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 811-07885
Name of Fund: Master Enhanced Small Cap Series of Quantitative Master Series
Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Master Enhanced Small Cap Series of Quantitative Master Series
Trust, 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing address:
P.O. Box 9011, Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 12/31/06
Date of reporting period: 01/01/06 - 12/31/06
Item 1 - Report to Stockholders
Master Enhanced Small Cap Series of Quantitative Master Series Trust
Annual Report, December 31, 2006
A Discussion With Your Fund's Portfolio Managers
During the annual period, Master Enhanced Small Cap Series of Quantitative
Master Series Trust generated returns that were competitive with that offered by
the benchmark Standard & Poor's (S&P) SmallCap 600 Index.
How did the portfolio perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended December 31, 2006, Master Enhanced Small Cap
Series had a net total return of +15.23%. For the same period, the benchmark S&P
Small Cap 600 Index returned +15.12%. Positive performance from our
stock-substitution strategies was offset slightly by disappointing results from
our stock-selection strategies.
With respect to our stock-substitution strategies, performance benefited
primarily from portfolio trading conducted in response to structural index
changes. Merger arbitrage trading strategies also added favorably to
performance. Regarding our stock-selection strategies, short interest and value
signals drove positive performance, as did risk control positions. The primary
detractors during the annual period were earnings quality, earnings surprise,
external financing, price momentum and turn of the year signals.
Following decent, but uninspiring, results in 2004 and 2005, U.S. equities
surged forward in 2006, with the S&P 500 Index advancing 15.79% to close at
1,418. Key highlights of the 12-
1
month period included weaker economic growth triggered by a slowdown in the U.S.
housing market; a long-awaited pause in the Federal Reserve Board's (the Fed)
interest rate-hiking campaign; threats of higher inflation; and robust corporate
earnings, which rose by double-digit percentages for an unprecedented fifth
consecutive year. Amid these crosscurrents, financial markets were left to
weather a high degree of volatility.
At the outset, a burgeoning corporate sector, ample liquidity and record levels
of merger-and-acquisition (M&A) activity provided a solid backdrop for equity
markets. During the first few months of 2006, U.S. stocks were solidly on an
upward trajectory, posting the best first quarter gains in several years. Of
note, the S&P 500 Index advanced 4.21% in the quarter, marking its largest gain
since the fourth quarter of 2004 (+9.23%) and its best first quarter since 1999
(+4.98%). Growth continued outside of the housing and auto sectors (capital
spending in particular expanded at a brisk pace); private equity deals, M&A
action and corporate buy-backs abounded in high volumes; and corporate cash
flows held steady.
Notwithstanding such broad-based strength, evidence of an economic slowdown
mounted. By May, we saw a striking shift in investor sentiment, triggered by a
deceleration in consumer spending, rising energy prices, a slump in housing
activity and uncertainty around Fed policy and the sustainability of economic
growth. Stock market volatility took on a more negative spin and eventually
resulted in the first double-digit correction for U.S. equity markets in nearly
four years. The average U.S. stock fell by about 12% and stocks outside the U.S.
were hit even harder. The pullback could be attributed to several factors, not
the least of which was that the lagged effects of higher interest rates and oil
prices finally took their toll on both the economy and stock prices. Further, a
resurgence of inflation fears prompted the Fed to continue its interest
2
rate tightening campaign. Under the auspices of new Chairman Ben Bernanke, the
central bank ended the second quarter with its 17th consecutive 25 basis point
interest rate hike since June 2004, bringing the target federal funds rate to
5.25%.
As the second half of 2006 got underway, positive momentum returned to the
market. The Fed made big news in August by finally ending its streak of interest
rate increases. At the same time, commodity prices collapsed. After reaching an
all-time high near $78 per barrel in July, crude oil ended the year at $61 per
barrel. Stocks generally climbed back above the levels they reached prior to the
market's earlier retrenchment. Most equity markets experienced one of their best
third-quarter periods in several years, though there was a broad-based changing
of the guard that favored larger-cap, higher-quality and more predictable stocks
over smaller-cap, lower-quality and more cyclical securities (as was the trend
early in the year).
Macroeconomic uncertainty persisted in the third quarter. Investors struggled
with moderating economic activity - real gross domestic product (GDP) growth was
estimated at 2%, compared to 2.6% in the second quarter and 5.6% in the first
quarter. The magnitude of the housing downturn and its effect on the consumer
sector was a significant wildcard. Weakness in the U.S. dollar was challenging
the stability of currency markets. Moreover, tensions in the Middle East were
heating up, and economic data offered a mixed outlook for inflation.
Still, strong momentum continued in the equity markets during the year's final
quarter. Key to investors' optimism were: a strong labor market, where the
unemployment rate reached a post-9/11 low and year-on-year average hourly
salaries reached a post-9/11 high; receding risks of higher inflation and high
oil prices; and finally, the pervasive strength in corporate fundamentals
3
that included reasonably good investment levels, healthy balance sheets and
profit margins. 2006 ended and the new year began with the world awash in
liquidity, global economic growth still quite strong despite the U.S. slowdown,
record-high corporate profitability, fairly low inflation and interest rates,
and relatively strong investor confidence.
For the 12-month period, small-cap stocks, as measured by the S&P Small Cap 600
Index, returned +15.12%, slightly behind the S&P 500 Index's +15.79% return but
well ahead of the +10.32% return of the S&P MidCap 400 Index. In terms of sector
performance, each of the 10 S&P 600 sectors posted positive returns for the
12-month period. The top performer was telecommunication services, which was up
+34.93%, followed by materials and consumer staples, with respective returns of
+30.13% and +28.74%. At the bottom were the consumer discretionary and health
care sectors, with respective returns of +7.65% and +8.53%.
What changes were made to the portfolio during the period?
Throughout the fiscal year, as changes were made to the composition of the S&P
Small Cap 600 Index, we purchased and sold securities to maintain the Series'
objective of tracking the risks and return of the benchmark.
We continued to use our quantitative stock-selection and stock-substitution
strategies in an effort to generate returns above those offered by the index.
The goal of our stock-selection process is to use quantitative techniques to
determine whether a stock might outperform or underperform the market. We
analyze each security by using quantitative screens that provide signals that
ultimately inform our investment decisions. These signals may include earnings
quality,
4
valuations, earnings surprises, external financing, short interest and price
momentum factors, among others.
We also apply stock-substitution strategies opportunistically as a value-added
trading strategy. Our goal is to take advantage of temporary price strength in a
security that might result from a corporate acquisition, corporate restructuring
or index composition change. We also might employ convertible bond substitution
when opportunities exist, taking a position in a company's convertible
securities -- bonds that can be exchanged for shares of stock, in certain
situations -- as a cheaper alternative to buying its equity shares.
In December 2006, we implemented the turn of the year signal. We also removed
the earnings surprise signal and increased the turn of the year signal exposure
heading into year-end.
How would you characterize the portfolio's position at the close of the period?
We believe the portfolio remains positioned to match the risk characteristics of
its benchmark, regardless of the direction the market takes.
Leon Roisenberg
Vice President and Co-Portfolio Manager
Jeffrey L. Russo, CFA
Vice President and Co-Portfolio Manager
January 22, 2007
5
Master Enhanced Small Cap Series
- --------------------------------------------------------------------------------
Portfolio Information
As of December 31, 2006
- --------------------------------------------------------------------------------
Percent of
Total
Sector Representation Investments
- --------------------------------------------------------------------------------
Industrials 17.8%
Information Technology 17.1
Financial Services 16.0
Consumer Discretionary 15.2
Health Care 11.5
Energy 7.4
Materials 5.0
Utilities 4.3
Consumer Staples 3.5
Telecommunication Services 0.4
Other* 1.8
- --------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments.
o For Series compliance purposes, the Series' sector classifications refer
to any one or more of the sector sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Series management. This definition may not apply for purposes
of this report, which may combine sector sub-classifications for reporting
ease.
6
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
Aerospace & Defense - 2.1% 11,500 Applied Signal Technology, Inc. $ 161,690
10,700 Armor Holdings, Inc. (b) 586,895
3,550 Ceradyne, Inc. (b) 200,575
6,500 Cubic Corp. 141,050
18,200 Curtiss-Wright Corp. 674,856
26,200 EDO Corp. 621,988
19,900 Esterline Technologies Corp. (b) 800,577
2,000 GenCorp, Inc. (b) 28,040
11,500 KBR, Inc. (b) 300,840
17,325 Moog, Inc. Class A (b) 661,642
17,500 Teledyne Technologies, Inc. (b) 702,275
9,400 Triumph Group, Inc. 492,842
------------
5,373,270
- ----------------------------------------------------------------------------------------------------------------------------
Air Freight & Logistics - 0.4% 21,900 EGL, Inc. (b) 652,182
9,300 Forward Air Corp. 269,049
1,700 HUB Group, Inc. Class A (b) 46,835
------------
968,066
- ----------------------------------------------------------------------------------------------------------------------------
Airlines - 0.3% 1,000 Allegiant Travel Co. (b) 28,060
15,400 Frontier Airlines Holdings, Inc. (b) 113,960
5,600 Mesa Air Group, Inc. (b) 47,992
26,400 SkyWest, Inc. 673,464
------------
863,476
- ----------------------------------------------------------------------------------------------------------------------------
Auto Components - 0.3% 7,700 Drew Industries, Inc. (b) 200,277
18,900 LKQ Corp. (b) 434,511
11,900 Standard Motor Products, Inc. 178,262
------------
813,050
