Annual report BlackRock European Absolute Alpha Fund
For the year ended 28 February 2019 Contents General Information
Manager & Registrar General Information 2 BlackRock Fund Managers Limited About the Fund 3 12 Throgmorton Avenue, London EC2N 2DL
Investment Objective & Policy 3 Member of The Investment Association and authorised and regulated by the Financial Conduct Authority (“FCA”).
Fund Managers 3 Directors of the Manager G D Bamping* C L Carter M B Cook (appointed 2 May 2018) W I Cullen* Significant Events 3 R A Damm (resigned 31 December 2018) R A R Hayes A M Lawrence Risk and Reward Profile 4 L E Watkins (appointed 16 May 2018, resigned 1 March 2019) M T Zemek*
Performance Table 5 * Non-executive Director.
Classification of Investments 6 Trustee* & Custodian The Bank of New York Mellon (International) Limited Investment Report 7 One Canada Square, London E14 5AL
Performance Record 9 Authorised by the Prudential Regulation Authority and regulated by the FCA and the Prudential Report on Remuneration 10 Regulation Authority. * On 18 June 2018 the Trustee changed from BNY Mellon Trust & Depositary (UK) Limited to The Bank of New York Mellon (International) Limited. Portfolio Statement 16
Statement of Total Return 28 Investment Manager BlackRock Investment Management (UK) Limited Statement of Change in Net Assets Attributable to Unitholders 28 12 Throgmorton Avenue, London EC2N 2DL
Balance Sheet 29 Authorised and regulated by the FCA.
Notes to Financial Statements 30 Securities Lending Agent Statement of Manager’s Responsibilities 51 BlackRock Advisors (UK) Limited 12 Throgmorton Avenue, London EC2N 2DL Statement of the Trustee’s Responsibilities in Respect of the Fund and Report of the 52 Trustee to the Unitholders of the Fund for the Year Ended 28 February 2019 Authorised and regulated by the FCA.
Independent Auditor’s Report 53 Auditor Supplementary Information 56 Ernst & Young LLP Atria One, 144 Morrison Street, Edinburgh EH3 8EX
BlackRock’s proxy voting agent is ISS (Institutional Shareholder Services).
This Report relates to the packaged products of and is issued by: BlackRock Fund Managers Limited 12 Throgmorton Avenue, London EC2N 2DL Telephone: 020 7743 3000 Dealing and Investor Services: 0800 44 55 22 blackrock.co.uk
For your protection, telephone calls are usually recorded.
1 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 2 About the Fund Significant Eventscontinued
BlackRock European Absolute Alpha Fund (the “Fund”) is a UCITS scheme under the COLL Sourcebook. Changes to the Trustee The Fund was established on 27 March 2009 and authorised by the FCA on 27 March 2009. The Fund’s FCA On 18 June 2018 the Trustee changed from BNY Mellon Trust & Depositary (UK) Limited to The Bank of New product reference number is 496621. York Mellon (International) Limited.
Investment Objective & Policy Risk and Reward Profile The Fund seeks to achieve a positive absolute return for investors and, as such, the Fund will not be managed against any European equity index. The Fund will seek to achieve this investment objective by taking long Lower risk Higher risk positions and using derivatives to take synthetic long and synthetic short investment positions. Typically lower rewards Typically higher rewards Unit Class The Fund will be managed with the aim of delivering absolute (more than zero) returns on a twelve month basis in any market conditions. However, an absolute return is not guaranteed over a twelve month or any P Accumulation 1 2 3 4 5 6 7 period and the Fund may experience periods of negative return. The Fund’s capital is at risk. D Accumulation 1 2 3 4 5 6 7
The Fund primarily aims to gain investment exposure to equities and equity-related securities of, or giving • The risk indicator was calculated incorporating historical data and may not be a reliable indication of the exposure to, companies incorporated or listed in the European Economic Area and Switzerland. In order future risk profile of the Fund. to gain this exposure, the Fund invests primarily in derivatives, equities and equity-related securities and, • The risk category shown is not guaranteed and may change over time. when determined appropriate, cash and near cash. The Fund may also invest in other transferable securities, permitted money market instruments, permitted deposits and units in collective investment schemes. • The lowest category does not mean risk free. • The use of derivatives will impact the value of the Fund and may expose the Fund to a higher degree of risk. Derivatives are highly sensitive to changes in the value of the asset on which they are based and can Fund Managers increase the size of losses and gains, resulting in greater fluctuations in the value of the Fund. The impact to the Fund can be greater where derivatives are used in an extensive or complex way.
For more information on this, please see the Fund’s Key Investor Information Documents (“KIIDs”), which are As at 28 February 2019, the Fund Managers of the Fund are David Tovey and Stefan Gries. available at www.blackrock.com.
Significant Events
Registrar Fees Between 30 September 2016 and 13 April 2018 the prospectus incorrectly stated the registrar fee applicable to all unit classes (except Class X units) in the Fund as 0.05% of the relevant unit class net asset value. The correct registrar fee for the unit classes in these funds (excluding Class X units) is (and has always been) 0.15% of the relevant unit class net asset value. This correct amount (0.15% of the relevant unit class net asset value) has been charged throughout the aforementioned period and the relevant KIIDs and Annual/Interim reports have correctly recorded the amount charged on the relevant unit classes. The Prospectus was corrected on 13 April 2018.
Changes in the Directors of the Manager M B Cook was appointed as a Director effective 2 May 2018. L E Watkins was appointed as a Director effective 16 May 2018, and resigned as a Director effective 1 March 2019. R A Damm resigned as a Director effective 31 December 2018.
