7.60% due 11/20/2028 1,473,625
5,000,000 6.90% due 10/01/2037 5,331,305
1,400,000 6.59% due 7/07/2038 1,450,093
6,951,000 Susa Partnership LP, 6.95% due 7/01/2006 7,770,509
------------
30,091,280
- --------------------------------------------------------------------------------------------------
Telecommunica- $ 2,500,000 British Telecom PLC,
tions--2.7% 7.875% due 12/15/2005 2,819,262
2,500,000 Deutsche Telekom International Finance,
8.25% due 6/15/2005 2,733,515
2,500,000 France Telecom, 8.70% due 3/01/2006 2,737,160
5,000,000 Qwest Capital Funding, 5.875% due 8/03/2004 4,200,000
Sprint Capital Corporation:
2,000,000 5.70% due 11/15/2003 1,990,000
2,000,000 5.875% due 5/01/2004 1,980,000
5,000,000 WorldCom, Inc., 7.55% due 4/01/2004 (e) 1,175,000
------------
17,634,937
- --------------------------------------------------------------------------------------------------
Transportation-- 2,000,000 CSX Corporation, 6.46% due 6/22/2005 2,154,096
0.3%
- --------------------------------------------------------------------------------------------------
Total Corporate Bonds & Notes
(Cost--$207,813,012) 207,944,755
- --------------------------------------------------------------------------------------------------
December 31, 2002 (22) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS (CONTINUED)
In U.S. Dollars
Face ---------------
Amount Investments Value
- --------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES**--14.2%
==================================================================================================
Collateralized Fannie Mae:
Mortgage $ 299,355 1993-6 S, 20.895% due 1/25/2008 (a) $ 314,984
Obligations--0.8% 29,975 1994-60 D, 7% due 4/25/2024 30,156
71,000 Freddie Mac, 1617-D,
6.50% due 11/15/2023 (c) 71,721
4,981,751 Ginnie Mae, 2002-83 A,
3.313% due 4/16/2017 5,025,223
-----------
5,442,084
- --------------------------------------------------------------------------------------------------
Pass-Through Fannie Mae:
Securities--13.4% 40,000,000 8% (d) 42,875,680
343,604 1999-53 AT, 6% due 10/25/2013 344,180
Freddie Mac:
13,900,745 E00975, 6% due 5/01/2016 14,553,857
3,145,432 E01009, 6.50% due 8/01/2016 3,326,314
4,087,273 E01139, 6% due 4/01/2017 4,276,856
4,736,276 E88102, 6.50% due 2/01/2017 4,998,674
4,479,233 E88913, 6% due 4/01/2017 4,689,684
3,988,830 E89435, 6% due 5/01/2017 4,173,847
4,228,670 E90312, 6% due 6/01/2017 4,424,812
2,567,681 G11267, 6.50% due 1/01/2017 2,715,339
-----------
86,379,243
- --------------------------------------------------------------------------------------------------
Total Government Agency Mortgage-Backed
Securities (Cost--$90,796,206) 91,821,327
- --------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY OBLIGATIONS--5.1%
==================================================================================================
9,280,000 Federal Farm Credit Bank,
5.15% due 3/05/2004 9,673,147
11,000,000 Federal Home Loan Bank,
5.25% due 2/13/2004 11,466,312
11,360,000 Freddie Mac, 3.25% due 12/15/2003 11,574,545
- --------------------------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost--$31,867,367) 32,714,004
- --------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES**--18.7%
==================================================================================================
5,000,000 ARNC Auto Owner Trust, 2001-A A3,
3.76% due 10/17/2005 5,061,160
104,230 Advanta Mortgage Loan Trust, 1998-2 A17,
6.05% due 9/25/2018 105,270
434,381 Asset-Backed Funding Certificates, 1999-1 A2F,
7.641% due 10/25/2030 447,050
5,000,000 CIT Equipment Collateral, 2002-VT1 A3,
4.03% due 1/20/2006 5,132,692
December 31, 2002 (23) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS (CONTINUED)