- ----------------------------------------------------------------------------------------------------------------------------
Automobiles - 0.2% 11,300 Monaco Coach Corp. 160,008
12,900 Winnebago Industries, Inc. 424,539
------------
584,547
- ----------------------------------------------------------------------------------------------------------------------------
Biotechnology - 0.6% 16,500 Arqule, Inc. (b) 97,680
10,200 Digene Corp. (b) 488,784
23,700 Regeneron Pharmaceuticals, Inc. (b) 475,659
23,600 Sirna Therapeutics, Inc. (b) 307,036
7,800 Tanox, Inc. (b) 155,220
------------
1,524,379
- ----------------------------------------------------------------------------------------------------------------------------
Building Products - 1.8% 4,300 Apogee Enterprises, Inc. 83,033
14,200 ElkCorp 583,478
29,300 Griffon Corp. (b) 747,150
39,600 Lennox International, Inc. 1,212,156
8,700 NCI Building Systems, Inc. (b) 450,225
28,300 Simpson Manufacturing Co., Inc. 895,695
10,400 Universal Forest Products, Inc. 484,848
------------
4,456,585
- ----------------------------------------------------------------------------------------------------------------------------
Capital Markets - 0.6% 8,900 Investment Technology Group, Inc. (b) 381,632
13,900 LaBranche & Co., Inc. (b) 136,637
13,800 Piper Jaffray Cos. (b) 899,070
3,200 SWS Group, Inc. 114,240
------------
1,531,579
- ----------------------------------------------------------------------------------------------------------------------------
7
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
Chemicals - 1.1% 10,000 Arch Chemicals, Inc. $ 333,100
14,200 Georgia Gulf Corp. 274,202
25,100 H.B. Fuller Co. 648,082
10,700 MacDermid, Inc. 364,870
17,300 OM Group, Inc. (b) 783,344
2,100 Penford Corp. 36,330
26,400 PolyOne Corp. (b) 198,000
1,100 Quaker Chemical Corp. 24,277
5,200 Schulman A, Inc. 115,700
42,900 Wellman, Inc. 136,851
------------
2,914,756
- ----------------------------------------------------------------------------------------------------------------------------
Commercial Banks - 5.8% 10,300 Boston Private Financial Holdings, Inc. 290,563
12,100 Cascade Bancorp 374,011
18,900 Chittenden Corp. 580,041
30,400 Community Bank System, Inc. 699,200
29,520 East-West Bancorp, Inc. 1,045,598
67,400 First BanCorp 642,322
35,300 First Commonwealth Financial Corp. 474,079
13,700 First Financial Bancorp 227,557
5,400 First Indiana Corp. 136,944
18,800 First Midwest Bancorp, Inc. 727,184
9,400 First Republic Bank 367,352
25,800 Glacier Bancorp, Inc. 630,552
21,800 Hanmi Financial Corp. 491,154
13,900 Independent Bank Corp. 351,531
2,300 Interchange Financial Services Corp. 52,877
26,900 Irwin Financial Corp. 608,747
5,900 Nara Bancorp, Inc. 123,428
7,000 Prosperity Bancshares, Inc. 241,570
11,900 Provident Bankshares Corp. 423,640
29,400 The South Financial Group, Inc. 781,746
4,562 State National Bancshares, Inc. 175,591
15,000 Sterling Bancorp 295,500
17,700 Sterling Bancshares, Inc. 230,454
22,416 Sterling Financial Corp. 757,885
21,300 Susquehanna Bancshares, Inc. 572,544
48,600 UCBH Holdings, Inc. 853,416
18,600 Umpqua Holdings Corp. 547,398
13,700 United Bankshares, Inc. 529,505
25,200 Whitney Holding Corp. 822,024
13,300 Wintrust Financial Corp. 638,666
------------
14,693,079
- ----------------------------------------------------------------------------------------------------------------------------
Commercial Services & Supplies - 3.7% 11,600 ABM Industries, Inc. 263,436
10,300 Administaff, Inc. 440,531
9,200 Angelica Corp. 237,360
24,400 Aramark Corp. 816,180
1,200 Banta Corp. 43,680
37,200 Bowne & Co., Inc. 592,968
8,000 Brady Corp. 298,240
8
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
2,000 CDI Corp. $ 49,800
27,800 Central Parking Corp. 500,400
7,000 Consolidated Graphics, Inc. (b) 413,490
7,800 G&K Services, Inc. Class A 303,342
5,500 Healthcare Services Group 159,280
4,600 Heidrick & Struggles International, Inc. (b) 194,856
20,900 John H. Harland Co. 1,049,180
32,800 Labor Ready, Inc. (b) 601,224
8,100 School Specialty, Inc. (b) 303,669
25,400 Spherion Corp. (b) 188,722
23,700 Tetra Tech, Inc. (b) 428,733
21,700 United Stationers, Inc. (b) 1,013,173
3,600 Volt Information Sciences, Inc. (b) 180,756
5,650 Waste Connections, Inc. (b) 234,758
26,700 Watson Wyatt Worldwide, Inc. 1,205,505
------------
9,519,283
- ----------------------------------------------------------------------------------------------------------------------------
Communications Equipment - 1.3% 1,800 Acme Packet, Inc. (b) 37,152
800 Audiovox Corp. Class A (b) 11,272
10,800 Bel Fuse, Inc. 375,732
14,600 Black Box Corp. 613,054
11,900 C-COR, Inc. (b) 132,566
12,100 Comtech Telecommunications Corp. (b) 460,647
2,500 Digi International, Inc. (b) 34,475
13,400 Ditech Networks, Inc. (b) 92,728
30,700 Harmonic, Inc. (b) 223,189
8,800 Inter-Tel, Inc. 195,008
10,700 NETGEAR Inc. (b) 280,875
8,000 Symmetricom, Inc. (b) 71,360
11,300 Tollgrade Communications, Inc. (b) 119,441
23,200 Viasat, Inc. (b) 691,592
------------
3,339,091
- ----------------------------------------------------------------------------------------------------------------------------
Computers & Peripherals - 0.7% 7,733 Avid Technology, Inc. (b) 288,131
19,900 Komag, Inc. (b) 753,812
1,300 Neoware Systems, Inc. (b) 17,173
20,100 Synaptics, Inc. (b) 596,769
------------
1,655,885
- ----------------------------------------------------------------------------------------------------------------------------
Construction & Engineering - 1.1% 20,000 EMCOR Group, Inc. (b) 1,137,000
20,700 The Shaw Group, Inc.(b) 693,450
22,100 URS Corp. (b) 946,985
------------
2,777,435
- ----------------------------------------------------------------------------------------------------------------------------
Construction Materials - 0.5% 13,500 Headwaters, Inc. (b) 323,460
15,300 Texas Industries, Inc. 982,719
------------
1,306,179
- ----------------------------------------------------------------------------------------------------------------------------
Consumer Finance - 0.5% 14,700 Cash America International, Inc. 689,430
11,900 First Cash Financial Services, Inc. (b) 307,853
52,100 Rewards Network, Inc. (b) 362,095
------------
1,359,378
- ----------------------------------------------------------------------------------------------------------------------------
Containers & Packaging - 0.6% 19,300 AptarGroup, Inc. 1,139,472
3,640 Myers Industries, Inc. 57,002
9
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
8,200 Rock-Tenn Co. Class A $ 222,302
------------
1,418,776
- ----------------------------------------------------------------------------------------------------------------------------
Distributors - 0.3% 20,860 Brightpoint, Inc. (b) 280,567
12,000 Building Material Holding Corp. 296,280
4,000 Keystone Automotive Industries, Inc. (b) 135,960
------------
712,807
- ----------------------------------------------------------------------------------------------------------------------------
Diversified Consumer Services - 0.7% 20,000 Bright Horizons Family Solutions, Inc. (b) 773,200
4,100 CPI Corp. 190,609
22,600 Coinstar, Inc. (b) 690,882
------------
1,654,691
- ----------------------------------------------------------------------------------------------------------------------------
Diversified Telecommunication 8,700 CT Communications, Inc. 199,404
Services - 0.3% 5,531 Commonwealth Telephone Enterprises, Inc. 231,528
25,000 IMPSAT Fiber Networks, Inc. (b) 230,250
------------
661,182
- ----------------------------------------------------------------------------------------------------------------------------
Electric Utilities - 1.2% 15,466 Allete, Inc. 719,787
12,900 Central Vermont Public Service Corp. 303,795
40,200 Cleco Corp. 1,014,246
6,900 Green Mountain Power Corp. 233,841
18,200 Unisource Energy Corp. 664,846
------------
2,936,515
- ----------------------------------------------------------------------------------------------------------------------------
Electrical Equipment - 2.2% 19,800 AO Smith Corp. 743,688
26,300 Acuity Brands, Inc. 1,368,652
22,000 American Power Conversion Corp. 672,980
8,900 Baldor Electric Co. 297,438
18,000 Belden CDT, Inc. 703,620
58,300 C&D Technologies, Inc. 276,342
11,000 First Solar, Inc. (b) 327,800
15,400 Regal-Beloit Corp. 808,654
8,200 Vicor Corp. 91,102
9,600 Woodward Governor Co. 381,216
------------
5,671,492
- ----------------------------------------------------------------------------------------------------------------------------
Electronic Equipment & 12,600 Agilysys, Inc. 210,924
Instruments - 4.5% 16,200 Anixter International, Inc. (b) 879,660
22,850 Benchmark Electronics, Inc. (b) 556,626
7,800 CTS Corp. 122,460
11,500 Checkpoint Systems, Inc. (b) 232,300
32,700 Cognex Corp. 778,914
16,900 Coherent, Inc. (b) 533,533
6,000 Daktronics, Inc. 221,100
8,100 Electro Scientific Industries, Inc. (b) 163,134
5,100 Flir Systems, Inc. (b) 162,333
15,900 Gerber Scientific, Inc. (b) 199,704
15,400 Global Imaging Systems, Inc. (b) 338,030
36,700 Insight Enterprises, Inc. (b) 692,529
8,500 Itron, Inc. (b) 440,640
8,900 Keithley Instruments, Inc. 117,035
9,200 Littelfuse, Inc. (b) 293,296
7,700 LoJack Corp. (b) 131,516
19,200 MTS Systems Corp. 741,504
10
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
2,300 Mercury Computer Systems, Inc. (b) $ 30,728
7,500 Methode Electronics, Inc. 81,225
5,200 Park Electrochemical Corp. 133,380
17,300 Paxar Corp. (b) 398,938
24,375 Pemstar, Inc. (b) 93,844
7,000 Photon Dynamics, Inc. (b) 81,830
7,200 Planar Systems, Inc. (b) 69,624
8,900 Radisys Corp. (b) 148,363
5,500 Rogers Corp. (b) 325,325
15,000 ScanSource, Inc. (b) 456,000
69,700 Symbol Technologies, Inc. 1,041,318
27,500 Technitrol, Inc. 656,975
20,900 Trimble Navigation Ltd. (b) 1,060,257
------------
11,393,045
- ----------------------------------------------------------------------------------------------------------------------------
Energy Equipment & Services - 3.4% 8,300 Atwood Oceanics, Inc. (b) 406,451
11,600 Bristow Group, Inc. (b) 418,644
5,500 CARBO Ceramics, Inc. 205,535
19,200 Dril-Quip, Inc. (b) 751,872
6,500 Hydril Co. (b) 488,735
20,500 Input/Output, Inc. (b) 279,415
12,800 Lone Star Technologies, Inc. (b) 619,648
4,200 Lufkin Industries, Inc. 243,936
31,000 Oceaneering International, Inc. (b) 1,230,700
3,300 SEACOR Holdings Inc. (b) 327,162
30,550 Tetra Technologies, Inc. (b) 781,469
28,300 Unit Corp. (b) 1,371,135
13,200 Veritas DGC, Inc. (b) 1,130,316
9,700 W-H Energy Services, Inc. (b) 472,293
------------
8,727,311
- ----------------------------------------------------------------------------------------------------------------------------
Food & Staples Retailing - 0.9% 26,200 Casey's General Stores, Inc. 617,010
4,100 Great Atlantic & Pacific Tea Co. 105,534
16,600 Longs Drug Stores Corp. 703,508
5,500 Nash Finch Co. 150,150
18,700 Performance Food Group Co. (b) 516,868
2,900 United Natural Foods, Inc. (b) 104,168
------------
2,197,238
- ----------------------------------------------------------------------------------------------------------------------------
Food Products - 1.5% 2,900 American Italian Pasta Co. Class A (b) 25,810
43,000 Corn Products International, Inc. 1,485,220