3 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 4 Performance Table Classification of Investments
The following charts provide an analysis of the portfolio weightings as at 28 February 2019 and 28 February For the year For the three years For the five years to 28.2.2019 to 28.2.2019 to 28.2.2019 2018 by their respective equity and Contracts for Differences (“CFDs”) sector allocations. TOTAL RETURN Due to the nature of the Fund’s investment strategy which involves taking long positions and using derivatives (with net income reinvested) to take synthetic long and synthetic short investment positions, the % holdings are based on the underlying notional value of any such synthetic positions. This leads to a higher % value compared to an equivalent value Class D Accumulation Units based on the accounting or fair value of such synthetic positions. BlackRock European Absolute Alpha Fund +4.8% +5.2% +12.4% Please note the positions below include both long and short positions and are based on a synthetic net asset †# 3 month Sterling LIBOR +0.7% +1.6% +2.7% value created by using the notional gross absolute value. All Fund figures quoted are based on bid-to-bid dealing prices (the price at which units are sold) and are calculated net of fees. Performance returns are cumulative. All returns are in Sterling. † The Fund is not managed in reference to an index. For purely reference purposes we are showing the 3 month Sterling LIBOR as an indicator of the general return on cash investments over the period. # Figures from Index Vendor. 28 February 2019 Aerospace & Defence 2.59% (Long CFDs 2.59%) (28.2.2018 1.94%) All financial investments involve an element of risk. Therefore, the value of your investment and the income Alternative Energy 0.68% (Short CFDs 0.68%) (28.2.2018 0.00%) from it will vary and the return of your initial investment amount cannot be guaranteed. Changes in exchange Automobiles & Parts 4.76% (Short CFDs 4.76%) (28.2.2018 4.91%) rates may cause the value of an investment to fluctuate. Past performance is not a guide to future performance Banks 2.52% (Short CFDs 2.52%) (28.2.2018 0.75%) and should not be the sole factor of consideration when selecting a product. Construction & Materials 0.91% (Long CFDs 0.91%) (28.2.2018 0.78%) Electronic & Electrical Equipment 2.31% (Equities 0.20%, Short CFDs 0.72%, Long CFDs 1.39%) (28.2.2018 3.66%) Financial Services 8.36% (Equities 4.00%, Short CFDs 2.92%, Long CFDs 1.44%) (28.2.2018 2.93%) Fixed Line Telecommunications 2.46% (Short CFDs 2.46%) (28.2.2018 0.00%) Food & Beverage 1.91% (Equities 1.91%) (28.2.2018 2.07%) Food & Drug Retailers 2.32% (Short CFDs 2.32%) (28.2.2018 5.24%) General Retailers 4.75% (Equities 1.17%, Short CFDs 3.58%) (28.2.2018 4.05%) Health Care Equipment & Services 8.60% (Equities 4.55%, Short CFDs 3.87%, Long CFDs 0.18%) (28.2.2018 6.15%) Household Goods & Home Construction 2.33% (Short CFDs 2.33%) (28.2.2018 2.26%) Industrial Engineering 6.15% (Equities 2.64%, Short CFDs 1.77%, Long CFDs 1.74%) (28.2.2018 9.45%) 28 February 2018 Industrial Transportation 3.79% (Equities 2.15%, Short CFDs 1.64%) (28.2.2018 5.01%) Media 3.37%(Equities 2.47%, Short CFDs 0.90%) (28.2.2018 5.02%) Non-Life Insurance 1.78% (Long CFDs 1.78%) (28.2.2018 1.62%) Oil & Gas Producers 0.00% (28.2.2018 2.16%) Personal Goods 3.22% (Equities 1.82%, Short CFDs 1.40%) (28.2.2018 6.07%) Pharmaceuticals & Biotechnology 5.56% (Equities 3.32%, Short CFDs 2.24%) (28.2.2018 8.29%) Support Services 6.22% (Short CFDs 2.54%, Long CFDs 3.68%) (28.2.2018 5.29%) Technology Hardware & Equipment 0.99% (Short CFDs 0.99%) (28.2.2018 3.39%) Travel & Leisure 3.02% (Equities 0.83%, Short CFDs 2.19%) (28.2.2018 2.52%) Other 21.40% (Equities 6.23%, Short CFDs 12.27%, Long CFDs 2.90%) (28.2.2018 16.44%)
At the end of the period, the Fund also held 7.32% in bonds (28.2.2018: 5.35%) and 55.50% in other Money Market Instruments such as certificate of deposits and commercial papers (28.2.2018: 51.00%). These instruments are used both to provide cover for derivative positions such as CFDs and also with the intention of generating a higher rate of return than if derivatives were covered by cash held in a current account. For this purpose, cover of CFDs is measured by reference to the current notional exposure of the CFD, in other words, the economic interest in the security underlying the CFD, although only the difference between the price on opening the position and the price on closing the position is settled.
5 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 6 Investment Report
Summary of Performance over the Year Fund Performance and Activity continued The Fund returned 4.8%* over the year to 28 February 2019. Over the six-month period to 28 February 2019, Over the period we reduced exposure in the long book, exiting positions where we felt fundamentals had the Fund returned 1.4%*. deteriorated. Our long book continues to consist of higher quality companies with strong management, attractive returns on capital investment and robust free cashflow profiles. The Fund is managed on an absolute return basis and not relative to any benchmark. For reference purposes, the 3-month Sterling LIBOR returned 0.7% for the year to 28 February 2019 and 0.4% for the six-month period We added exposure in the short book, entering positions in highly leveraged companies with poorly executing to 28 February 2019. business models across a number of end markets. At the end of the period the Fund had a negative stance towards the European share market, with a net exposure of -4.7%. Market Review European shares fell in sterling terms, as they were weighed down by political uncertainty and signs of slowing Outlook growth. In the fourth quarter of 2018, GDP in the eurozone fell to 0.2% (1.2% annualised), while Germany’s Global political uncertainty remains high and continues to impact markets adversely. The European market economy contracted in the third quarter, feeling the effects of lower exports, among other factors. The US-China is set to face a number of issues this year, not least the impending Brexit date. However, we believe a lot has trade dispute also affected investor confidence, particularly in the German automobile sector. At a policy been priced into equity markets, including a greater potential of recession than fundamentals currently point level, the European Central Bank ended its asset-purchase scheme in December, as was expected. Interest to. We see opportunity for a gentle increase in European growth as we move through the year. This could rates were unchanged throughout the period. In politics, Brexit negotiations were fruitless, which proved an be driven by fiscal stimulus, reducing impediments, as well as the resilience of the consumer. We believe impediment for UK stocks. Meanwhile, Italy’s populist coalition proposed a budget that fell foul of European a selective, stock-focused approach could provide meaningful uplift to investors’ portfolios in this higher- Commission standards, putting pressure on Italian stocks. In France, thousands took to the streets to protest volatility environment. against fuel taxes and austerity. March 2019 Fund Performance and Activity
In such unsettled market conditions, the Fund produced a positive return net of fees, driven primarily by the short book (where we expect share prices to fall). The Fund had increased its exposure to short positions over the year; we saw a growing number of opportunities as multiple end markets, particularly in the semiconductor and automobile sectors, began to slow. These positions contributed positively to performance in the fourth quarter as profit warnings and weaker earnings caused share prices to fall.
Short positions in energy and materials proved particularly profitable during the period. One of the largest contributors to performance was a short position in an energy company that exhibits a high level of financial leverage and poor cashflow control. This company warned on profitability at the end of the year as the fall in oil price and increasing competitive pressure weighed on its operations.
The long book (where we expect share prices to rise) marginally detracted from performance over the period as markets fell sharply at the end of 2018. The largest detractor was a long position in industrial company Stabilus. Given the business’ exposure to the automobile sector, shares came under pressure when data showed a slowing in automobile production in the third quarter. The departure of the CEO also weighed on the shares. Shares in British American Tobacco proved negative for performance as competitive pressures, from vaping product company JUUL, and regulatory overhangs led to a lack of investor confidence in the shares. With fundamentals changing the risk-reward profile of the stock, we trimmed the position over the period.
* Performance figures quoted are based on bid-to-bid dealing prices (the price at which units are sold). Performance is calculated net of fees and reported for the Fund’s class D Accumulation Units.
7 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 8 Performance Record Report on Remuneration
Comparative Table The below disclosures are made in respect of the remuneration policies of the BlackRock group (“BlackRock”), as they apply to BlackRock Fund Managers Limited (the “Manager”). The disclosures are made in accordance P Accumulation Units D Accumulation Units with the Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to For the year For the year For the year For the year For the year For the year undertakings for collective investment in transferable securities (“UCITS”), as amended, including in particular to 28.2.2019 to 28.2.2018 to 28.2.2017 to 28.2.2019 to 28.2.2018 to 28.2.2017 by Directive 2014/91/EU of the European Parliament and of the council of 23 July 2014, (the “Directive”), the Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit “Guidelines on sound remuneration policies under the UCITS Directive and AIFMD” issued by the European
Change in net assets per unit Securities and Markets Authority, the Financial Conduct Authority Handbook SYSC 19E: The UCITS Remuneration Code (the “UCITS Remuneration Code”), and COLL 4.5.7 R(7). Opening net asset value per unit 126.7 122.1 128.1 134.6 128.7 134.0
Return before operating charges 7.41 6.75 (3.81) 7.75 7.20 (3.98) BlackRock’s UCITS Remuneration Policy (the “UCITS Remuneration Policy”) will apply to the EEA entities Operating charges (2.23) (2.16) (2.16) (1.34) (1.33) (1.28) within the BlackRock group authorised as a manager of alternative investment funds in accordance with the Return after operating charges 5.18 4.59 (5.97) 6.41 5.87 (5.26) Directive, and will ensure compliance with the requirements of Article 14b of the Directive and the UCITS Remuneration Code. Distributions 0.00 0.00* 0.00* 0.00 0.00* 0.00*
Retained distributions on accumulation units 0.00 0.00* 0.00* 0.00 0.00* 0.00* The Manager has adopted the UCITS Remuneration Policy, a summary of which is set out below.