In U.S. Dollars
Face ---------------
Amount Investments Value
- --------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (continued)
==================================================================================================
California Infrastructure PG&E:
$ 1,600,000 1997-1 A6, 6.38% due 9/25/2008 $ 1,747,424
2,000,000 1997-1 A7, 6.42% due 9/25/2008 2,177,129
Centex Home Equity:
3,166,685 2001-B A2, 5.35% due 10/25/2022 3,182,732
4,000,000 2001-C A2, 3.94% due 2/25/2025 4,030,445
3,000,000 2002-C AF2, 2.87% due 8/25/2018 3,021,882
3,500,000 Chase Funding Mortgage Loan Asset-Backed
Certificates, 2002-3 1A3,
3.55% due 3/25/2022 3,549,301
5,000,000 Chase Manhattan Auto Owner Trust, 2002-B,
4.24% due 1/15/2009 5,184,206
1,164,762 CityScape Home Equity Loan Trust, 1996-4 A10,
7.40% due 9/25/2027 (c) 1,205,603
364,683 Countrywide Home Equity Loan Trust, 1999-A,
1.74% due 4/15/2025 (a) 363,302
5,000,000 DaimlerChrysler Auto Trust, 2001-D A4,
3.78% due 2/06/2007 5,177,301
10,000,000 First Franklin Mortgage Loan Asset-Backed
Certificates, 2002-FF4 2A2,
2.80% due 2/25/2033 10,000,000
Freddie Mac:
5,000,000 T-45 A2, 2.91% due 8/27/2007 5,029,225
14,000,000 T-50 A3, 2.182% due 9/27/2007 13,965,000
5,000,000 GMAC Mortgage Corporation Loan Trust,
2002-HE A2, 4.63% due 6/25/2027 (c) 5,070,130
78,358 Green Tree Recreational, Equipment &
Consumer Trust, 1996-C A1, 1.66%
due 10/15/2017 (a) 78,367
2,500,000 Harley-Davidson Motorcycle Trust, 2001-2 A2,
4.72% due 6/15/2009 2,611,712
2,030,677 IndyMac Home Equity Loan Asset-Backed Trust,
2001-B AF3, 5.692% due 3/25/2027 (a) 2,044,215
5,000,000 John Deere Owner Trust, 2001-A A3,
3.26% due 10/17/2005 5,067,356
2,590,000 M & I Auto Loan Trust, 2001-1 A4,
4.97% due 3/20/2007 2,730,874
5,368,984 PSE&G Transition Funding LLC, 2001-1 A2,
5.74% due 3/15/2007 5,615,796
9,000,000 Residential Asset Mortgage Products, Inc.,
2002-RZ1 A2, 4.30% due 4/25/2023 9,157,971
Residential Asset Securities Corporation:
5,000,000 2002-KS5 AIB2, 2.47% due 8/25/2022 5,011,315
5,000,000 2002-KS6 AI2, 3.09% due 11/25/2022 5,040,374
5,000,000 2002-KS8 A2, 3.04% due 6/25/2023 5,039,063
December 31, 2002 (24) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS (CONTINUED)
In U.S. Dollars
Face ---------------
Amount Investments Value
- --------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (concluded)
==================================================================================================
$ 2,000,000 USAA Auto Owner Trust, 2001-2 A3,
3.20% due 2/15/2006 $ 2,018,150
2,000,000 Whole Auto Loan Trust, 2002-1 B,
2.91% due 4/15/2009 2,021,246
- --------------------------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost--$119,263,086) 120,886,291
- --------------------------------------------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES**--13.8%
==================================================================================================
Collateralized ABN AMRO Mortgage Corporation:
Mortgage 1,482,805 2001-1A 1A3, 4.75% due 11/25/2031 1,482,981
Obligations--11.5% 2,642,082 2001-8 2A1, 6.50% due 1/25/2032 2,673,100
830,846 Bank of America Mortgage Securities,
2000-A A-1, 6.944% due 1/25/2031 (a) 837,700
327,719 Blackrock Capital Finance LP, 1997-R2 AP,
9.03% due 12/25/2035 (a)(c) 347,661
6,584,482 Chase Mortgage Finance Corporation,
1999-S4 A1, 6.50% due 4/25/2029 6,762,795
Citicorp Mortgage Securities, Inc.:
104,573 1989-8 A1, 10.50% due 6/25/2019 113,489
217,881 1994-4 A6, 6% due 2/25/2009 219,554
2,390 Countrywide Funding Corp., 1994-17 A9,
8% due 7/25/2024 2,395
2,324,318 GE Capital Mortgage Services, Inc.,
1996-5 A4, 6.75% due 3/25/2011 2,327,038
93,393 Housing Securities Inc., 1994-2 B1,