11,600 Delta & Pine Land Co. 469,220
16,800 Flowers Foods, Inc. 453,432
9,000 J&J Snack Foods Corp. 372,600
12,700 Lance, Inc. 255,016
100 Peet's Coffee & Tea, Inc. (b) 2,624
100 Ralcorp Holdings, Inc. (b) 5,089
9,500 Sanderson Farms, Inc. 287,755
10,600 TreeHouse Foods, Inc. (b) 330,720
------------
3,687,486
- ----------------------------------------------------------------------------------------------------------------------------
Gas Utilities - 2.9% 21,800 Atmos Energy Corp. 695,638
9,800 Cascade Natural Gas Corp. 254,016
11
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
28,000 Energen Corp. $ 1,314,320
8,800 The Laclede Group, Inc. 308,264
11,600 New Jersey Resources Corp. 563,528
11,000 Northwest Natural Gas Co. 466,840
35,900 Piedmont Natural Gas Co. 960,325
6,700 South Jersey Industries, Inc. 223,847
24,205 Southern Union Co. 676,530
16,900 Southwest Gas Corp. 648,453
44,900 UGI Corp. 1,224,872
------------
7,336,633
- ----------------------------------------------------------------------------------------------------------------------------
Health Care Equipment & 48,600 American Medical Systems Holdings, Inc. (b) 900,072
Supplies - 4.7% 600 ArthroCare Corp. (b) 23,952
1,000 Biolase Technology, Inc. (b) 8,750
2,600 Biomet, Inc. 107,302
6,700 Biosite, Inc. (b) 327,295
16,800 CONMED Corp. (b) 388,416
8,800 Conor Medsystems, Inc. (b) 275,704
26,979 Cooper Cos., Inc. 1,200,566
11,800 DJO, Inc. (b) 505,276
15,900 Dionex Corp. (b) 901,689
8,200 Haemonetics Corp. (b) 369,164
12,400 Hologic, Inc. (b) 586,272
11,700 Idexx Laboratories, Inc. (b) 927,810
31,525 Immucor, Inc. (b) 921,476
11,600 Integra LifeSciences Holdings Corp. (b) 494,044
26,300 Invacare Corp. 645,665
4,200 Kensey Nash Corp. (b) 133,560
26,200 Mentor Corp. 1,280,394
22,177 Meridian Bioscience, Inc. 544,002
7,500 Osteotech, Inc. (b) 42,375
7,300 Palomar Medical Technologies, Inc. (b) 369,891
7,500 Possis Medical, Inc. (b) 101,100
16,200 Respironics, Inc. (b) 611,550
19,500 Theragenics Corp. (b) 60,450
2,100 Viasys Healthcare, Inc. (b) 58,422
2,400 Vital Signs, Inc. 119,808
------------
11,905,005
- ----------------------------------------------------------------------------------------------------------------------------
Health Care Providers & 31,900 AMERIGROUP Corp. (b) 1,144,891
Services - 4.5% 24,700 AMN Healthcare Services, Inc. (b) 680,238
31,250 Amsurg Corp. (b) 718,750
18,200 Centene Corp. (b) 447,174
13,100 Chemed Corp. 484,438
100 CryoLife, Inc. (b) 765
4,200 Gentiva Health Services, Inc. (b) 80,052
22,100 Healthways, Inc. (b) 1,054,391
4,700 Horizon Health Corp. (b) 91,979
21,500 inVentiv Health, Inc. (b) 760,025
35,050 Odyssey HealthCare, Inc. (b) 464,763
30,900 Owens & Minor, Inc. 966,243
12
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
29,600 Pediatrix Medical Group, Inc. (b) $ 1,447,440
14,728 Per-Se Technologies, Inc. (b) 409,144
36,300 Sierra Health Services, Inc. (b) 1,308,252
29,500 Sunrise Senior Living, Inc. (b) 906,240
14,500 United Surgical Partners International, Inc. (b) 411,075
------------
11,375,860
- ----------------------------------------------------------------------------------------------------------------------------
Health Care Technology - 0.7% 3,900 Allscripts Healthcare Solutions, Inc. (b) 105,261
25,100 Cerner Corp. (b) 1,142,050
40,400 Dendrite International, Inc. (b) 432,684
------------
1,679,995
- ----------------------------------------------------------------------------------------------------------------------------
Hotels, Restaurants & Leisure - 3.5% 24,300 Aztar Corp. (b) 1,322,406
17,100 CEC Entertainment, Inc. (b) 688,275
23,000 CKE Restaurants, Inc. 423,200
8,100 California Pizza Kitchen, Inc. (b) 269,811
6,500 IHOP Corp. 342,550
4,300 Isle of Capri Casinos, Inc. (b) 114,294
23,400 Jack in the Box, Inc. (b) 1,428,336
1,700 Landry's Restaurants, Inc. 51,153
13,900 Marcus Corp. 355,562
19,700 Multimedia Games, Inc. (b) 189,120
15,700 O'Charleys, Inc. (b) 334,096
8,200 PF Chang's China Bistro, Inc. (b) 314,716
5,400 Panera Bread Co. Class A (b) 301,914
20,100 Pinnacle Entertainment, Inc. (b) 666,114
18,050 Rare Hospitality International, Inc. (b) 594,387
1,550 Shuffle Master, Inc. (b) 40,610
34,300 Sonic Corp. (b) 821,485
4,500 The Steak n Shake Co. (b) 79,200
6,000 Trump Entertainment Resorts, Inc. (b) 109,440
12,400 WMS Industries, Inc. (b) 432,264
------------
8,878,933
- ----------------------------------------------------------------------------------------------------------------------------
Household Durables - 1.7% 6,800 Bassett Furniture Industries, Inc. 111,112
32,100 Champion Enterprises, Inc. (b) 300,456
21,500 Interface, Inc. Class A (b) 305,730
13,900 La-Z-Boy, Inc. 164,993
8,800 Lenox Group, Inc. (b) 56,320
12,900 Libbey, Inc. 159,186
2,777 NVR, Inc. (b) 1,791,165
1,200 National Presto Industries, Inc. 71,844
17,900 Russ Berrie & Co., Inc. (b) 276,555
400 Skyline Corp. 16,088
23,500 Standard-Pacific Corp. 629,565
15,000 Yankee Candle Co., Inc. 514,200
------------
4,397,214
- ----------------------------------------------------------------------------------------------------------------------------
Household Products - 0.4% 10,150 Central Garden and Pet Co. (b) 491,463
44,700 Spectrum Brands, Inc. (b) 487,230
4,000 WD-40 Co. 139,480
------------
1,118,173
- ----------------------------------------------------------------------------------------------------------------------------
IT Services - 2.7% 10,400 CACI International, Inc. Class A (b) 587,600
6,000 Carreker Corp. (b) 45,840
13
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
71,000 Ciber, Inc. (b) $ 481,380
14,400 eFunds Corp. (b) 396,000
24,300 Gevity HR, Inc. 575,667
37,900 Global Payments, Inc. 1,754,770
5,000 Integral Systems, Inc. 115,850
23,000 Kanbay International, Inc. (b) 661,710
11,600 Keane, Inc. (b) 138,156
20,300 MAXIMUS, Inc. 624,834
3,900 Mantech International Corp. Class A (b) 143,637
28,800 SYKES Enterprises, Inc. (b) 508,032
17,700 Sabre Holdings Corp. Class A 564,453
12,600 Startek, Inc. 170,604
------------
6,768,533
- ----------------------------------------------------------------------------------------------------------------------------
Industrial Conglomerates - 0.3% 800 Standex International Corp. 24,104
31,600 Tredegar Corp. 714,476
------------
738,580
- ----------------------------------------------------------------------------------------------------------------------------
Insurance - 2.7% 16,150 Delphi Financial Group Class A 653,429
9,400 Direct General Corp. 194,016
1,300 Hilb Rogal & Hobbs Co. 54,756
4,800 Infinity Property & Casualty Corp. 232,272
900 LandAmerica Financial Group, Inc. 56,799
24,400 Philadelphia Consolidated Holding Co. (b) 1,087,264
27,300 Presidential Life Corp. 599,235
13,700 ProAssurance Corp. (b) 683,904
4,200 SCPIE Holdings, Inc. (b) 109,788
8,073 Safety Insurance Group, Inc. 409,382
12,700 Selective Insurance Group 727,583
18,700 Stewart Information Services Corp. 810,832
5,200 United Fire & Casualty Co. 183,300
24,550 Zenith National Insurance Corp. 1,151,641
------------
6,954,201
- ----------------------------------------------------------------------------------------------------------------------------
Internet & Catalog Retail - 0.2% 6,000 Blue Nile, Inc. (b) 221,340
15,900 PetMed Express, Inc. (b) 212,265
------------
433,605
- ----------------------------------------------------------------------------------------------------------------------------
Internet Software & Services - 1.5% 15,200 Digital Insight Corp. (b) 585,048
43,300 Digitas, Inc. (b) 580,653
26,400 Infospace, Inc. (b) 541,464
5,500 j2 Global Communications, Inc. (b) 149,875
12,400 MIVA, Inc. (b) 42,036
53,200 United Online, Inc. 706,496
14,900 WebEx Communications, Inc. (b) 519,861
30,100 WebSense, Inc. (b) 687,183
------------
3,812,616
- ----------------------------------------------------------------------------------------------------------------------------
Leisure Equipment & Products - 0.8% 5,200 Arctic Cat, Inc. 91,468
11,400 Jakks Pacific, Inc. (b) 248,976
13,800 Polaris Industries, Inc. 646,254
9,200 Pool Corp. 360,364
15,800 RC2 Corp. (b) 695,200
------------
2,042,262
- ----------------------------------------------------------------------------------------------------------------------------
14
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
Life Sciences Tools & Services - 0.5% 16,500 Cambrex Corp. $ 374,880
26 Enzo Biochem, Inc. (b) 371
2,900 Kendle International, Inc. (b) 91,205
14,400 Parexel International Corp. (b) 417,168
19,000 PharmaNet Development Group, Inc. (b) 419,330
------------
1,302,954
- ----------------------------------------------------------------------------------------------------------------------------
Machinery - 3.8% 3,200 ASV, Inc. (b) 52,064
12,300 Albany International Corp. Class A 404,793
15,300 Astec Industries, Inc. (b) 537,030
10,000 Barnes Group, Inc. 217,500
21,200 Briggs & Stratton Corp. 571,340
17,600 Clarcor, Inc. 595,056
19,700 EnPro Industries, Inc. (b) 654,237
16,200 Flow International Corp. (b) 178,524
19,400 Gardner Denver, Inc. (b) 723,814
20,000 IDEX Corp. 948,200
14,800 Kaydon Corp. 588,152
100 Lydall, Inc. (b) 1,081
24,200 Manitowoc Co. 1,438,206
23,400 Mueller Industries, Inc. 741,780
8,400 Mueller Water Products, Inc. Series B (b) 125,160
1,000 Navistar International Corp. (b) 33,430
4,600 Robbins & Myers, Inc. 211,232
14,500 Toro Co. 676,135
14,700 Valmont Industries, Inc. 815,703
12,900 Wabash National Corp. 194,790
------------
9,708,227
- ----------------------------------------------------------------------------------------------------------------------------
Marine - 0.4% 26,200 Kirby Corp. (b) 894,206
- ----------------------------------------------------------------------------------------------------------------------------
Media - 0.9% 5,600 4Kids Entertainment, Inc. (b) 102,032
24,695 Advo, Inc. 805,057
3,500 Live Nation (b) 78,400
31,700 Radio One, Inc. Class D (b) 213,658
21,000 The Reader's Digest Association, Inc. Class A 350,700
20,000 Univision Communications, Inc. Class A (b) 708,400
------------
2,258,247
- ----------------------------------------------------------------------------------------------------------------------------
Metals & Mining - 2.5% 8,390 AM Castle & Co. 213,525
4,900 AMCOL International Corp. 135,926
6,000 Brush Engineered Materials, Inc. (b) 202,620
14,400 Carpenter Technology Corp. 1,476,288
7,300 Century Aluminum Co. (b) 325,945
19,100 Chaparral Steel Co. 845,557
17,200 Cleveland-Cliffs, Inc. 833,168
10,700 Oregon Steel Mills, Inc. (b) 667,787
15,275 Quanex Corp. 528,362
13,700 RTI International Metals, Inc. (b) 1,071,614
4,800 Steel Technologies, Inc. 84,240
------------
6,385,032
- ----------------------------------------------------------------------------------------------------------------------------
Multi-Utilities - 0.2% 5,600 CH Energy Group, Inc. 295,680
8,800 NorthWestern Corp. 311,344
------------
607,024
- ----------------------------------------------------------------------------------------------------------------------------
15
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
Multiline Retail - 0.1% 16,700 Fred's, Inc. $ 201,068