Closing net asset value per unit 131.9 126.7 122.1 141.0 134.6 128.7 Remuneration Governance After direct transaction costs of (0.03) (0.07) (0.16) (0.03) (0.08) (0.17) BlackRock’s remuneration governance in EMEA operates as a tiered structure which includes: (a) the Management Development and Compensation Committee (“MDCC”) (which is the global, independent Performance remuneration committee for BlackRock, Inc. and all of its subsidiaries, including the Manager); and (b) the Return after charges1 4.09% 3.76% (4.66)% 4.76% 4.56% (3.93)% Manager’s board of directors (the “Manager’s Board”). These bodies are responsible for the determination
Other information of BlackRock’s remuneration policies.
Closing net asset value (£000’s) 18,539 4,099 5,740 60,664 37,264 79,172 (a) MDCC Closing number of units 14,057,790 3,235,226 4,700,622 43,019,797 27,690,254 61,499,408 The MDCC’s purposes include: Operating charges2 1.72% 1.72% 1.72% 0.97% 1.00% 0.97%
Direct transaction costs3 0.02% 0.06% 0.13% 0.02% 0.06% 0.13% • providing oversight of: Performance fee4 0.74% 0.21% 0.03% 0.75% 0.00% 0.01% – BlackRock’s executive compensation programmes;
Prices Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit – BlackRock’s employee benefit plans; and Highest offer unit price 139.4 135.4 135.6 141.9 137.2 135.4 – such other compensation plans as may be established by BlackRock from time to time for which the Lowest bid unit price 126.1 121.2 120.3 134.0 127.8 126.6 MDCC is deemed as administrator;
1 The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in • reviewing and discussing the compensation discussion and analysis included in the BlackRock, Inc. the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/trustee and entry/exit charges paid to an underlying collective annual proxy statement with management and approving the MDCC’s report for inclusion in the proxy investment scheme (if any). statement; 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund’s purchase and sale of equity instruments. See note 14 for further details. • reviewing, assessing and making reports and recommendations to the BlackRock, Inc. board of directors 4 A performance fee is payable in respect of Class P Accumulation units and Class D Accumulation units with regards to any outperformance as per the calculation methodology outlined in the Prospectus. (the “BlackRock, Inc. Board”) as appropriate on BlackRock’s talent development and succession planning, * At 28 February 2019, 28 February 2018 and 28 February 2017, a net shortfall after taxation arose because the expenses and taxation of the Fund exceeded the Fund’s with the emphasis on performance and succession at the highest management levels; and revenue. Accordingly, no distribution has been made. • in accordance with applicable UK and European regulations and guidance, to act as the Remuneration Committee for BlackRock’s EMEA regulated entities.
The MDCC directly retains its own independent compensation consultant, Semler Brossy Consulting Group LLC, who has no relationship with BlackRock, Inc. or the BlackRock, Inc. Board that would interfere with its ability to provide independent advice to the MDCC on compensation matters.
9 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 10 Report on Remuneration continued
The BlackRock, Inc. Board has determined that all of the members of the MDCC are “independent” within The MDCC regularly considers management’s recommendation as to the percentage of preincentive operating the meaning of the listing standards of the New York Stock Exchange (NYSE), which requires each meet a income that will be accrued and reflected as a compensation expense throughout the year for the cash portion “non-employee director” standard. of the total annual bonus pool (the “accrual rate”). The accrual rate of the cash portion of the total annual bonus pool may be modified by the MDCC during the year based on its review of the financial information described The MDCC held 10 meetings during 2018. The MDCC charter is available on BlackRock, Inc.’s website above. The MDCC does not apply any particular weighting or formula to the information it considers when (www.blackrock.com). determining the size of the total bonus pool or the accruals made for the cash portion of the total bonus pool.
Through its regular reviews, the MDCC continues to be satisfied with the principles of BlackRock’s Following the end of the performance year, the MDCC approves the final bonus pool amount. compensation policy and approach. As part of the year-end review process the Enterprise Risk and Regulatory Compliance departments report to (b) The Manager’s Board the MDCC on any activities, incidents or events that warrant consideration in making compensation decisions. The Manager’s Board has the task of supervising and providing oversight of the UCITS Remuneration Policy as it applies to the Manager and its Identified Staff. Individuals are not involved in setting their own remuneration.
The Manager’s Board (through independent review by the relevant control functions) remains satisfied with the Control functions implementation of the UCITS Remuneration Policy as it applies to the Manager and its Identified Staff. Each of the control functions (Enterprise Risk, Legal & Compliance, and Internal Audit) has its own organisational structure which is independent of the business units. The head of each control function is either a member of Decision-making process the Global Executive Committee (“GEC”), the global management committee, or has a reporting obligation to Remuneration decisions for employees are made once annually in January following the end of the performance the board of directors of BlackRock Group Limited, the parent company of all of BlackRock’s EMEA regulated year. This timing allows full-year financial results to be considered along with other non-financial goals entities, including the Manager. and objectives. Although the framework for remuneration decision-making is tied to financial performance, significant discretion is used to determine individual variable remuneration based on achievement of strategic Functional bonus pools are determined with reference to the performance of each individual function. The and operating results and other considerations such as management and leadership capabilities. remuneration of the senior members of control functions is directly overseen by the MDCC.
No set formulas are established and no fixed benchmarks are used in determining annual incentive awards. In Link between pay and performance determining specific individual remuneration amounts, a number of factors are considered including non-financial There is a clear and well defined pay-for-performance philosophy and compensation programmes which are goals and objectives and overall financial and investment performance. These results are viewed in the aggregate designed to meet the following key objectives as detailed below: without any specific weighting, and there is no direct correlation between any particular performance measure and the resulting annual incentive award. The variable remuneration awarded to any individual(s) for a particular • appropriately balance BlackRock’s financial results between shareholders and employees; performance year may also be zero. • attract, retain and motivate employees capable of making significant contributions to the long-term success of the business; Annual incentive awards are paid from a bonus pool. • align the interests of senior employees with those of shareholders by awarding BlackRock Inc.’s stock as a significant part of both annual and long-term incentive awards; The size of the projected bonus pool, including cash and equity awards, is reviewed throughout the year by the MDCC and the final total bonus pool is approved after year-end. As part of this review, the MDCC receives actual • control fixed costs by ensuring that compensation expense varies with profitability; and projected financial information over the course of the year as well as final year-end information. The financial • link a significant portion of an employee’s total compensation to the financial and operational performance information that the MDCC receives and considers includes the current year projected income statement of the business as well as its common stock performance; and other financial measures compared with prior year results and the current year budget. The MDCC • discourage excessive risk-taking; and additionally reviews other metrics of BlackRock’s financial performance (e.g., net inflows of AUM and investment • ensure that client interests are not negatively impacted by remuneration awarded on a short-term, mid-term performance) as well as information regarding market conditions and competitive compensation levels. and/or long-term basis.
11 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 12 Report on Remuneration continued
Driving a high-performance culture is dependent on the ability to measure performance against objectives, Supplementary to the annual discretionary bonus as described above, equity awards from the “Partner Plan” values and behaviours in a clear and consistent way. Managers use a 5-point rating scale to provide an and “Targeted Equity Award Plan” are made to select senior leaders to provide greater linkage with future overall assessment of an employee’s performance, and employees also provide a self-evaluation. The overall, business results. The long-term incentive awards have been established individually to provide meaningful final rating is reconciled during each employee’s performance appraisal. Employees are assessed on the incentive for continued performance over a multi-year period recognising the scope of the individual’s role, manner in which performance is attained as well as the absolute performance itself. business expertise and leadership skills.