6.50% due 7/25/2009 73,838
1,130,590 Ocwen Residential MBS Corporation,
1998-R2 AP, 7.124% due 11/25/2034 (a)(c) 1,150,198
9,735,000 PNC Mortgage Securities Corp., 1999-4 1A5,
6.20% due 6/25/2029 10,000,804
5,000,000 Permanent Financing PLC, 1 2A,
4.20% due 6/10/2007 5,175,000
1,106,267 Residential Funding Mortgage Securities I,
2001-S24 A8, 5.50% due 10/25/2031 1,118,702
106,206 Salomon Brothers Mortgage Securities VI,
1986-1 A, 6% due 12/25/2011 108,940
9,361,409 Structured Asset Securities Corporation,
2002-19 A1, 4.20% due 10/25/2032 9,528,885
Structured Mortgage Asset Residential Trust:
10,873 1991-1H, 8.25% due 6/25/2022 11,277
29,690 1992-3A AA, 8% due 10/25/2007 30,660
34,037 1993-5A AA, 8.575% due 6/25/2024 (a) 36,919
December 31, 2002 (25) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS (CONTINUED)
In U.S. Dollars
Face ---------------
Amount Investments Value
- --------------------------------------------------------------------------------------------------
NON-AGENCY MORTGAGE-BACKED SECURITIES** (concluded)
==================================================================================================
$ 271,048 Walsh Acceptance, 1997-2 A,
2.42% due 3/01/2027 (a)(c) $ 162,629
Washington Mutual:
1,900,000 2000-1 B1, 5.42% due 1/25/2040 (a)(c) 1,892,281
9,695,588 2002-AR15 A3, 4.07% due 12/25/2032 9,934,996
5,000,000 2002-AR19 A3, 3.492% due 1/25/2033 5,015,625
6,836,043 2002-S3 1A1, 6.50% due 6/25/2032 7,015,372
Wells Fargo Mortgage-Backed Securities Trust:
3,112,370 2002-A A2, 5.90% due 3/25/2032 3,122,228
5,127,661 2002-3 A1, 5.50% due 3/25/2032 5,220,215
-----------
74,365,282
- --------------------------------------------------------------------------------------------------
Commercial 2,568,656 Banc of America Commercial Mortgage Inc.,
Mortgage-Backed 2000-1 A1A, 7.109% due 11/15/2008 2,871,406
Securities--2.3% CS First Boston Mortgage Securities
Corporation:
4,637,603 1995-WF1 AX,
1.338% due 12/21/2027 (a)(b)(c) 26,934
3,938,562 2001-CK6 A1, 4.393% due 7/15/2006 4,086,651
1,120,116 First Union NB-Bank of America Commercial
Mortgage Trust, 2001-C1 A1,
5.711% due 3/15/2033 1,205,071
3,036,759 GS Mortgage Securities Corporation II,
1998-C1 A1, 6.06% due 10/18/2030 3,221,259
2,676,501 Nomura Asset Securities Corporation,
1995-MD3 A1B, 8.15% due 3/04/2020 2,947,458
-----------
14,358,779
- --------------------------------------------------------------------------------------------------
Stripped 22,843,358 Asset Securitization Corporation, 1997-D5 ACS1,
Mortgage-Backed 2.091% due 2/14/2043 (a)(b) 129,419
Securities--0.0% 13,725,000 Saxon Asset Securities Trust, 2000-2 AIO,
6% due 7/25/2030 (b) 4,289
-----------
133,708
- --------------------------------------------------------------------------------------------------
Total Non-Agency Mortgage-Backed
Securities (Cost--$88,004,177) 88,857,769
- --------------------------------------------------------------------------------------------------
Shares
Held
- --------------------------------------------------------------------------------------------------
PREFERRED STOCK--0.1%
==================================================================================================
1,500 Home Ownership Funding 2 (c) 929,273
- --------------------------------------------------------------------------------------------------
Total Preferred Stock (Cost--$1,500,000) 929,273
- --------------------------------------------------------------------------------------------------
December 31, 2002 (26) Mercury Low Duration Fund
SCHEDULE OF INVESTMENTS (CONCLUDED)
In U.S. Dollars
Face ---------------
Amount Investments Value
- --------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS--2.0%