6,500 Retail Ventures, Inc. (b) 123,760
------------
324,828
- ----------------------------------------------------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels - 4.0% 18,200 Cabot Oil & Gas Corp. Class A 1,103,830
34,799 Cimarex Energy Co. 1,270,163
47,700 Frontier Oil Corp. 1,370,898
1,600 Giant Industries, Inc. (b) 119,920
35,147 Helix Energy Solutions Group, Inc. (b) 1,102,561
1,600 Kinder Morgan, Inc. 169,200
24,800 Massey Energy Co. 576,104
13,700 Penn Virginia Corp. 959,548
15,600 Petroleum Development Corp. (b) 671,580
34,600 St. Mary Land & Exploration Co. 1,274,664
19,900 Stone Energy Corp. (b) 703,465
9,500 Swift Energy Co. (b) 425,695
10,000 World Fuel Services Corp. 444,600
------------
10,192,228
- ----------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products - 0.3% 6,600 Buckeye Technologies, Inc. (b) 79,068
3,600 Deltic Timber Corp. 200,808
7,200 Pope & Talbot, Inc. (b) 39,384
6,500 Schweitzer-Mauduit International, Inc. 169,325
9,800 Wausau Paper Corp. 146,902
------------
635,487
- ----------------------------------------------------------------------------------------------------------------------------
Personal Products - 0.5% 6,900 Mannatech, Inc. 101,637
21,000 NBTY, Inc. (b) 872,970
16,000 Playtex Products, Inc. (b) 230,240
------------
1,204,847
- ----------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals - 0.5% 30,900 Alpharma, Inc. Class A 744,690
7,200 Bradley Pharmaceuticals, Inc. (b) 148,176
14,200 MGI Pharma, Inc. (b) 261,422
8,900 Sciele Pharma, Inc. (b) 213,600
------------
1,367,888
- ----------------------------------------------------------------------------------------------------------------------------
Real Estate Investment 13,100 Acadia Realty Trust 327,762
Trusts (REITs) - 3.2% 1,250 BNP Residential Properties, Inc. 30,188
11,500 Colonial Properties Trust 539,120
10,900 Entertainment Properties Trust 636,996
8,600 Essex Property Trust, Inc. 1,111,550
52,400 Government Properties Trust, Inc. 555,440
34,700 Inland Real Estate Corp. 649,584
9,000 Kilroy Realty Corp. 702,000
13,400 LTC Properties, Inc. 365,954
16,200 Lexington Corporate Properties Trust 363,204
9,900 Mid-America Apartment Communities, Inc. 566,676
5,000 The Mills Corp. 100,000
33,600 MortgageIT Holdings, Inc. 495,600
4,600 National Retail Properties, Inc. 105,570
5,922 New Century Financial Corp. 187,076
6,600 PS Business Parks, Inc. 466,686
34,000 Senior Housing Properties Trust 832,320
9,500 Trustreet Properties, Inc. 160,075
------------
8,195,801
- ----------------------------------------------------------------------------------------------------------------------------
16
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
Road & Rail - 1.0% 20,300 Arkansas Best Corp. $ 730,800
16,233 Heartland Express, Inc. 243,820
13,700 Kansas City Southern (b) 397,026
20,975 Knight Transportation, Inc. 357,624
12,500 Landstar System, Inc. 477,250
21,200 RailAmerica, Inc. (b) 340,896
------------
2,547,416
- ----------------------------------------------------------------------------------------------------------------------------
Semiconductors & Semiconductor 27,100 ATMI, Inc. (b)(f) 827,363
Equipment - 3.7% 14,000 Actel Corp. (b) 254,240
14,900 Advanced Energy Industries, Inc. (b) 281,163
28,400 Axcelis Technologies, Inc. (b) 165,572
24,114 Brooks Automation, Inc. (b) 347,241
10,600 Cabot Microelectronics Corp. (b) 359,764
4,300 Cohu, Inc. 86,688
16,200 Cymer, Inc. (b) 711,990
6,000 DSP Group, Inc. (b) 130,200
8,200 Diodes, Inc. (b) 290,936
46,200 Exar Corp. (b) 600,600
10,700 FEI Co. (b) 282,159
18,900 Intevac, Inc. (b) 490,455
82,800 Kopin Corp. (b) 295,596
13,500 Kulicke & Soffa Industries, Inc. (b) 113,400
16,000 MKS Instruments, Inc. (b) 361,280
25,100 Microsemi Corp. (b) 493,215
1,200 Pericom Semiconductor Corp. (b) 13,764
17,300 Photronics, Inc. (b) 282,682
4,800 PortalPlayer, Inc. (b) 64,560
4,700 Rudolph Technologies, Inc. (b) 74,824
18,700 Skyworks Solutions, Inc. (b) 132,396
19,400 Standard Microsystems Corp. (b) 542,812
13,100 Supertex, Inc. (b) 514,175
32,900 Varian Semiconductor Equipment Associates, Inc. (b) 1,497,608
7,600 Veeco Instruments, Inc. (b) 142,348
------------
9,357,031
- ----------------------------------------------------------------------------------------------------------------------------
Software - 2.7% 18,500 Ansys, Inc. (b) 804,565
4,400 Catapult Communications Corp. (b) 39,512
5,900 EPIQ Systems, Inc. (b) 100,123
5,400 Factset Research Systems, Inc. 304,992
27,100 Hyperion Solutions Corp. (b) 973,974
12,100 JDA Software Group, Inc. (b) 166,617
13,200 Kronos, Inc. (b) 484,968
22,800 Manhattan Associates, Inc. (b) 685,824
1,400 MapInfo Corp. (b) 18,270
13,600 Micros Systems, Inc. (b) 716,720
19,000 Napster, Inc. (b) 68,970
20,400 Open Solutions, Inc. (b) 767,856
11,100 Phoenix Technologies Ltd. (b) 49,950
4,500 Quality Systems, Inc. 167,715
2,900 Radiant Systems, Inc. (b) 30,276
18,000 SPSS, Inc. (b) 541,260
17
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
50,300 Secure Computing Corp. (b) $ 329,968
10,300 THQ, Inc. (b) 334,956
10,950 Take-Two Interactive Software, Inc. (b) 194,472
------------
6,780,988
- ----------------------------------------------------------------------------------------------------------------------------
Specialty Retail - 4.0% 13,250 The Cato Corp. Class A 303,557
14,800 The Children's Place Retail Stores, Inc.(b) 940,096
27,950 Christopher & Banks Corp. 521,547
9,200 Cost Plus, Inc. (b) 94,760
23,400 Dress Barn, Inc. (b) 545,922
110,000 Eddie Bauer Holdings, Inc. (b) 996,600
17,800 Genesco, Inc. (b) 663,940
4,504 Golf Galaxy, Inc. (b) 83,955
15,100 Group 1 Automotive, Inc. 780,972
1,300 Guitar Center, Inc. (b) 59,098
19,600 Gymboree Corp. (b) 747,936
11,100 Hot Topic, Inc. (b) 148,074
11,500 Haverty Furniture Cos., Inc. 170,200
10,100 Hibbett Sporting Goods, Inc. (b) 308,353
7,625 Jos. A. Bank Clothiers, Inc. (b) 223,794
19,100 Men's Wearhouse, Inc. 730,766
22,200 Select Comfort Corp. (b) 386,058
12,600 Sonic Automotive, Inc. 365,904
9,150 Stage Stores, Inc. 278,069
11,400 Stein Mart, Inc. 151,164
12,500 Tractor Supply Co. (b) 558,875
10,900 Tween Brands, Inc. (b) 435,237
24,400 Zale Corp. (b) 688,324
------------
10,183,201
- ----------------------------------------------------------------------------------------------------------------------------
Textiles, Apparel & Luxury Goods - 2.5% 6,300 Ashworth, Inc. (b) 45,738
22,300 Brown Shoe Co., Inc. 1,064,602
6,000 CROCS, Inc. (b) 259,200
700 Heelys, Inc. (b) 22,477
21,400 K-Swiss, Inc. Class A 657,836
25,100 Kellwood Co. (f) 816,252
8,800 Movado Group, Inc. 255,200
9,300 Oxford Industries, Inc. 461,745
20,200 Phillips-Van Heusen Corp. 1,013,434
18,400 Quiksilver, Inc. (b) 289,800
20,800 Skechers U.S.A., Inc. Class A (b) 692,848
24,250 Wolverine World Wide, Inc. 691,610
------------
6,270,742
- ----------------------------------------------------------------------------------------------------------------------------
Thrifts & Mortgage Finance - 1.3% 26,200 BankAtlantic Bancorp, Inc. Class A 361,822
13,200 BankUnited Financial Corp. Class A 369,072
13,900 Downey Financial Corp. 1,008,862
5,600 Fidelity Bankshares, Inc. 222,152
45,100 Flagstar Bancorp, Inc. 669,284
9,700 Franklin Bank Corp. (b) 199,238
22,200 Fremont General Corp. 359,862
16,900 TrustCo Bank Corp. NY 187,928
------------
3,378,220
- ----------------------------------------------------------------------------------------------------------------------------
18
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
Shares
Industry Held Common Stocks Value
- ----------------------------------------------------------------------------------------------------------------------------
Tobacco - 0.2% 82,500 Alliance One International, Inc. (b) $ 582,450
- ----------------------------------------------------------------------------------------------------------------------------
Trading Companies & Distributors - 0.6% 11,225 Applied Industrial Technologies, Inc. 295,329
17,100 Kaman Corp. Class A 382,869
18,000 Watsco, Inc. 848,880
------------
1,527,078
- ----------------------------------------------------------------------------------------------------------------------------
Transportation Infrastructure - 0.0% 2,700 Aegean Marine Petroleum Network, Inc. (b) 44,280
- ----------------------------------------------------------------------------------------------------------------------------
Wireless Telecommunication 12,600 Price Communications Corp. (b) 265,230
Services - 0.1%
- ----------------------------------------------------------------------------------------------------------------------------
Total Common Stocks
(Cost - $199,767,167) - 96.2% 244,195,596
- ----------------------------------------------------------------------------------------------------------------------------
Exchange-Traded Funds
- ----------------------------------------------------------------------------------------------------------------------------
54,177 iShares S&P SmallCap 600 Index Fund 3,577,307
- ----------------------------------------------------------------------------------------------------------------------------
Total Exchange Traded Funds
(Cost - $3,331,161) - 1.4% 3,577,307
- ----------------------------------------------------------------------------------------------------------------------------
Face
Amount Fixed Income Securities
- ----------------------------------------------------------------------------------------------------------------------------
Electronic Equipment & Instruments - 0.1% $250,000 Flir Systems, Inc., 3% due 6/01/2023 (a) 384,375
- ----------------------------------------------------------------------------------------------------------------------------
Insurance - 0.3% 300,000 LandAmerica Financial Group, Inc.,
3.25% due 5/15/2034 (a)(c) 384,750
650,000 Selective Insurance Group, 1.616% due 9/24/2032 (a)(g) 484,250
------------
869,000
- ----------------------------------------------------------------------------------------------------------------------------
Total Fixed Income Securities
(Cost - $1,041,947) - 0.4% 1,253,375
- ----------------------------------------------------------------------------------------------------------------------------
Beneficial
Interest Short-Term Securities
- ----------------------------------------------------------------------------------------------------------------------------
LLC Cash Sweep Series, 5.26% (d)(e) 4,555,304
- ----------------------------------------------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost - $4,555,304) - 1.8% 4,555,304
- ----------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost - $208,695,579*) - 99.8% 253,581,582
Other Assets Less Liabilities - 0.2% 381,074
------------
Net Assets - 100.0% $253,962,656
============
* The cost and unrealized appreciation (depreciation) of investments as of
December 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost $ 209,881,171
=============
Gross unrealized appreciation $ 46,652,911
Gross unrealized depreciation (2,952,500)
-------------
Net unrealized appreciation $ 43,700,411
=============
(a) Convertible security.