In keeping with the pay-for-performance philosophy, ratings are used to differentiate and reward individual Selected senior leaders are eligible to receive performance-adjusted equity-based awards from the “BlackRock performance – but don’t pre-determine compensation outcomes. Compensation decisions remain Performance Incentive Plan” (“BPIP”). Awards made from the BPIP have a three-year performance period discretionary and are made as part of the year-end compensation process. based on a measurement of As Adjusted Operating Margin1 and Organic Revenue Growth2. Determination of pay-out will be made based on the firm’s achievement relative to target financial results at the conclusion of When setting remuneration levels other factors are considered, as well as individual performance, which the performance period. The maximum number of shares that can be earned is 165% of the award in those may include: situations where both metrics achieve pre-determined financial targets. No shares will be earned where the firm’s financial performance in both of the above metrics is below a pre-determined performance threshold. • the performance of the Manager, the funds managed by the Manager and/or the relevant functional These metrics have been selected as key measures of shareholder value which endure across market cycles. department; • factors relevant to an employee individually; relationships with clients and colleagues; teamwork; skills; any A limited number of investment professionals have a portion of their annual discretionary bonus (as described conduct issues; and, subject to any applicable policy, the impact that any relevant leave of absence may above) awarded as deferred cash that notionally tracks investment in selected products managed by the have on contribution to the business); employee. The intention of these awards is to align investment professionals with the investment returns of the products they manage through the deferral of compensation into those products. Clients and external • the management of risk within the risk profiles appropriate for BlackRock’s clients; evaluators have increasingly viewed more favourably those products where key investors have “skin in the • strategic business needs, including intentions regarding retention; game” through significant personal investments. • market intelligence; and • criticality to business. Identified Staff The UCITS Remuneration Policy sets out the process that will be applied to identify staff as Identified Staff, A primary product tool is risk management and, while employees are compensated for strong performance in being categories of staff of the Manager, including senior management, risk takers, control functions and their management of client assets, they are required to manage risk within the risk profiles appropriate for their any employee receiving total remuneration that takes them into the same remuneration bracket as senior clients. Therefore, employees are not rewarded for engaging in high-risk transactions outside of established management and risk takers, whose professional activities have a material impact on the risk profiles of the parameters. Remuneration practices do not provide undue incentives for short-term planning or short-term Manager or of the funds it manages. financial rewards, do not reward unreasonable risk and provide a reasonable balance between the many and substantial risks inherent within the business of investment management, risk management and advisory services. The list of Identified Staff will be subject to regular review, being formally reviewed in the event of, but not limited to: BlackRock operates a total compensation model for remuneration which includes a base salary, which is contractual, and a discretionary bonus scheme. • organisational changes; • new business initiatives; BlackRock operates an annual discretionary bonus scheme. Although all employees are eligible to be • changes in significant influence function lists; considered for a discretionary bonus, there is no contractual obligation to make any award to an employee • changes in role responsibilities; and under its discretionary bonus scheme. In exercising discretion to award a discretionary bonus, the factors listed above (under the heading “Link between pay and performance”) may be taken into account in addition • revised regulatory direction. to any other matters which become relevant to the exercise of discretion in the course of the performance year.
Discretionary bonus awards for all employees, including executive officers, are subject to a guideline that determines the portion paid in cash and the portion paid in BlackRock, Inc. stock and subject to additional vesting/clawback conditions. Stock awards are subject to further performance adjustment through variation in BlackRock, Inc.’s share price over the vesting period. As total annual compensation increases, a greater portion is deferred into stock. The MDCC adopted this approach in 2006 to substantially increase the retention value and shareholder alignment of the compensation package for eligible employees, including the executive 1 As Adjusted Operating Margin: As reported in BlackRock’s external filings, reflects adjusted Operating Income divided by Total Revenue net of distribution and servicing expenses and amortisation of deferred sales commissions. officers. The portion deferred into stock vests into three equal instalments over the three years following grant. 2 Organic Revenue Growth: Equal to net new base fees plus net new Aladdin revenue generated in the year (in dollars).
13 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 14 Report on Remuneration continued Portfolio Statement at 28 February 2019
Quantitative Remuneration Disclosure Holding or Market % of The Manager is required under UCITS to make quantitative disclosures of remuneration. These disclosures Nominal Value Total Net are made in line with BlackRock’s interpretation of currently available regulatory guidance on quantitative Value Investment £000’s Assets remuneration disclosures. As market or regulatory practice develops BlackRock may consider it appropriate EQUITIES – 26.02%; 28.2.2018 31.70% to make changes to the way in which quantitative remuneration disclosures are calculated. Where such changes are made, this may result in disclosures in relation to a fund not being comparable to the disclosures BELGIUM – 0.00%; 28.2.2018 1.46% made in the prior year, or in relation to other BlackRock fund disclosures in that same year. Media – 0.00%; 28.2.2018 1.46% DENMARK – 5.36%; 28.2.2018 5.98% Disclosures are provided in relation to (a) the staff of the Manager; (b) staff who are senior management; and (c) staff who have the ability to materially affect the risk profile of the Fund, including individuals who, Financial Services – 2.75%; 28.2.2018 0.00% although not directly employed by the Manager, are assigned by their employer to carry out services directly 59,188 Novo Nordisk class ‘B’ shares 2,181 2.75 for the Manager. Food & Beverage – 0.82%; 28.2.2018 0.76% 11,706 Royal Unibrew 649 0.82 All individuals included in the aggregated figures disclosed are rewarded in line with BlackRock’s Health Care Equipment & Services – 0.00%; 28.2.2018 0.99% remuneration policy for their responsibilities across the relevant BlackRock business area. As all individuals have a number of areas of responsibilities, only the portion of remuneration for those individuals’ services Industrial Transportation – 1.79%; 28.2.2018 1.65% attributable to the Fund is included in the aggregate figures disclosed. 