==================================================================================================
U.S. Treasury Notes:
$ 3,890,000 4.75% due 2/15/2004 $ 4,042,258
4,303,000 1.875% due 9/30/2004 4,333,087
4,500,000 3.25% due 8/15/2007 4,611,447
- --------------------------------------------------------------------------------------------------
Total US Treasury Obligations
(Cost--$12,639,997) 12,986,792
- --------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--19.7%
==================================================================================================
Commercial 11,340,000 Autoliv ASP Inc., 1.33% due 1/02/2003 11,340,000
Paper* 17,408,000 BMW US Capital Group,
1.35% due 1/09/2003 17,403,431
30,000,000 Barton Capital Corporation,
1.36% due 1/07/2003 29,994,333
15,700,000 Ciesco LP, 6.253% due 1/03/2003 15,697,273
27,600,000 Fortis Funding LLC, 1.35% due 1/23/2003 27,578,265
13,500,000 Variable Funding Capital Corp.,
1.34% due 1/14/2003 13,493,970
12,000,000 Viacom, 2.02% due 1/14/2003 11,994,000
- --------------------------------------------------------------------------------------------------
Total Short-Term Investments
(Cost--$127,499,192) 127,501,272
- --------------------------------------------------------------------------------------------------
Total Investments
(Cost--$679,383,037)--105.8% 683,641,483
Time Deposit--0.0%*** 37,158
Liabilities in Excess of Other Assets--(5.8%) (37,622,636)
------------
Net Assets--100.0% $646,056,005
============
- --------------------------------------------------------------------------------------------------
(a) Floating rate note.
(b) Represents the interest-only portion of a mortgage-backed obligation.
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(d) Represents a "to-be-announced" (TBA) transaction. The Portfolio has
committed to purchasing securities for which all specific information is
not available at this time.
(e) Non-income producing security.
(f) Target Return Index Securities (TRAINS).
* Commercial Paper is traded on a discount basis; the interest rates shown
reflect the discount rates paid at the time of purchase by the Portfolio.
** Mortgage-Backed and Asset-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.
*** Time deposit bears interest at 0.74% and matures on 1/02/2003.
See Notes to Financial Statements.
December 31, 2002 (27) Mercury Low Duration Fund
STATEMENT OF ASSETS
AND LIABILITIES
As of December 31, 2002
- --------------------------------------------------------------------------------
LOW DURATION MASTER PORTFOLIO
================================================================================
Assets:
Investments, at value (identified cost--$679,383,037) $683,641,483
Time deposit 37,158
Cash 4,453
Receivables:
Interest $ 4,629,288
Paydowns 3,455,852
Contributions 3,336,842 11,421,982
-----------
Prepaid expenses 698
------------
Total assets 695,105,774
------------
- ------------------------------------------------------------------------------------
Liabilities:
Payables:
Securities purchased 42,953,055
Withdrawals 5,883,036
Investment adviser 114,890 48,950,981
-----------
Accrued expenses and other liabilities 98,788
------------
Total liabilities 49,049,769
------------
- ------------------------------------------------------------------------------------
Net Assets:
Net assets $646,056,005
============
- ------------------------------------------------------------------------------------
Net Assets Consist of:
Investors' capital $641,797,559
Unrealized appreciation on investments--net 4,258,446
------------
Net assets $646,056,005
------------
- ------------------------------------------------------------------------------------
See Notes to Financial Statements.