(b) Non-income producing security.
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(d) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
BlackRock Liquidity Series,
LLC Cash Sweep Series $ (17,274,587) $ 377,647
--------------------------------------------------------------------------
19
Master Enhanced Small Cap Series
Schedule of Investments as of December 31, 2006
(e) Represents the current yield as of December 31, 2006.
(f) All or portion of security held as collateral in connection with open
financial futures contracts.
(g) Represents a step bond; the interest rate shown reflects the effective
yield at the time of purchase by the Series.
o For Series compliance purposes, the Series' industry classifications refer
to any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Series management. This definition may not apply for purposes
of this report, which may combine sub-classifications for reporting ease.
Industries are shown as a percent of net assets. These industry
classifications are unaudited.
o Financial futures contracts purchased as of December 31, 2006 were as
follows:
--------------------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Depreciation
--------------------------------------------------------------------------------------
46 Russell 2000 Index March 2007 $ 18,391,675 $ (108,975)
--------------------------------------------------------------------------------------
See Notes to Financial Statements.
20
STATEMENT OF ASSETS AND LIABILITIES
Master Enhanced Small Cap Series
As of December 31, 2006
- -----------------------------------------------------------------------------------------------------------------------------------
Assets: Investments in unaffiliated securities, at value (identified
cost-$204,140,275) ............................................................. $249,026,278
Investments in affiliated securities, at value (identified
cost-$4,555,304) ............................................................... 4,555,304
Cash ............................................................................ 1,203,148
Receivables:
Securities sold ........................................................ $ 2,017,528
Dividends .............................................................. 194,617
Contributions .......................................................... 51,921
Interest ............................................................... 4,623 2,268,689
------------
Prepaid expenses and other assets ............................................... 2,361
------------
Total assets .................................................................... 257,055,780
------------
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities: Payables:
Securities purchased ..................................................... 2,807,059
Variation margin ......................................................... 140,300
Withdrawals .............................................................. 119,274
Other affiliates ......................................................... 2,282
Investment adviser ....................................................... 2,021 3,070,936
------------
Accrued expenses ................................................................ 22,188
------------
Total liabilities ............................................................... 3,093,124
------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets: Net assets ...................................................................... $253,962,656
============
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets Investors' capital .............................................................. $209,185,628
Consist of: Unrealized appreciation-net ..................................................... 44,777,028
------------
Net assets ...................................................................... $253,962,656
============
See Notes to Financial Statements.
21
STATEMENT OF OPERATIONS
Master Enhanced Small Cap Series
For the Year Ended December 31, 2006
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Dividends (net of $1,279 foreign withholding tax) ............................... $ 2,169,002
Income: Interest (including $377,647 from affiliates) ................................... 409,933
------------
Total income .................................................................... 2,578,935
------------
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses: Accounting services ............................................................. $ 41,410
Professional fees ............................................................... 40,440
Custodian fees .................................................................. 29,456
Investment advisory fees ........................................................ 24,409
Printing and shareholder reports ................................................ 6,503
Trustees' fees and expenses ..................................................... 3,651
Pricing fees .................................................................... 705
Other ........................................................................... 6,267
------------
Total expenses .................................................................. 152,841
------------
Investment income-net ........................................................... 2,426,094
------------
- -----------------------------------------------------------------------------------------------------------------------------------
Realized & Realized gain on:
Unrealized Investments-net ......................................................... 29,496,238
Gain (Loss)-Net: Futures contracts-net ................................................... 2,373,328 31,869,566
------------
Change in unrealized appreciation/depreciation on:
Investments-net ......................................................... (320,772)
Futures contracts-net ................................................... 399,775 79,003
----------------------------
Total realized and unrealized gain-net .......................................... 31,948,569
------------
Net Increase in Net Assets Resulting from Operations ............................ $ 34,374,663
============
See Notes to Financial Statements.
22
Master Enhanced Small Cap Series
STATEMENTS OF CHANGES IN NET ASSETS
For the
Year Ended
December 31,
----------------------------
Increase (Decrease) in Net Assets: 2006 2005
- -----------------------------------------------------------------------------------------------------------------------------------
Operations: Investment income-net ........................................................... $ 2,426,094 $ 2,423,329
Realized gain-net ............................................................... 31,869,566 21,937,583
Change in unrealized appreciation/depreciation-net .............................. 79,003 (8,352,113)
------------ ------------
Net increase in net assets resulting from operations ............................ 34,374,663 16,008,799
------------ ------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net Capital Proceeds from contributions ..................................................... 44,107,231 39,523,028
Transactions: Fair value of withdrawals ....................................................... (56,700,552) (45,115,732)
------------ ------------
Net decrease in net assets derived from capital transactions .................... (12,593,321) (5,592,704)
------------ ------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets: Total increase in net assets .................................................... 21,781,342 10,416,095
Beginning of year ............................................................... 232,181,314 221,765,219
------------ ------------
End of year ..................................................................... $253,962,656 $232,181,314
============ ============
See Notes to Financial Statements.
23
Master Enhanced Small Cap Series
FINANCIAL HIGHLIGHTS
The following ratios have For the
been derived from information Year Ended
provided in the financial December 31, For the Period
statements. ----------------------------------------------- December 10, 2002+
2006 2005 2004 2003 to December 31, 2002
- -------------------------------------------------------------------------------------------------------- --------------------
Total Investment Total investment return ........... 15.23% 7.45% 22.50% 40.06% (1.90%)++
Return: ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------- -------- --------------------
Ratios to Expenses .......................... .06% .07% .07% .11% .06% *
Average Net ======== ======== ======== ======== ========
Assets: Investment income-net ............. .99% 1.10% 1.07% .80% 1.33% *
======== ======== ======== ======== ========
- ------------------------------------------------------------------------------------------- -------- --------------------
Supplemental Net assets, end of period
Data: (in thousand) ..................... $253,963 $232,181 $221,765 $167,017 $118,808
======== ======== ======== ======== ========
Portfolio turnover ................ 160.21% 120.53% 111.89% 88.79% 9.91%
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------------------- --------------------
* Annualized.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
24
Master Enhanced Small Cap Series
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Master Enhanced Small Cap Series (the "Series"), a non-diversified investment
company, is part of Quantitative Master Series Trust (the "Trust"). The Trust is
registered under the Investment Company Act of 1940, as amended, and is
organized as a Delaware statutory trust. The Declaration of Trust permits the
Trustees to issue nontransferable interests in the Series, subject to certain
limitations. The financial statements of the Series are prepared in conformity
with U.S. generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. The following is a summary of significant accounting policies
followed by the Series.
(a) Valuation of investments - Equity securities that are held by the Series
that are traded on stock exchanges or the NASDAQ Global Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available asked
price for short positions. In cases where equity securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the Trust.
Long positions traded in the over-the-counter ("OTC") market, NASDAQ Capital
Market or Bulletin Board are valued at the last available bid price or yield
equivalent obtained from one or more dealers or pricing services approved by the
Board of Trustees of the Trust. Short positions traded in the OTC market are
valued at the last available asked price. Portfolio securities that are traded
both in the OTC market and on a stock exchange are valued according to the
broadest and most representative market.
Options written or purchased are valued at the last sale price in the case of
exchange-traded options. Options traded in the OTC market are valued at the last
asked price (options written) or the last bid price (options purchased). Swap
agreements are valued based upon quoted fair valuations received daily by the
Series from a pricing service or counterparty. Financial futures contracts and
options thereon, which are traded on exchanges, are valued at their last sale
price as of the close of such exchanges. Obligations with remaining maturities
of 60 days or less are valued at amortized cost unless BlackRock Advisors, LLC
(the "Manager"), an indirect, wholly owned subsidiary of BlackRock, Inc.,
believes that this method no longer produces fair valuations. Valuation of other
short-term investment vehicles is generally based on the net asset value of the
underlying investment vehicle or amortized cost.
Repurchase agreements are valued at cost plus accrued interest. The Series
employs pricing services to provide certain securities prices for the Series.
Securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Trust, including valuations furnished by the
pricing services retained by the Trust, which may use a matrix system for
valuations. The procedures of a pricing service and its valuations are reviewed
by the officers of the Trust under the general supervision of the Board of
Trustees of the Trust. Such valuations and procedures will be reviewed
periodically by the Board of Trustees of the Trust.
Generally, trading in foreign securities, as well as U.S. government securities,
money market instruments and certain fixed income securities is substantially
completed each day at various times prior to the close of business on the New
York Stock Exchange ("NYSE"). The values of such securities used in computing
the net assets of the Series are determined as of such times. Foreign currency
exchange rates will generally be determined as of the close of business on the
NYSE. Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of business on the NYSE that may not be reflected in the computation of
the Series' net assets. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such
25
securities, those securities will be valued at their fair value as determined in
good faith by the Trust's Board of Trustees or by the Manager using a pricing
service and/or procedures approved by the Trust's Board of Trustees.
(b) Derivative financial instruments - The Series may engage in various
portfolio investment strategies to provide liquidity or as a proxy for a direct
investment in securities underlying the Series' Index. 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 Series may purchase or sell
financial futures contracts and options on such financial futures
contracts. Financial futures contracts are contracts for delayed
delivery of securities at a specific future date and at a specific
price or yield. Upon entering into a contract, the Series deposits
and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the
contract, the Series agrees to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the
contract. Such receipts or payments are known as variation margin
and are recorded by the Series as unrealized gains or losses. When
the contract is closed, the Series 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 Options - The Series may purchase and write call and put options.
When the Series writes an option, an amount equal to the premium
received by the Series is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of
an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Series enters into a closing transaction), the
Series realizes a gain or loss on the option to the extent of the
premiums received or paid (or loss or gain to the extent the cost of
the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(c) Income taxes - The Series is classified as a partnership for federal income
tax purposes. As such, each investor in the Series is treated as owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Series. Therefore, no federal income tax
provision is required. Under the applicable foreign tax law, a withholding tax
may be imposed on interest, dividends and capital gains at various rates. It is
intended that the Series' assets will be managed so an investor in the Series
can satisfy the requirements of Subchapter M of the Internal Revenue Code.