22,659 DSV 1,416 1.79 Pharmaceuticals & Biotechnology – 0.00%; 28.2.2018 2.58% Members of staff and senior management of the Manager typically provide both UCITS and non-UCITS related FINLAND – 0.46%; 28.2.2018 1.57% services in respect of multiple funds, clients and functions of the Manager and across the broader BlackRock group. Therefore, the figures disclosed are a sum of each individual’s portion of remuneration attributable to Industrial Engineering – 0.46%; 28.2.2018 1.57% the Manager according to an objective apportionment methodology which acknowledges the multiple-service 29,969 Wartsila 366 0.46 nature of the Manager. Accordingly the figures are not representative of any individual’s actual remuneration FRANCE – 1.74%; 28.2.2018 3.64% or their remuneration structure. Automobiles & Parts – 0.00%; 28.2.2018 0.44%
The amount of the total remuneration awarded by the Manager to its staff which has been attributed to the Food & Beverage – 0.77%; 28.2.2018 1.28% Manager’s UCITS-related business in respect of the Manager’s financial year ending 31 December 2018 is 6,228 Rémy Cointreau 609 0.77 GBP 20.5 million. This figure is comprised of fixed remuneration of GBP 1.5 million and variable remuneration General Retailers – 0.97%; 28.2.2018 0.97% of GBP 19.0 million. There were a total of 59 beneficiaries of the remuneration described above. 1,862 Kering 770 0.97 Household Goods & Home Construction – 0.00%; 28.2.2018 0.95% The amount of the aggregate remuneration awarded by the Manager, which has been attributed to the Manager’s UCITS-related business in respect of the Manager’s financial year ending 31 December 2018, to GERMANY – 4.06%; 28.2.2018 5.57% its senior management was GBP 0.6 million, and to other members of its staff whose actions have a material Automobiles & Parts – 0.00%; 28.2.2018 1.05% impact on the risk profile of the Manager’s UCITS-related business was GBP 19.9 million. General Industrials – 0.81%; 28.2.2018 0.00% 8,436 Knorr-Bremse 638 0.81 Health Care Equipment & Services – 2.08%; 28.2.2018 1.35% 28,232 Fresenius Medical Care 1,649 2.08 Industrial Engineering – 0.00%; 28.2.2018 0.38% Industrial Transportation – 0.00%; 28.2.2018 0.91% Personal Goods – 0.00%; 28.2.2018 1.24% Software & Computer Services – 1.17%; 28.2.2018 0.64% 11,510 SAP 928 1.17
15 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 16 Portfolio Statement continued
Holding or Market % of Holding or Market % of Nominal Value Total Net Nominal Value Total Net Value Investment £000’s Assets Value Investment £000’s Assets
IRELAND – 0.69%; 28.2.2018 0.98% BONDS – 42.63%; 28.2.2018 22.28% Travel & Leisure – 0.69%; 28.2.2018 0.98% UK STERLING – 42.63%; 28.2.2018 20.80% 127,306 Irish Continental 545 0.69 UK Sterling Denominated ECP Bonds* – 35.31%; 28.2.2018 16.93% ITALY – 0.16%; 28.2.2018 0.00% £2,000,000 Agence 0% Commercial Paper 7/3/2019 2,000 2.53 £2,000,000 Albion 0% European Commercial Paper 23/4/2019 1,998 2.52 Electronic & Electrical Equipment – 0.16%; 28.2.2018 0.00% £1,000,000 BRED Banque Populaire 0% Commercial Paper 8/4/2019 999 1.26 14,656 Carel Industries 130 0.16 £2,000,000 Collateralized III 0% Commercial Paper 11/6/2019 1,995 2.52 LUXEMBOURG – 1.02%; 28.2.2018 2.11% £1,000,000 Dekabank Deutsche 0% Commercial Paper 18/4/2019 999 1.26 Industrial Engineering – 1.02%; 28.2.2018 2.11% £2,000,000 DNB Bank 0% Commercial Paper 4/4/2019 1,999 2.52 18,468 Stabilus 804 1.02 £2,000,000 FMS Wertmanagement 0% Commercial Paper 11/4/2019 1,998 2.52 £2,000,000 Managed 0% Commercial Paper 4/3/2019 2,000 2.53 NETHERLANDS – 0.79%; 28.2.2018 2.02% £2,000,000 Nieuw Amsterdam 0% Commercial Paper 25/3/2019 1,999 2.52 Chemicals – 0.79%; 28.2.2018 0.00% £2,000,000 Nordea Bank 0% Commercial Paper 7/5/2019 1,997 2.52 10,620 IMCD 626 0.79 £1,000,000 OP Corporate Bank 0% Commercial Paper 17/4/2019 999 1.26 £1,000,000 Op Corporate Bank 0% Commercial Paper 6/3/2019 1,000 1.27 Media – 0.00%; 28.2.2018 1.41% £2,000,000 Paccar Financial 0% Commercial Paper 15/3/2019 1,999 2.52 Technology Hardware & Equipment – 0.00%; 28.2.2018 0.61% £1,000,000 Sumitomo Mitsui Banking 0% Commercial Paper 25/4/2019 999 1.26 £1,000,000 Sumitomo Mitsui Banking 0% Commercial Paper 7/5/2019 998 1.26 SPAIN – 1.51%; 28.2.2018 1.86% £2,000,000 Svenska 0% Commercial Paper 10/6/2019 1,995 2.52 Personal Goods – 1.51%; 28.2.2018 1.86% £2,000,000 Transport 0% Commercial Paper 8/4/2019 1,998 2.52 53,062 Inditex 1,199 1.51 27,972 35.31 SWITZERLAND – 8.17%; 28.2.2018 6.51% UK Sterling Denominated Variable Rate Corporate Bonds – 7.32%; 28.2.2018 3.87% Chemicals – 2.41%; 28.2.2018 0.00% £200,000 Bank of Nova Scotia 1.08963% Floating Rate European 18,791 Sika 1,911 2.41 Medium Term Notes 13/11/2019 200 0.25 £300,000 Canadian Imperial Bank of Commerce 0.98013% Floating Financial Services – 0.58%; 28.2.2018 0.00% Rate Note Bonds 4/11/2019 300 0.38 840 Partners 456 0.58 £300,000 Canadian Imperial Bank of Commerce 0.98013% Floating Health Care Equipment & Services – 1.70%; 28.2.2018 1.90% Rate Note Bonds 4/11/2019 300 0.38 2,296 Straumann 1,347 1.70 £200,000 Canadian Imperial Bank of Commerce 1.03213% Floating Industrial Engineering – 0.72%; 28.2.2018 0.00% Rate Note Bonds 8/11/2019 200 0.25 985 Schindler (Part Certified) 166 0.21 £200,000 Canadian Imperial Bank of Commerce 1.03213% Floating 2,418 Schindler (Registered) 403 0.51 Rate Note Bonds 8/11/2019 200 0.25 £100,000 Commonwealth Bank of Australia 0.85875% Floating Rate 569 0.72 European Medium Term Notes 21/6/2019 100 0.13 Industrial Transportation – 0.00%; 28.2.2018 0.65% £100,000 Commonwealth Bank of Australia 1.07356% Floating Rate European Medium Term Notes 16/7/2019 100 0.13 Personal Goods – 0.00%; 28.2.2018 1.36% £1,000,000 DBS Bank 1.06744% Floating Rate European Medium Pharmaceuticals & Biotechnology – 2.76%; 28.2.2018 2.60% Term Notes 17/7/2019 1,000 1.26 10,293 Lonza 2,187 2.76 £1,000,000 HSBC Bank 0.83013% Floating Rate European Medium UNITED KINGDOM – 2.06%; 28.2.2018 0.00% Term Notes 20/3/2019 1,000 1.26 £100,000 National Australia Bank 0.8395% Floating Rate European Media – 2.06%; 28.2.2018 0.00% Medium Term Notes 14/6/2019 100 0.13 94,389 RELX 1,627 2.06