December 31, 2002 (28) Mercury Low Duration Fund
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2002
- --------------------------------------------------------------------------------
LOW DURATION MASTER PORTFOLIO
================================================================================
Investment Income:
Interest $11,903,429
Dividends 100,591
-----------
Total income 12,004,020
-----------
- ----------------------------------------------------------------------------------
Expenses:
Investment advisory fees $ 638,937
Accounting services 140,788
Custodian fees 24,905
Professional fees 24,311
Trustees' fees and expenses 10,461
Pricing fees 6,112
Printing and shareholder reports 2,321
Other 11,699
---------
Total expenses 859,534
-----------
Investment income--net 11,144,486
-----------
- ----------------------------------------------------------------------------------
Realized & Unrealized Gain on Investments--Net:
Realized gain on investments--net 2,041,755
Change in unrealized appreciation/depreciation
on investments--net 7,146,509
-----------
Total realized and unrealized gain on investments--net 9,188,264
-----------
Net Increase in Net Assets Resulting from Operations $20,332,750
===========
- ----------------------------------------------------------------------------------
See Notes to Financial Statements.
December 31, 2002 (29) Mercury Low Duration Fund
STATEMENTS OF CHANGES
IN NET ASSETS
LOW DURATION MASTER PORTFOLIO
================================================================================
For the Six For the
Months Ended Year Ended
December 31, June 30,
Increase in Net Assets: 2002 2002
- -----------------------------------------------------------------------------------------------
Operations:
Investment income--net $ 11,144,486 $ 17,080,656
Realized gain on investments and
foreign currency transactions--net 2,041,755 914,391
Change in unrealized appreciation/depreciation on
investments--net 7,146,509 (3,287,313)
-------------------------------
Net increase in net assets resulting from operations 20,332,750 14,707,734
-------------------------------
- -----------------------------------------------------------------------------------------------
Capital Transactions:
Proceeds from contributions 320,920,427 551,288,181
Fair value of withdrawals (207,532,041) (359,175,221)
-------------------------------
Net increase in net assets derived from capital transactions 113,388,386 192,112,960
-------------------------------
- -----------------------------------------------------------------------------------------------
Net Assets:
Total increase in net assets 133,721,136 206,820,694
Beginning of period 512,334,869 305,514,175
-------------------------------
End of period $ 646,056,005 $ 512,334,869
===============================
- -----------------------------------------------------------------------------------------------
See Notes to Financial Statements.
December 31, 2002 (30) Mercury Low Duration Fund
FINANCIAL HIGHLIGHTS
LOW DURATION MASTER PORTFOLIO
================================================================================
The following ratios have been derived from information provided in the
financial statements.
For the Six For the For the Period
Months Ended Year Ended October 6,
December 31, June 30, 2000+ to
2002 2002 June 30, 2001
-----------------------------------------------------
Total Investment Return**: 3.50%++ 5.59% --
=====================================================
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses .28%* .32% .30%*
=====================================================
Investment income--net 3.66%* 5.03% 6.78%*
=====================================================
- -----------------------------------------------------------------------------------------------------
Supplemental Data:
Net assets, end of period (in thousands) $ 646,056 $ 512,335 $ 305,514
=====================================================
Portfolio turnover 153.98% 70.92% 192.04%
=====================================================
- -----------------------------------------------------------------------------------------------------
* Annualized.
** Total return is required to be disclosed for fiscal years beginning after
December 15, 2000.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
December 31, 2002 (31) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
LOW DURATION MASTER PORTFOLIO
================================================================================
(1) Significant Accounting Policies:
Low Duration Master Portfolio ("the "Portfolio") is a fund of Fund Asset
Management Master Trust (the "Master Trust"). The Master Trust is registered
under the Investment Company Act of 1940 and is organized as a Delaware business
trust. The Declaration of Trust permits the Trustees to issue nontransferable
interests in the Portfolio, subject to certain limitations. The Portfolio's
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America, which may require the use of
management accruals and estimates. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary to a fair
statement of the results for the interim period presented. All such adjustments
are of a normal, recurring nature. The following is a summary of significant
accounting policies followed by the Portfolio.
(a) Valuation of investments -- Portfolio securities that are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price. Securities
that are traded in the over-the-counter market are valued at the last available
bid price prior to the time of valuation. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange designated
by or under the authority of the Board of Trustees as the primary market.
Securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market.
Short-term securities are valued at amortized cost, which approximates market
value. Other investments, including futures contracts and related options, are
stated at market value. 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 Master Trust's Board of Trustees.