(d) Security transactions and investment income - Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis.
(e) Recent accounting pronouncements - In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109."
FIN 48 prescribes the minimum recognition threshold a tax position must meet in
connection with accounting for uncertainties in income tax positions taken or
expected to be taken by an entity including mutual funds before being measured
and recognized in the financial statements. Adoption of FIN 48 is required for
the last net asset value calculation in the first required financial statement
reporting period for fiscal years beginning after December 15, 2006. The impact
on the Series' financial statements, if any, is currently being assessed.
26
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, "Fair Value Measurements" ("FAS 157"), was issued and is effective for
fiscal years beginning after November 15, 2007. FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the implications of
FAS 157. At this time, its impact on the Series' financial statements has not
been determined.
2. Investment Advisory Agreement and Transactions with Affiliates:
On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. ("MLIM"), and its affiliates, including Fund Asset
Management, L.P. ("FAM") with BlackRock, Inc. to create a new independent
company. Merrill Lynch has a 49.8% economic interest and a 45% voting interest
in the combined company and The PNC Financial Services Group, Inc., has
approximately a 34% economic and voting interest. The new company operates under
the BlackRock name and is governed by a board of directors with a majority of
independent members.
On September 29, 2006, shareholders of the investors of the Series approved a
new Investment Advisory Agreement for the Trust with the Manager. BlackRock
Advisors, Inc. was recently reorganized into a limited liability company and
renamed BlackRock Advisors, LLC. The new Investment Advisory Agreement between
the Trust and the Manager became effective on September 29, 2006. Prior to
September 29, 2006, FAM was the Manager. The general partner of FAM is Princeton
Services, Inc. ("PSI"), an indirect, wholly owned subsidiary of Merrill Lynch,
which is the limited partner.
The Manager is responsible for the management of the Series' portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Series. For such services, the
Series pays a fee at an annual rate of .01% of the average daily value of the
Series' net assets. In addition, the Manager has entered into a Sub-Advisory
Agreement with BlackRock Investment Management, LLC ("BIM"), an affiliate of the
Manager, under which the Manager pays the Sub-Advisor for services it provides a
monthly fee at annual rate that is a percentage of the management fee paid by
the Series to the Manager.
In addition, MLPF&S received $3,647 in commissions on the execution of portfolio
security transactions for the Series for the year ended December 31, 2006.
For the year ended December 31, 2006, the Series reimbursed FAM and the Manager
$4,064 and $1,128, respectively, for certain accounting services.
Prior to September 29, 2006, certain officers and/or trustees of the Trust were
officers and/or directors of MLIM, PSI, FAM, and/or Merrill Lynch.
Commencing September 29, 2006, certain officers and/or trustees of the Trust are
officers and/or directors of BlackRock, Inc. or its affiliates.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2006 were $387,972,732 and $378,151,474, respectively.
4. Short-Term Borrowings:
The Trust on behalf of the Series, along with certain other funds managed by the
Manager and its affiliates (or FAM and its affiliates), is a party to a
$500,000,000 credit agreement with a group of lenders. The Series may borrow
under the credit agreement to Series shareholder redemptions and for other
lawful purposes other than for leverage. The Series may borrow up to the maximum
amount allowable under the Series' current prospectus and statement of
additional information, subject to various other legal, regulatory or
contractual limits. On November 22, 2006, the credit agreement was renewed for
one year under substantially the same terms. The Series pays a commitment fee of
..06% per annum based on the Series' 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 Series' election, the federal
27
funds rate plus .35% or a base rate as defined in the credit agreement. The
Series did not borrow under the credit agreement during the year ended December
31, 2006.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Investors and Board of Trustees of
Quantitative Master Series Trust:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Master Enhanced Small Cap Series, one of the
portfolios constituting the Quantitative Master Series Trust (the "Trust"), as
of December 31, 2006, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the respective
periods then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Master
Enhanced Small Cap Series of the Quantitative Master Series Trust as of December
31, 2006, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and its
financial highlights for each of the respective periods then ended, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte & Touche LLP
Princeton, New Jersey
February 26, 2007
28
QUANTITATIVE MASTER SERIES TRUST
Master Enhanced Small Cap Series
BlackRock Investment Advisory Agreement - Matters Considered by the Board
The following disclosure appeared in the June 30, 2006 Semi-Annual Report of the
Series and is the discussion referred to in "New BlackRock Sub-Advisory
Agreement - Matters Considered by the Board" below. The term "Investment
Adviser" as used herein refers to Fund Asset Management, L.P.
New BlackRock Investment Advisory Agreement - Matters Considered by the Board
In connection with the Transaction between Merrill Lynch and BlackRock,
the Trust's Board of Trustees considered a new investment advisory agreement
(the "New Investment Advisory Agreement") between the Trust and BlackRock
Advisors, Inc. ("BlackRock Advisors"). If the New Investment Advisory Agreement
is approved by shareholders, it will become effective upon the closing of the
Transaction, which is expected in the third quarter of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic
and in-person meetings held during April and May 2006. The Board, including the
independent trustees, approved the New Investment Advisory Agreement on May 8,
2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent trustees, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the New Investment Advisory
Agreement. The additional information was provided in advance of the May 2006
meeting. In addition, the independent trustees consulted with their counsel and
counsel for the Trust on numerous occasions, discussing, among other things, the
legal standards and certain other considerations relevant to the trustees'
deliberations.
At the Board meetings, the trustees discussed with Merrill Lynch
management and certain BlackRock representatives the Transaction, its strategic
rationale and BlackRock's general plans and intentions regarding the Series and
the Trust. At these Board meetings, representatives of Merrill Lynch and
BlackRock made presentations to and responded to questions from the Board. The
trustees also inquired about the plans for and anticipated roles and
responsibilities of certain employees and officers of the Investment Adviser and
certain affiliates being transferred to BlackRock in connection with the
Transaction. The independent trustees of the Board also conferred separately and
with their counsel about the Transaction and other matters related to the
Transaction on a number of occasions, including in connection with the April and
May 2006 meetings. After the presentations and after reviewing the written
materials provided, the independent trustees met in executive sessions with
their counsel to consider the New Investment Advisory Agreement.
In connection with the Board's review of the New Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the trustees about a variety
of matters. The advice included the following, among other matters:
o that there is not expected to be any diminution in the nature,
quality and extent of services provided to the Series and its
shareholders by BlackRock Advisors, including compliance services;
29
o that operation of New BlackRock as an independent investment
management firm will enhance its ability to attract and retain
talented professionals;
o that the Series should benefit from having access to BlackRock's
state of the art technology and risk management analytic tools,
including investment tools, provided under the BlackRock
Solutions(R) brand name;
o that BlackRock has no present intention to alter any applicable
expense waivers or reimbursements currently in effect and, while it
reserves the right to do so in the future, it would seek the
approval of the Board before making any changes;
o that in connection with the Transaction, Merrill Lynch and BlackRock
have agreed to conduct, and use reasonable best efforts to cause
their respective affiliates to conduct, their respective businesses
in compliance with the conditions of Section 15(f) of the Investment
Company Act of 1940 (the "1940 Act") in relation to any public funds
advised by BlackRock or the Investment Adviser (or its affiliates),
respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they have a different financial
interest in the matters that were being considered than do Series
shareholders.
The trustees considered the information provided by Merrill Lynch and
BlackRock above, and, among other factors, the following:
o the potential benefits to Series shareholders from being part of a
combined fund family with BlackRock-sponsored funds, including
possible economies of scale and access to investment opportunities;
o the reputation, financial strength and resources of BlackRock and
its investment advisory subsidiaries and the anticipated financial
strength and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Series' total advisory
fees will not increase by virtue of the New Investment Advisory
Agreement, but will remain the same;
o that in May and August 2005, the Board had performed a full annual
review of the investment advisory agreement currently in effect for
the Series (the "Current Investment Advisory Agreement") as required
by the 1940 Act and has determined that the Investment Adviser has
the capabilities, resources and personnel necessary to provide the
advisory and administrative services currently provided to the
Series; and that the advisory and/or management fees paid by the
Series, taking into account any applicable agreed-upon fee waivers
and breakpoints, represent reasonable compensation to the Investment
Adviser in light of the services provided, the costs to the
Investment Adviser of providing those services, economies of scale,
the fees and other expenses paid by similar funds (including
information provided by Lipper Inc. ["Lipper"]), and such other
matters as the trustees have considered relevant in the exercise of
their reasonable judgment; and
o that Merrill Lynch agreed to pay all expenses of the Series in
connection with the Board's consideration of the New Investment
Advisory Agreement and related agreements and all costs of
shareholder approval of the New
30
Investment Advisory Agreement and as a result the Series would bear
no costs in obtaining shareholder approval of the New Investment
Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed
the nature, scope and quality of the services to be provided to the Series by
the personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting, marketing services
and assistance in meeting legal and regulatory requirements. In its review of
the New Investment Advisory Agreement, the Board also considered a range of
information in connection with its oversight of the services to be provided by
BlackRock Advisors and its affiliates. Among the matters considered were: (a)
fees (in addition to management fees) to be paid to BlackRock Advisors and its
affiliates by the Series; (b) operating expenses of the Series paid to third
parties; (c) the resources devoted to and compliance reports relating to the
investment objective, policies and restrictions of the Series, and its
compliance with the Trust's Code of Ethics and BlackRock Advisors' compliance
policies and procedures; and (d) the nature, cost and character of
non-investment management services to be provided by BlackRock Advisors and its
affiliates.
In the period prior to the Board meetings to consider renewal of the
Current Investment Advisory Agreement, the Board had requested and received
materials specifically relating to the Current Investment Advisory Agreement.
These materials included (a) information compiled by Lipper on the fees and
expenses and the investment performance of the Series as compared to a
comparable group of funds as classified by Lipper; (b) a discussion by the
portfolio management team for the Series on investment strategies used by the
Series during its most recent fiscal year; (c) information on the profitability
to the Investment Adviser of the Current Investment Advisory Agreement and other
payments received by the Investment Adviser and its affiliates from the Series
and the Trust; and (d) information provided by the Investment Adviser concerning
services related to the valuation and pricing of portfolio holdings of the
Series, allocation of brokerage fees, portfolio turnover statistics, and direct
and indirect benefits to the Investment Adviser and its affiliates from their
relationship with the Series and the Trust.
In their deliberations, the trustees considered information received in
connection with their most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The trustees did not
identify any particular information that was all-important or controlling, and
each trustee attributed different weights to the various factors. The trustees,
including a majority of the independent trustees, concluded that the terms of
the New Investment Advisory Agreement are appropriate, that the fees to be paid
are reasonable in light of the services to be provided to the Series, and that
the New Investment Advisory Agreement should be approved and recommended to
Series shareholders.