17 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 18 Portfolio Statement continued
Holding or Market % of Holding or Underlying Market % of Nominal Value Total Net Nominal Exposure – Derivatives Value Total Net Value Investment £000’s Assets Value Investment £000’s £000’s Assets
£100,000 National Australia Bank 0.8395% Floating Rate European DERIVATIVES – (0.40)%; 28.2.2018 0.05% Medium Term Notes 14/6/2019 100 0.13 DANISH KRONE – (0.05)%; 28.2.2018 0.03% £200,000 New York Life Global Funding 0.98088% Floating Rate European Medium Term Notes 29/7/2019 200 0.25 CFDs Short – (0.05)%; 28.2.2018 (0.08)% £300,000 Royal Bank of Canada 1.07563% Floating Rate European Personal Goods – 0.00%; 28.2.2018 (0.04)% Medium Term Notes 24/7/2019 300 0.38 £1,000,000 Toronto-Dominion Bank 0.976% Floating Rate European Pharmaceuticals & Biotechnology – (0.03)%; 28.2.2018 (0.04)% Medium Term Notes 18/9/2019 999 1.26 (21,622) Lundbeck 744 (11) (0.01) £100,000 Westpac Banking 0.85575% Floating Rate European (11,265) Novozymes class ‘B’ shares 385 (18) (0.02) Medium Term Notes 14/6/2019 100 0.13 1,129 (29) (0.03) £200,000 Westpac Banking 1.04469% Floating Rate European Support Services – (0.02)%; 28.2.2018 0.00% Medium Term Notes 11/7/2019 200 0.25 (10,138) ISS 238 (13) (0.02) £200,000 Westpac Banking 1.04469% Floating Rate European Medium Term Notes 11/7/2019 200 0.25 CFDs Long – 0.00%; 28.2.2018 0.11% £200,000 Westpac Banking 1.04656% Floating Rate European Pharmaceuticals & Biotechnology – 0.00%; 28.2.2018 0.11% Medium Term Notes 12/7/2019 200 0.25 EURO – (0.43)%; 28.2.2018 (0.08)% 5,799 7.32 CFDs Short – (0.58)%; 28.2.2018 (0.08)% EURO – 0.00%; 28.2.2018 1.48% Aerospace & Defence – 0.00%; 28.2.2018 0.02% Euro Denominated Fixed Rate Corporate Bonds – 0.00%; 28.2.2018 0.95% Alternative Energy – 0.01%; 28.2.2018 0.00% Euro Denominated Variable Rate Corporate Bonds – 0.00%; 28.2.2018 0.53% (37,984) Siemens Gamesa 438 8 0.01 CERTIFICATE OF DEPOSITS – 20.19%; 28.2.2018 34.07% Automobiles & Parts – (0.15)%; 28.2.2018 0.06% £2,000,000 ABN AMRO 0% Certificate of Deposit 5/6/2019 1,995 2.52 (4,871) Bayerische Motoren Werke 310 (20) (0.03) £2,000,000 BNP Paribas 1.01% Certificate of Deposit 8/7/2019 2,000 2.53 (4,189) Continental 516 (55) (0.07) £1,000,000 BPCE 0.97% Certificate of Deposit 11/3/2019 1,000 1.26 (18,442) Fiat Chrysler Automobiles^ 205 – 0.00 £2,000,000 DZ Bank 0% Certificate of Deposit 10/4/2019 1,998 2.53 (38,366) Gestamp Automocion 176 (9) (0.01) £1,000,000 HSBC 0% Certificate of Deposit 21/2/2020 1,000 1.26 (5,016) Jost Werke 125 5 0.01 £1,000,000 ING Bank 0% Certificate of Deposit 23/4/2019 999 1.26 (46,701) Schaeffler 322 (28) (0.04) £1,000,000 Mizuho Bank 0% Certificate of Deposit 16/4/2019 999 1.26 (3,415) Volkswagen 441 (12) (0.01) £1,000,000 Mizuho Bank 1% Certificate of Deposit 18/4/2019 1,001 1.26 £2,000,000 Standard Chartered 0.95% Certificate of Deposit 2,095 (119) (0.15) 7/5/2019 2,000 2.53 Banks – (0.01)%; 28.2.2018 (0.03)% £1,000,000 Sumito Mitsui Trust Bank 0.9% Certificate of Deposit (40,269) Deutsche Bank 281 (10) (0.01) 8/5/2019 1,000 1.26 Chemicals – (0.05)%; 28.2.2018 0.00% £1,000,000 Sumitomo Mitsui Banking 0.94% Certificate of Deposit (6,503) BASF 373 (25) (0.03) 7/5/2019 1,000 1.26 (7,286) Covestro 313 9 0.01 £1,000,000 Toronto-Dominion Bank 0% Certificate of Deposit (27,534) Evonik Industries 583 (23) (0.03) 12/11/2019 1,000 1.26 (22,408) K+S 321 (1) 0.00 15,992 20.19 1,590 (40) (0.05)
19 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 20 Portfolio Statement continued
Holding or Underlying Market % of Holding or Underlying Market % of Nominal Exposure – Derivatives Value Total Net Nominal Exposure – Derivatives Value Total Net Value Investment £000’s £000’s Assets Value Investment £000’s £000’s Assets
Electronic & Electrical Equipment – 0.00%; 28.2.2018 0.01% Industrial Transportation – 0.00%; 28.2.2018 (0.12)% (8,241) SLM 63 (1) 0.00 (33,332) CTT-Correios de Portugal^ 79 1 0.00 Financial Services – (0.10)%; 28.2.2018 0.00% Media – (0.01)%; 28.2.2018 (0.01)% (58,479) Azimut 644 (81) (0.10) (15,818) Mediaset Espana 89 (6) (0.01) (86,764) SNS REAAL** – – 0.00 Mining – 0.00%; 28.2.2018 0.00% 644 (81) (0.10) (6,355) Imerys 272 (1) 0.00 Fixed Line Telecommunications – (0.04)%; 28.2.2018 0.00% Oil & Gas Producers – 0.00%; 28.2.2018 0.00% (189,765) Altice series ‘A’ shares 322 (35) (0.04) (17,674) Orange 533 (1) 0.00 855 (36) (0.04) Personal Goods – (0.01)%; 28.2.2018 0.00% Food Producers – 0.00%; 28.2.2018 0.00% (9,819) Tod’s 364 (5) (0.01) ^ (14,509) Glanbia 221 – 0.00 Real Estate Investment & Services – 0.01%; 28.2.2018 0.00% (18,556) Greenyard 53 1 0.00 (8,288) Deutsche Euroshop 185 5 0.01 274 1 0.00 Software & Computer Services – 0.01%; 28.2.2018 0.00% Food & Drug Retailers – 0.00%; 28.2.2018 0.12% (23,229) RIB Software 255 5 0.01 (6,129) Casino Guichard Perrachon 244 (5) (0.01) (9,319) Software 256 2 0.00 (78,209) Ceconomy 331 (4) (0.01) 511 7 0.01 (23,488) Metro 297 14 0.02 Technology Hardware & Equipment – 0.00%; 28.2.2018 0.06% 872 5 0.00 Travel & Leisure – 0.00%; 28.2.2018 (0.01)% Gas, Water & Multiutilities – (0.01)%; 28.2.2018 0.00% (55,779) Elior 606 7 0.01 (61,276) Suez 589 (9) (0.01) (6,167) Sodexo 510 (10) (0.01) General Industrials – 0.01%; 28.2.2018 0.02% 1,116 (3) 0.00 (32,856) ThyssenKrupp 370 7 0.01 CFDs Long – 0.15%; 28.2.2018 0.00% General Retailers – (0.15)%; 28.2.2018 0.00% (25,738) Zalando 714 (117) (0.15) Aerospace & Defence – 0.12%; 28.2.2018 0.00% 15,680 Safran 1,609 95 0.12 Health Care Equipment & Services – (0.03)%; 28.2.2018 (0.11)% (1,679) Eurofins Scientific 532 (42) (0.05) Construction & Materials – 0.03%; 28.2.2018 0.00% (25,328) Siemens Healthineers 772 16 0.02 8,078 Vinci 580 20 0.03 1,304 (26) (0.03) NORWEGIAN KRONE – (0.03)%; 28.2.2018 0.02% Household Goods & Home Construction – 0.01%; 28.2.2018 (0.05)% CFDs Short – (0.03)%; 28.2.2018 0.02% (8,744) Henkel non-voting preference shares 658 (1) 0.00 Chemicals – (0.02)%; 28.2.2018 0.00% (7,350) Societe 523 7 0.01 (2,424,033) REC Silicon 133 (15) (0.02) 1,181 6 0.01 Software & Computer Services – (0.01)%; 28.2.2018 0.00% Industrial Engineering – (0.07)%; 28.2.2018 (0.04)% (47,355) Opera Software 62 (4) (0.01) (224,213) Vallourec 457 (56) (0.07) Travel & Leisure – 0.00%; 28.2.2018 0.02%
21 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 22 Portfolio Statement continued
Holding or Underlying Market % of Holding or Underlying Market % of Nominal Exposure – Derivatives Value Total Net Nominal Exposure – Derivatives Value Total Net Value Investment £000’s £000’s Assets Value Investment £000’s £000’s Assets