(b) Derivative financial instruments -- The Portfolio may engage in various
portfolio investment techniques to increase or decrease the level of risk to
which the Portfolio is exposed more quickly and efficiently than transactions in
other types of investments. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
o Financial futures contracts -- The Portfolio may purchase or sell financial
futures contracts and options on such futures contracts for the purpose of
hedging the market risk on existing securities or the intended purchase of
securities. Upon entering into a contract, the Portfolio deposits and maintains
as collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the
December 31, 2002 (32) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
Portfolio agrees to receive from or pay to the broker an amount of cash equal to
the daily fluctuation in the value of the contract. Such receipts or payments
are known as variation margin and are recorded by the Portfolio as unrealized
gains or losses. When the contract is closed, the Portfolio 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.
o Interest rate spreadlocks -- The Portfolio is authorized to enter into
interest rate spreadlocks, which are over-the-counter contracts in which one
party agrees to make periodic payments based on the change in the market value
of a specified security, basket of securities or index in exchange for periodic
payments based on a fixed or variable interest rate or the change in market
value of a different security, basket of securities or index. Agreements may be
used to obtain exposure to the underlying investments without taking physical
custody of the securities in circumstances where direct investment is restricted
by law or is otherwise impractical.
(c) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
(d) Income taxes -- The Portfolio is classified as a partnership for Federal
income tax purposes. As such, each investor in the Portfolio is treated as owner
of its proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Portfolio. Accordingly, as a "pass through"
entity, the Portfolio pays no income dividends or capital gains distributions.
Therefore, no Federal income tax provision is required. It is intended that the
Portfolio's assets will be managed so an investor in the Portfolio can satisfy
the requirements of subchapter M of the Internal Revenue Code.
(e) Security transactions and investment income -- Security transactions are
accounted for on the date the securities are purchased or sold (the trade
dates). Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis.
(2) Investment Advisory Agreement and Transactions with Affiliates:
The Master Trust has entered into an Investment Advisory Agreement for the
Portfolio with Fund Asset Management, L.P. ("FAM"). The general partner of FAM
is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner.
December 31, 2002 (33) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
FAM is responsible for the management of the Portfolio's investments and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Portfolio. For such services, the
Portfolio pays a monthly fee based upon the average daily value of the
Portfolio's net assets at the annual rate of 0.21%.
For the six months ended December 31, 2002, the Portfolio reimbursed FAM $8,691
for certain accounting services.
Certain officers and/or trustees of the Master Trust are officers and/or
directors of FAM, PSI, and/or ML & Co.
(3) Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended December 31, 2002 were $931,176,862 and $829,230,186, respectively.
Net realized gains for the six months ended December 31, 2002 and net unrealized
gains as of December 31, 2002 were as follows:
Realized Unrealized
Gains Gains
- --------------------------------------------------------------------------------
Long-term investments $ 1,921,539 $ 4,256,366
Short-term investments 7,721 2,080
Interest rate spreadlock 65,620 --
Options written 46,875 --
====================================
Total investments $ 2,041,755 $ 4,258,446
====================================
- --------------------------------------------------------------------------------
Transactions in put options written for the six months ended December 31, 2002
were as follows:
Nominal Value
Covered by Premiums
Options Written Received
- --------------------------------------------------------------------------------
Outstanding put options written,
beginning of period -- --
Options written 5,000,000 --
Options expired (5,000,000) --
====================================
Outstanding put options written,
beginning of period -- --
====================================
- --------------------------------------------------------------------------------
As of December 31, 2002, net unrealized appreciation for Federal income tax
purposes aggregated $4,255,888, of which $10,599,277 related to appreciated
securities and $6,343,389 related to depreciated securities. At December 31,
2002, the aggregate cost of investments for Federal income tax purposes was
$679,385,595.
December 31, 2002 (34) Mercury Low Duration Fund
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
(4) Short-Term Borrowings:
The Master Trust on behalf of the Portfolio, along with certain other funds
managed by FAM and its affiliates, is a party to a $500,000,000 credit agreement
with Bank One, N.A. and certain other lenders. The Portfolio may borrow under
the credit agreement to fund investor withdrawals and for other lawful purposes
other than for leverage. The Portfolio may borrow up to the maximum amount
allowable under the Portfolio's current prospectus and statement of additional
information, subject to various other legal, regulatory or contractual limits.