Nature, Quality and Extent of Services Provided. The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of the
Series, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's investment advisory services and the investment performance of the
Series, but also considered certain areas in which both the Investment Adviser
and the Series receive services as part of the Merrill Lynch complex. The Board
compared the performance of the Series - both including and excluding the
effects of fees and expenses - to the performance of a comparable group of
funds, and the performance of a relevant index or combination of indexes. While
the Board reviews performance data at least quarterly, consistent with the
Investment Adviser's investment goals, the Board attaches more importance to
performance over relatively long periods of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be
provided by BlackRock Advisors under the New Investment Advisory Agreement, the
trustees considered, among other things, the expected impact of the Transaction
on the
31
operations, facilities, organization and personnel of BlackRock Advisors and how
it would affect the Series; the ability of BlackRock Advisors to perform its
duties after the Transaction; and any anticipated changes to the current
investment and other practices of the Series.
The trustees were given information with respect to the potential benefits
to the Series and its shareholders from having access to BlackRock's state of
the art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
The trustees were advised that, as a result of Merrill Lynch's equity
interest in BlackRock after the Transaction, the Trust will continue to be
subject to restrictions concerning certain transactions involving Merrill Lynch
affiliates (for example, transactions with a Merrill Lynch broker-dealer acting
as principal) absent revised or new regulatory relief. The trustees were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief. There can be no
assurance that such relief will be obtained.
Based on their review of the materials provided and the assurances they
had received from the management of Merrill Lynch and of BlackRock, the trustees
determined that the nature and quality of services to be provided to the Series
under the New Investment Advisory Agreement were expected to be as good or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in personnel
following the Transaction and the combination of the operations of the
Investment Adviser and its affiliates with those of BlackRock. The trustees
noted that if current portfolio managers or other personnel cease to be
available, the Board would consider all available options, which could include
seeking the investment advisory or other services of BlackRock affiliates.
Accordingly, the trustees concluded that, overall, they were satisfied at the
present time with assurances from BlackRock and BlackRock Advisors as to the
expected nature, extent and quality of the services to be provided to the Series
under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability. It was noted that, in
conjunction with the recent review of the Current Investment Advisory Agreement,
the trustees had received, among other things, a report from Lipper comparing
the fees, expenses and performance of the Series to those of a peer group
selected by Lipper, and information as to the fees charged by the Investment
Adviser or its affiliates to other registered investment company clients for
investment management services. The Board reviewed the contractual management
fee rate and actual management fee rate of the Series as a percentage of total
assets at common asset levels - the actual rate includes advisory fees and the
effects of any fee waivers - compared to the other funds in its Lipper category.
They also compared the total expenses of the Series to those of other comparable
funds. The information showed that the Series had fees and expenses within the
range of fees and expenses of comparable funds. The Board concluded that the
management fee and fee rate and overall expense ratio of the Series are
reasonable compared to those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock
Advisors under the New Investment Advisory Agreement, the trustees considered,
among other things, whether advisory fees or other expenses would change as a
result of the Transaction. Based on their review of the materials provided and
the fact that the New Investment Advisory Agreement is substantially similar to
the Current Investment Advisory Agreement in all material respects, including
the rates of compensation, the trustees determined that the Transaction should
not increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. The trustees noted
that it was not possible to predict with certainty New BlackRock's future
profitability from its relationship with the Series.
The trustees discussed with BlackRock Advisors its general methodology to
be used in determining New BlackRock's profitability with respect to its
relationship with the Series and the Trust. The trustees noted that they expect
to receive profitability information from New BlackRock on at least an annual
basis and thus be
32
in a position to evaluate whether any adjustments in fees and/or fee breakpoints
of the Series would be appropriate.
Fees and Economies of Scale. The Board considered the extent to which
economies of scale might be realized as the assets of the Series increase and
whether there should be changes in the management fee rate or structure in order
to enable the Series to participate in these economies of scale. The Board
determined that changes were not currently necessary and that the Series
appropriately participated in these economies of scale.
In reviewing the Transaction, the trustees considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the trustees determined
that as a result of the Transaction, the total advisory fees of the Series would
be no higher than the fees under the Current Investment Advisory Agreement. The
trustees noted that in conjunction with their most recent deliberations
concerning the Current Investment Advisory Agreement, the trustees had
determined that the total fees for advisory and administrative services for the
Series were reasonable in light of the services provided. It was noted that in
conjunction with the recent review of the Current Investment Advisory Agreement,
the trustees had received, among other things, a report from Lipper comparing
the fees, expenses and performance of the Series to those of a peer group
selected by Lipper, and information as to the fees charged by the Investment
Adviser to other registered investment company clients for investment management
services. The trustees concluded that, because the rates for advisory for the
Series would be no higher than its current fee rates, the proposed management
fee structure, including any fee waivers, was reasonable and that no additional
changes were currently necessary.
Fall-Out Benefits. In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, the trustees
considered whether the Transaction would have an impact on the fall-out benefits
received by the Investment Adviser by virtue of the Current Investment Advisory
Agreement. Based on their review of the materials provided, including materials
received in connection with their most recent approval or continuance of the
Current Investment Advisory Agreement, and their discussions with management of
the Investment Adviser and BlackRock, the trustees determined that those
benefits could include increased ability for BlackRock to distribute shares of
its funds and other investment products and to obtain research services using
the Series' portfolio transaction brokerage commissions. The trustees noted that
any benefits were difficult to quantify with certainty at this time, and
indicated that they would continue to evaluate them going forward.
Investment Performance. The trustees considered investment performance for
the Series. The trustees compared the Series' performance -- both including and
excluding the effects of fees and expenses -- to the performance of a comparable
group of funds, and the performance of a relevant index or combination of
indexes. The comparative information received from Lipper showed Series
performance at various levels within the range of performance of comparable
funds over different time periods. While the Board reviews performance data at
least quarterly, consistent with the Investment Adviser's investment goals, the
Board attaches more importance over relatively long periods of time, typically
three to five years. The trustees believed the performance of the Series was
satisfactory. Also, the trustees took into account the investment performance of
funds currently advised by BlackRock Advisors. The Board considered comparative
information from Lipper which showed that the performance of the funds advised
by BlackRock Advisors was within the range of performance of comparable funds
over different time periods. The Board noted BlackRock's considerable investment
management experience and capabilities, but was unable to predict what effect,
if any, consummation of the Transaction would have on the future performance of
the Series.
Conclusion. After the independent trustees of the Trust deliberated in
executive session, the entire Board, including the independent trustees,
approved the New Investment Advisory Agreement on behalf of the Series,
concluding that the advisory fee rate was reasonable in relation to the services
provided and that the
33
New Investment Advisory Agreement was in the best interests of the shareholders.
In approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Sub-Advisory Agreement - Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at
which the Board discussed and approved the New Investment Advisory Agreement,
the Board of Trustees, including the independent trustees, also discussed and
approved a contingent sub-advisory agreement (the "Contingent Sub-Advisory
Agreement") between the Investment Adviser and BlackRock Advisors (the
"BlackRock Sub-Adviser"). The Contingent Sub-Advisory Agreement is intended to
ensure that the Series operates with efficient portfolio management services
until the closing of the Transaction, in the event that the Board deems it
necessary and in the best interests of a series and its shareholders that the
BlackRock Sub-Adviser assist in managing the operations of the series during the
interim period until the closing of the Transaction. If shareholders approve the
Contingent Sub-Advisory Agreement, it will take effect only upon recommendation
from the Investment Adviser and upon subsequent approval of the Board in the
period up to the closing of the Transaction. The effectiveness of the Contingent
Sub-Advisory Agreement, therefore, would be contingent on further Board approval
after shareholders approve it. Pursuant to each Contingent Sub-Advisory
Agreement, the BlackRock Sub-Adviser would receive a monthly fee from the
Investment Adviser equal to 50% of the advisory fee received by the Adviser. The
Investment Adviser would pay the BlackRock Sub-Adviser out of its own resources.
There would be no increase in Series expenses as a result of the Contingent
Sub-Advisory Agreement.
In making its approval at the May in-person meeting, the Board considered
the Contingent Sub-Advisory Agreement in conjunction with the New Investment
Advisory Agreement and reviewed the same information and factors discussed
above. The Board also considered in conjunction with the Contingent Sub-Advisory
Agreement the necessity of ensuring that the Series operates with effective
management services until the closing of the Transaction. In reviewing the
sub-advisory fee rate provided in the Contingent Sub-Advisory Agreement, the
Board took note of the fact that both the Investment Adviser and the BlackRock
Sub-Adviser would have significant responsibilities under their respective
advisory agreements. The Investment Adviser would remain responsible for
oversight of the operations and administration of the Series and the BlackRock
Sub-Adviser would provide advisory services to the Series under the Contingent
Sub-Advisory Agreement. The Board also took into account the expected short
duration of the term of any Contingent Sub-Advisory Agreement and the fact that
total advisory fees paid by the Series would not increase as a result of the
Contingent Sub-Advisory Agreement. Under all of the circumstances, the Board
concluded that it was a reasonable allocation of fees for the BlackRock
Sub-Adviser to receive 50% of the advisory fee paid by the Series to the
Investment Adviser.
After the independent trustees deliberated in executive session, the entire
Board, including the independent trustees, approved the Contingent Sub-Advisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that the Contingent Sub-Advisory Agreement was in the best
interests of shareholders.
New BlackRock Sub-Advisory Agreement - Matters Considered by the Board
At an in-person meeting held on August 16-17, 2006, the Board of Trustees,
including the independent trustees, discussed and approved the sub-advisory
agreement with respect to the Series between BlackRock Advisors, LLC (previously
organized as BlackRock Advisors, Inc.) ("BlackRock Advisors") and BlackRock
Investment Management, LLC (the "Sub-Adviser") (the "BlackRock Sub-Advisory
Agreement"). The BlackRock Sub-Advisory Agreement became effective on September
29, 2006, at the same time the New Investment Advisory Agreement with BlackRock
Advisors (which had been approved by the Series' shareholders) became effective.
Pursuant to the BlackRock Sub-Advisory Agreement, the Sub-Adviser receives
a monthly fee from BlackRock Advisors at an annual rate equal to 74% of the
advisory fee received by BlackRock Advisors from the Series. BlackRock Advisors
pays the Sub-
34
Adviser out of its own resources, and there is no increase in Series expenses as
a result of the BlackRock Sub-Advisory Agreement.
In approving the BlackRock Sub-Advisory Agreement at the August in-person
meeting, the Board reviewed its considerations in connection with its approval
of the New Investment Advisory Agreement in May 2006. The Board relied on the
same information and considered the same factors as those discussed above in
connection with the approval of the New Investment Advisory Agreement, and came
to the same conclusions. In reviewing the sub-advisory fee rate provided for in
the BlackRock Sub-Advisory Agreement, the Board noted the fact that both
BlackRock Advisors and the Sub-Adviser have significant responsibilities under
their respective advisory agreements. Under the New Investment Advisory
Agreement, BlackRock Advisors remains responsible for the overall management of
the Series and for oversight of the Series' operations and administration. Under
the BlackRock Sub-Advisory Agreement, the Sub-Adviser provides advisory services
to the Series and is responsible for the day-to-day management of the Series'
portfolio. The Board also took into account the fact that there is no increase
in total advisory fees paid by the Series as a result of the BlackRock
Sub-Advisory Agreement. Based on its considerations, the Board concluded that it
was a reasonable allocation of fees for the Sub-Adviser to receive a fee at an
annual rate equal to 74% of the advisory fee paid by the Series to BlackRock
Advisors.