SWEDISH KRONE – (0.03)%; 28.2.2018 (0.15)% Electronic & Electrical Equipment – (0.01)%; 28.2.2018 0.00% (8,858) Landis+Gyr 423 (8) (0.01) CFDs Short – (0.11)%; 28.2.2018 (0.15)% Financial Services – 0.00%; 28.2.2018 (0.04)% Automobiles & Parts – (0.10)%; 28.2.2018 (0.05)% (7,445) Autoliv 456 (48) (0.06) Fixed Line Telecommunications – 0.00%; 28.2.2018 0.00% (15,885) Veoneer 365 (35) (0.04) (2,918) Sunrise Communications^ 163 – 0.00 821 (83) (0.10) General Retailers – (0.01)%; 28.2.2018 0.00% Financial Services – 0.00%; 28.2.2018 0.00% (5,885) Dufry 449 (10) (0.01) (9,853) Avanza Bank 324 1 0.00 Health Care Equipment & Services – 0.00%; 28.2.2018 0.00% General Retailers – (0.01)%; 28.2.2018 0.00% (4,643) Sonova 671 3 0.00 (34,473) Hennes & Mauritz series ‘B’ shares 392 (5) (0.01) Industrial Engineering – 0.03%; 28.2.2018 0.00% Health Care Equipment & Services – (0.01)%; 28.2.2018 (0.02)% (49,717) ABB 742 21 0.03 (24,823) Arjo^ 69 (1) 0.00 Industrial Transportation – 0.00%; 28.2.2018 0.00% (59,985) Getinge class ‘B’ shares 534 (4) (0.01) (2,666) Flughafen Zuerich 358 (1) 0.00 603 (5) (0.01) Life Insurance – (0.04)%; 28.2.2018 0.01% Mobile Telecommunications – 0.00%; 28.2.2018 (0.05)% (1,448) Swiss Life 428 (30) (0.04) (3,610) Millicom International Cellular 163 2 0.00 Pharmaceuticals & Biotechnology – 0.01%; 28.2.2018 0.00% (148,139) Telia 484 (3) 0.00 (3,909) Vifor Pharma 369 7 0.01 647 (1) 0.00 Real Estate Investment & Services – 0.01%; 28.2.2018 0.01% Personal Goods – 0.01%; 28.2.2018 0.00% (9,206) Swiss Prime Site 585 5 0.01 (36,196) Oriflame 557 8 0.01 Technology Hardware & Equipment – (0.04)%; 28.2.2018 (0.02)% Technology Hardware & Equipment – 0.00%; 28.2.2018 (0.03)% (25,349) AMS 593 (35) (0.04) CFDs Long – 0.08%; 28.2.2018 0.00% CFDs Long – 0.00%; 28.2.2018 0.00% Electronic & Electrical Equipment – 0.06%; 28.2.2018 0.00% Health Care Equipment & Services – 0.00%; 28.2.2018 0.00% 30,208 AddTech 491 30 0.04 2,534 Medartis^ 116 – 0.00 9,638 Hexagon 381 14 0.02 UNITED KINGDOM STERLING – (0.24)%; 28.2.2018 0.33% 872 44 0.06 CFDs Short – (0.15)%; 28.2.2018 0.15% Leisure Goods – 0.02%; 28.2.2018 0.00% Aerospace & Defence – 0.00%; 28.2.2018 0.04% 24,110 Thule 403 14 0.02 Automobiles & Parts – (0.01)%; 28.2.2018 0.00% SWISS FRANCS – (0.10)%; 28.2.2018 (0.05)% (39,488) Aston Martin Lagonda 426 (5) (0.01) CFDs Short – (0.10)%; 28.2.2018 (0.05)% Banks – 0.01%; 28.2.2018 0.00% Banks – (0.05)%; 28.2.2018 0.00% (114,572) HSBC 702 10 0.01 (76,728) Credit Suisse 715 (36) (0.05) Chemicals – 0.00%; 28.2.2018 0.01%
23 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 24 Portfolio Statement continued
Holding or Underlying Market % of Holding or Underlying Market % of Nominal Exposure – Derivatives Value Total Net Nominal Exposure – Derivatives Value Total Net Value Investment £000’s £000’s Assets Value Investment £000’s £000’s Assets
Financial Services – (0.05)%; 28.2.2018 0.00% Support Services – (0.06)%; 28.2.2018 0.10% (140,134) Jupiter Fund Management 475 (30) (0.04) (91,144) Aggreko 653 5 0.01 (46,765) Paragon Banking 203 (2) 0.00 (81,511) Babcock 441 (7) (0.01) (14,248) Schroders 390 (4) (0.01) (28,181) Travis Perkins 405 (49) (0.06) 1,068 (36) (0.05) 1,499 (51) (0.06) Fixed Line Telecommunications – 0.04%; 28.2.2018 (0.03)% Technology Hardware & Equipment – (0.04)%; 28.2.2018 0.00% (278,384) BT 598 31 0.04 (131,885) IQE 120 (29) (0.04) Food & Drug Retailers – (0.04)%; 28.2.2018 (0.09)% Travel & Leisure – (0.04)%; 28.2.2018 0.00% (140,516) J Sainsbury 357 7 0.01 (53,986) Greene King 356 (29) (0.04) (31,676) Ocado 328 (37) (0.05) CFDs Long – (0.09)%; 28.2.2018 0.18% 685 (30) (0.04) Financial Services – 0.00%; 28.2.2018 0.07% Gas, Water & Multiutilities – (0.03)%; 28.2.2018 0.00% 22,115 Hargreaves Lansdown 385 10 0.01 (410,044) Centrica 511 (10) (0.01) 12,471 London Stock Exchange 562 (6) (0.01) (47,469) Pennon 369 (8) (0.01) 947 4 0.00 (18,212) Severn Trent 368 (11) (0.01) Food Producers – (0.01)%; 28.2.2018 0.01% 1,248 (29) (0.03) 46,381 Associated British Foods 1,040 (7) (0.01) General Industrials – 0.00%; 28.2.2018 0.01% General Retailers – 0.00%; 28.2.2018 0.01% General Retailers – (0.08)%; 28.2.2018 0.23% Industrial Engineering – 0.04%; 28.2.2018 0.03% (337,575) AA^ 304 (14) (0.02) 8,275 Spirax-Sarco Engineering 552 (14) (0.02) (282,183) Kingfisher 683 (47) (0.06) 33,844 Weir 555 48 0.06 987 (61) (0.08) 1,107 34 0.04 Health Care Equipment & Services – 0.00%; 28.2.2018 0.02% Media – 0.00%; 28.2.2018 0.01% Household Goods & Home Construction – 0.00%; 28.2.2018 (0.07)% Non-life Insurance – (0.02)%; 28.2.2018 (0.02)%
15,911 Beazley 87 (3) 0.00 (14,574) Persimmon 355 (3) 0.00 65,976 Hiscox 1,098 (12) (0.02) Industrial Transportation – 0.03%; 28.2.2018 0.00% 1,185 (15) (0.02) (220,837) Royal Mail 625 22 0.03 Oil Equipment, Services & Distribution – 0.00%; 28.2.2018 0.04% Media – 0.06%; 28.2.2018 (0.06)% (54,712) Pearson 463 46 0.06 Support Services – (0.07)%; 28.2.2018 0.03% 19,370 DCC 1,264 (58) (0.07) Mobile Telecommunications – 0.02%; 28.2.2018 (0.01)% (271,330) Vodafone 364 17 0.02 Tobacco – (0.03)%; 28.2.2018 0.00% 17,402 British American Tobacco 480 (21) (0.03) Oil Equipment, Services & Distribution – (0.01)%; 28.2.2018 (0.02)% (42,114) Petrofac 180 (5) (0.01) UNITED STATES DOLLARS – 0.12%; 28.2.2018 0.02% Oil & Gas Producers – 0.00%; 28.2.2018 0.00% CFDs Long – 0.12%; 28.2.2018 0.02% Real Estate Investment Trusts – 0.00%; 28.2.2018 0.02% Support Services – 0.12%; 28.2.2018 0.02% 15,594 Worldpay 1,123 92 0.12 Software & Computer Services – 0.05%; 28.2.2018 0.00% (211,015) Sophos 692 42 0.05
25 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 26 Portfolio Statement continued Statement of Total Return for the year ended 28 February 2019
Holding or Underlying Market % of For the year For the year Nominal Exposure – Derivatives Value Total Net to 28.2.2019 to 28.2.2018 Value Investment £000’s £000’s Assets Notes £000’s £000’s £000’s £000’s