The Portfolio pays a commitment fee of .09% per annum based on the Portfolio's
pro rata share of the unused portion of the credit agreement. Amounts borrowed
under the credit agreement bear interest at a rate equal to, at each fund's
election, the Federal Funds rate plus .50% or a base rate as determined by Bank
One, N.A. On November 29, 2002, the credit agreement was renewed for one year
under the same terms, except that the total commitment was reduced from
$1,000,000,000 to $500,000,000. The Portfolio did not borrow under the credit
agreement during the six months ended December 31, 2002.
December 31, 2002 (35) Mercury Low Duration Fund
[LOGO] Merrill Lynch Investment Managers
- --------------------------------------------------------------------------------
MUTUAL MANAGED ALTERNATIVE INSTITUTIONAL
FUNDS ACCOUNTS INVESTMENTS ASSET MANAGEMENT
- --------------------------------------------------------------------------------
[GRAPHICS OMITTED]
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.
Mercury Low Duration Fund of
Mercury Funds II
Box 9011
Princeton, NJ
08543-9011
[RECYCLED LOGO] Printed on post-consumer recycled paper #MHW-1070--12/02
- --------------------------------------------------------------------------------
Item 2 - Did registrant adopt a code of ethics, as of the end of the period
covered by this report, that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request-- N/A (not answered until July 15, 2003 and only
annually for funds)
Item 3 - Did the registrant's board of directors determine that the registrant
either: (i) has at least one audit committee financial expert serving
on its audit committee; or (ii) does not have an audit committee
financial expert serving on its audit committee? If yes, disclose name
of financial expert and whether he/she is "independent," (fund may, but
is not required, to disclose name/independence of more than one
financial expert) If no, explain why not. -N/A (not answered until July
15, 2003 and only annually for funds)
Item 4 - Disclose annually only (not answered until December 15, 2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last two
fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's
annual financial statements or services that are
normally provided by the accountant in connection with
statutory and regulatory filings or engagements for
those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the
last two fiscal years for assurance and related
services by the principal accountant that are
reasonably related to the performance of the
audit of the registrant's financial statements
and are not reported under paragraph (a) of this
Item. Registrants shall describe the nature of
the services comprising the fees disclosed under
this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two
fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and
tax planning. Registrants shall describe the nature of the
services comprising the fees disclosed under this category.
N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the last
two fiscal years for products and services provided
by the principal accountant, other than the services
reported in paragraphs (a) through (c) of this Item.
Registrants shall describe the nature of the
services comprising the fees disclosed under this
category. N/A.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A.
(e)(2) Disclose the percentage of services described in each of paragraphs
(b) through (d) of this Item that were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended on
the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser
that provides ongoing services to the registrant for each of the
last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence. N/A.
Items 5-6 - Reserved
Item 7 - For closed-end funds that contain voting securities in their portfolio,
describe the policies and procedures that it uses to determine how to
vote proxies relating to those portfolio securities. N/A.
Item 8 -- Reserved
Item 9(a) - Disclose the conclusions of the registrant's principal executive
officer or officers and principal financial officer or officers, or
persons performing similar functions, about the effectiveness of the
registrant's disclosure controls and procedures (as defined in Rule
30a-2(c) under the Act (17 CFR 270.30a-2(c))) based on their
evaluation of these controls and procedures as of a date within 90
days of the filing date of the report that includes the disclosure
required by this paragraph. N/A.
Item 9(b) -- There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon
request without charge. N/A.
10(b) - Attach certifications (4 in total pursuant to Sections 302 and 906 for
CEO/CFO). 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.
Mercury Low Duration Fund
By: /s/ Terry K. Glenn
--------------------------
Terry K. Glenn,
President of
Mercury Low Duration Fund
Date: February 18, 2003
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/ Terry K. Glenn
--------------------------
Terry K. Glenn,
President of
Mercury Low Duration Fund
Date: February 18, 2003
By: /s/ Donald C. Burke
--------------------------
Donald C. Burke
Chief Financial Officer of
Mercury Low Duration Fund
Date: February 18, 2003