35
Officers and Trustees
Number of
Funds and
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held with Of Time Overseen by Held by
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustees
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to Vice Chairman and Director of BlackRock, Inc., 122 Funds None
Doll, Jr.* Princeton, NJ and present Global Chief Investment Officer for Equities, 168 Portfolios
08543-9011 Trustee Chairman of the BlackRock Retail Operating
Age: 52 Committee, and member of the BlackRock Executive
Committee since 2006; President of the funds
advised by Merrill Lynch Investment Managers, L.P.
("MLIM") and its affiliates ("MLIM/FAM-advised
funds") from 2005 to 2006 and Chief Investment
Officer thereof from 2001 to 2006; President of
MLIM and Fund Asset Management, L.P. ("FAM") from
2001 to 2006; Co-Head (Americas Region) thereof
from 2000 to 2001 and Senior Vice President from
1999 to 2001; President and Director of Princeton
Services, Inc. ("Princeton Services") and
President of Princeton Administrators, L.P.
("Princeton Administrators") from 2001 to 2006;
Chief Investment Officer of OppenheimerFunds, Inc.
in 1999 and Executive Vice President thereof from
1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
BlackRock Advisors, LLC and its affiliates act as an investment adviser. Mr. Doll is an "interested person," as
described in the Investment Company Act, of the Fund based on his positions with BlackRock, Inc. and its
affiliates. Trustees serve until their resignation, removal or death, or until December 31 of the year in which
they turn 72. As Trust President, Mr. Doll serves at the pleasure of the Board of Trustees.
====================================================================================================================================
Independent Trustees*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald W. P.O. Box 9095 Trustee 2002 to General Partner of The Burton Partnership, 21 Funds Knology,
Burton Princeton, NJ present Limited partnership (an investment partnership) 38 Portfolios Inc., (tele-
08543-9095 since 1979; Managing General Partner of The South communica-
Age: 62 Atlantic Venture Funds since 1983; Member of the tions);
Investment Advisory Council of the Florida State Symbion, Inc.
Board of Administration since 2001. (healthcare);
Capital
Southwest
(financial)
- ------------------------------------------------------------------------------------------------------------------------------------
John P.O. Box 9095 Trustee 2005 to President and Chief Executive Officer of 21 Funds Cabot Corpor-
Francis Princeton, NJ present Allmerica Financial Corporation (financial 38 Portfolios ation
O'Brien 08543-9095 services holding company) from 1995 to 2002 and (chemicals);
Age: 63 Director from 1995 to 2003; President of LKQ Corpora-
Allmerica Investment Management Co., Inc. tion (auto
(investment adviser) from 1989 to 2002; Director parts manufa-
from 1989 to 2002 and Chairman of the Board from cturing); TJX
1989 to 1990; President, Chief Executive Officer Companies,
and Director of First Allmerica Financial Life Inc.
Insurance Company from 1989 to 2002 and Director (retailer)
of various other Allmerica Financial companies
until 2002; Director from 1989 to 2006, Member of
the Governance Nominating Committee from 2004 to
2006, Member of the Compensation Committee from
1989 to 2006 and Member of the Audit Committee
from 1990 to 2004 of ABIOMED; Director, Member of
the Governance and Nomination Committee and
Member of the Audit Committee of Cabot
Corporation since 1990; Director and Member of
the Audit Committee and Compensation Committee of
LKQ Corporation since 2003; Lead Director of TJX
Companies, Inc. since 1996; Trustee of the Woods
Hole Oceanographic Institute since 2003;
Director, Ameresco, Inc. since 2006; Director,
Boston Lyric Opera since 2002.
- ------------------------------------------------------------------------------------------------------------------------------------
36
Number of
Funds and
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held with Of Time Overseen by Held by
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
David H. P.O. Box 9095 Trustee 2003 to Director, Ruckleshaus Institute and Haub School 21 Funds None
Walsh Princeton, NJ present of Natural Resources at the University of Wyoming 38 Portfolios
08543-9095 since 2006; Consultant with Putnam Investments
Age: 65 from 1993 to 2003 and employed in various
capacities therewith from 1973 to 1992; Director,
Massachusetts Audubon Society from 1990 to 1997;
Director, The National Audubon Society from 1998
to 2005; Director, The American Museum of Fly
Fishing since 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
Fred G. P.O. Box 9095 Trustee 2000 to Managing Director of FGW Associates since 1997; 21 Funds Watson
Weiss** Princeton, NJ present Vice President, Planning, Investment and 38 Portfolios Pharmaceu-
08543-9095 Development of Warner Lambert Co. from 1979 to ticals, Inc.
Age: 65 1997; Director of the Michael J. Fox Foundation (pharmace-
for Parkinson's Research since 2000; Director of utical
BTG International, Plc (a global technology company)
commercialization company) since 2001.
- ------------------------------------------------------------------------------------------------------------------------------------
* Trustees serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Board of Trustees and the Audit Committee.
====================================================================================================================================
Trust Officers
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 1997 to Managing Director of BlackRock, Inc.
Burke Princeton, NJ President present since 2006; Managing Director of
08543-9011 and and 1999 Merrill Lynch Investment Managers, L.P.
Age: 46 Treasurer to and Fund Asset Management, L.P. in
present 2006; First Vice President of MLIM and
FAM from 1997 to 2005 and Treasurer
thereof from 1999 to 2006; Vice
President of MLIM and FAM from 1990 to 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
Debra L. P.O. Box 9011 Vice 2005 to Director of BlackRock, Inc. since 2006;
Jelilian Princeton, NJ President present Director of MLIM from 1999 to 2006.
08543-9011
Age: 39
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey L. P.O. Box 9011 Vice 2005 to Director of BlackRock, Inc. since 2006;
Russo Princeton, NJ President present Director of MLIM from 2004 to 2006;
08543-9011 Vice President of MLIM from 1994 to 2004.
Age: 39
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O Box 9011 Fund Chief 2004 to Managing Director of BlackRock, Inc. and Fund
Hiller Princeton, NJ Compliance present Chief Compliance Officer since 2006; Chief
08534 Officer Compliance Officer of the MLIM/FAM-advised funds
Age: 55 and First Vice President and Chief Compliance
Officer of MLIM (Americas Region) from 2004 to
2006; Chief Compliance Officer of the IQ Funds
since 2004; Global Director of Compliance at
Morgan Stanley Investment Management from 2002 to
2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from
2000 to 2002; Chief Compliance Officer at Soros
Fund Management in 2000; Chief Compliance Officer
at Prudential Financial from 1995 to 2000; Senior
Counsel in the Securities and Exchange
Commission's Division of Enforcement in
Washington, D.C. from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
37
Officers and Trustees (concluded)
Position(s) Length
Held with Of Time
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Trust Officers (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director of BlackRock, Inc. since 2006; Director
Pellegrino Princeton, NJ present (Legal Advisory) of MLIM from 2002 to 2006; Vice
08543-9011 President of MLIM from 1999 to 2002; Attorney
Age: 46 associated with MLIM from 1997 to 2006; Secretary
of MLIM, FAM, FAM Distributors, Inc. and
Princeton Services from 2004 to 2006.
- ------------------------------------------------------------------------------------------------------------------------------------
* Officers of the Trust serve at the pleasure of the Board of Trustees.
Further information about the Trust's Officers and Trustees is available in the Trust's Statement of Additional
Information, which can be obtained without charge by calling 1-800-441-7762.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
JPMorgan Chase Bank
3 Chase MetroTech Center
Brooklyn, NY 11245
Transfer Agent
PFPC Inc.
Wilmington, DE 19809
Availability of Quarterly Schedule of Investments
The Series files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Series' Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Series' Forms
N-Q may also be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room
may be obtained by calling 1-800-SEC-0330.
- --------------------------------------------------------------------------------
A description of the policies and procedures that the Series uses to determine
how to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-441-7762; (2) at
www.blackrock.com; and (3) on the Securities and Exchange Commission's Web site
at http://www.sec.gov. Information about how the Series voted proxies relating
to securities held in the Series' portfolio during the most recent 12-month
period ended December 31st is available (1) at www.blackrock.com; and (2) on the
Securities and Exchange Commission's Web site at http://www.sec.gov.
- --------------------------------------------------------------------------------
38
Proxy Results
During the six-month period ended December 31, 2006, Master Enhanced Small Cap
Series of Quantitative Master Series Trust's interest holders voted on the
following proposals, which were approved at a special interest holders' meeting
on September 29, 2006. A description of the proposals and number of units of
interest voted are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
Units of Interest Units of Interest Units of Interest
Voted For Voted Against Voted Abstain
- ------------------------------------------------------------------------------------------------------------------------------
To approve a new investment advisory agreement with
BlackRock Advisors, Inc. 248,624,375 0 0
- ------------------------------------------------------------------------------------------------------------------------------
To approve a contingent subadvisory agreement with
BlackRock Advisors, Inc. 248,624,375 0 0
- ------------------------------------------------------------------------------------------------------------------------------
39
Item 2 - Code of Ethics - The registrant has adopted 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
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge at
www.blackrock.com.
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) Donald W.
Burton, (2) Laurie Simon Hodrick (resigned as of May 1, 2006), (3) John
F. O'Brien, (4) David H. Walsh and (5) Fred G. Weiss.
The registrant's board of directors has determined that Laurie Simon
Hodrick qualifies as a financial expert pursuant to Item 3(c)(4) of
Form N-CSR.
Ms. Hodrick has a thorough understanding of generally accepted
accounting principals, financial statements, and internal controls and
procedures for financial reporting. Ms. Hodrick earned a Ph.D. in
economics and has taught courses in finance for over 15 years. Her
M.B.A.-level course centers around the evaluation and analysis of
firms' corporate financial statements. She has also taught in financial
analysts' training programs. Ms. Hodrick has also worked with several
prominent corporations in connection with the analysis of financial
forecasts and projections and analysis of the financial statements of
those companies, serving on the Financial Advisory Council of one of
these major corporations. She has also served as the Treasurer and
Finance Chair of a 501(c)(3) organization. Ms. Hodrick has published a
number of articles in leading economic and financial journals and is
the associate editor of two leading finance journals.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending December 31, 2006 - $32,700
Fiscal Year Ending December 31, 2005 - $32,000
(b) Audit-Related Fees - Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $0
(c) Tax Fees - Fiscal Year Ending December 31, 2006 - $5,800
Fiscal Year Ending December 31, 2005 - $5,500
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2006 - $3,071,450
Fiscal Year Ending December 31, 2005 - $5,577,771
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's 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.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,739,500, 0%
Item 5 - Audit Committee of Listed Registrants - Not Applicable
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - As of September 29, 2006, with the conclusion of the combination of
Merrill Lynch's asset management business with BlackRock, the registrant
was migrated to BlackRock's trading and compliance monitoring systems,
and various personnel changes occurred. In conjunction with these
business improvements, there were no changes in the registrants internal
control over financial reporting (as defined in Rule 30a-3(d) under Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year of
the period covered by this report that has materially affected, or is
reasonably likely to affect, the registrant's internal control over
financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Master Enhanced Small Cap Series of Quantitative Master Series Trust
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Master Enhanced Small Cap Series of Quantitative Master Series Trust
Date: February 20, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Master Enhanced Small Cap Series of Quantitative Master Series Trust
Date: February 20, 2007
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Master Enhanced Small Cap Series of Quantitative Master Series Trust
Date: February 20, 2007