FORWARD CURRENCY CONTRACTS – 0.36%; 28.2.2018 (0.07)% Income €322,229 Euro vs UK sterling 277 (4) (0.01) Net capital gains 3 3,645 4,014 £1,760,600 UK sterling vs Danish krone 1,725 36 0.05 Revenue 4 563 957 £20,531,557 UK sterling vs Euro 20,360 172 0.22 £4,069,736 UK sterling vs Swiss franc 3,991 79 0.10 Expenses 5 (1,013) (712) 26,353 283 0.36 Interest payable and similar charges 6 (1,022) (1,087) Portfolio of investments 70,045 88.44 Net expense before taxation (1,472) (842) CASH EQUIVALENTS Taxation 7 (24) (22) Short-term Money Market Funds – 9.54%; 28.2.2018 9.53% Net expense after taxation (1,496) (864) 7,555,733 Institutional Cash Series plc – Institutional Sterling Total return before distributions 2,149 3,150 Liquidity Fund*** 7,556 9.54 Distributions 8 – – Net other assets 1,602 2.02 Change in net assets Total net assets 79,203 100.00 attributable to unitholders Unless otherwise stated, all securities are either listed on a recognised exchange or traded on an eligible securities market. from investment activities 2,149 3,150 * An ECP (European Commercial Paper) Bond is an unsecured, short-term loan issued by a bank or corporation in the international money market, denominated in currency that differs from the corporation’s domestic currency. ** The underlying equity holding is delisted. *** Managed by a related party. The Contracts for Differences (CFDs) shown in the portfolio statement on pages 20 to 26 are expressed at both their mark-to-market and original notional value, Statement of Change in Net Assets Attributable to Unitholders which when added together represent the current notional value of the CFDs. The current notional value of a CFD represents the reference amount used to calculate for the year ended 28 February 2019 payments between the counterparties to the CFD. The full notional value represents the economic interest in the security underlying the CFD, but does not change hands in full between the counterparties. ^ Investments which are less than £500 are rounded to zero. For the year For the year Underlying exposure has been calculated according to the guidelines issued by the European Securities and Markets Authority (“ESMA”) and represents the market to 28.2.2019 to 28.2.2018 value of an equivalent position in the assets underlying each financial derivative instrument. The counterparties for the forward currency contracts are Bank of New York Mellon, Citigroup Global Markets Limited, Goldman Sachs International £000’s £000’s £000’s £000’s Opening net assets attributable to unitholders 41,363 84,912 Amounts receivable on issue of units 51,005 19,856 Amounts payable on cancellation of units (15,314) (66,555) 35,691 (46,699) Change in net assets attributable to unitholders from investment activities 2,149 3,150 Closing net assets attributable to unitholders 79,203 41,363
27 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 28 Balance Sheet Notes to Financial Statements at 28 February 2019 for the year ended 28 February 2019
1. Accounting and Distribution Policies 28.2.2019 28.2.2018 Notes £000’s £000’s Accounting Policies Assets: (a) The financial statements have been prepared in accordance with the Statement of Recommended Practice for Authorised Funds (the “SORP”) issued by the Investment Management Association (now Fixed assets known as the Investment Association) in May 2014 and amended in June 2017. – Investment assets 71,294 36,958 (b) Revenue from fixed interest securities is recognised on an effective interest rate basis. Current assets Accrued interest purchased and sold on interest bearing securities is excluded from the capital cost of – Debtors 9 2,450 9,705 these securities and dealt with as part of the revenue of the Fund. – Cash and bank balances 2,439 1,085 Dividends on quoted ordinary shares and preference shares are recognised when the securities are – Cash collateral posted 1,105 – quoted ex-dividend. Where such securities are not quoted, dividends are recognised when the right to – Cash equivalents 10 7,556 3,943 receive payment is established. Total assets 84,844 51,691 Dividend equivalent values on long or short CFDs are recognised when the underlying securities are Liabilities: quoted ex-dividend. Where such securities are not quoted, dividends are recognised when the right to Investment liabilities (1,249) (517) receive payment is established. Creditors All revenue is recognised as a gross amount that takes account of any withholding taxes but excludes any other taxes such as attributable tax credits. – Cash collateral payable – (365) Revenue from securities lending is accounted for net of associated costs and is recognised on an – Other creditors 11 (4,392) (9,446) accruals basis. Total liabilities (5,641) (10,328) Bank interest is recognised on an accruals basis. Net assets attributable to unitholders 79,203 41,363 (c) Ordinary stock dividends are recognised wholly as revenue and are based on the market value of the shares on the date they are quoted ex-dividend. Where an enhancement is offered, the amount by which the market value of the shares (on the date they are quoted ex-dividend) exceeds the cash dividend is G D Bamping (Director) taken to capital. R A R Hayes (Director) BlackRock Fund Managers Limited (d) The underlying circumstances behind both special dividends and share buy backs are reviewed on a 2 May 2019 case by case basis in determining whether the amount is revenue or capital in nature. Any tax treatment will follow the accounting treatment of the principal amount. (e) Underwriting commission is wholly recognised as revenue when the issue takes place, except where the Fund is required to take up some or all of the shares underwritten, in which case an appropriate proportion of the commission received is deducted from the cost of those shares. (f) All expenses, except those relating to the purchase and sale of investments are charged against revenue. All expenses are recognised on an accruals basis. (g) Provision for corporation tax is made at the current rate on the excess of taxable revenue over allowable expenses. Provision is made on all material timing differences arising from the different treatment of items for accounting and tax purposes. A deferred tax asset is recognised only to the extent that it is considered more likely than not that there will be taxable profits in the future against which the asset can be offset. (h) The investments of the Fund have been valued at market values, defined as fair value, which is usually bid value at 12 noon on the last business day of the accounting period. In the case of an investment which is not quoted, listed or dealt in on a recognised market, or in respect of which a listed, traded or dealt price or quotation is not available at the time of valuation, the fair value of such investment shall be estimated with care and in good faith by a competent professional person, body, firm or corporation including the Manager’s pricing committee and such fair value shall be determined on the basis of the probable realisation value of the investment. The Manager shall be entitled to adopt an alternative method of valuing any particular asset if it considers that the methods of valuation set out above do not provide a fair valuation of a particular asset or liability.
29 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 30 Notes to Financial Statements continued
For Over-the-Counter (“OTC”) derivatives including Credit Default Swaps, Currency Swaps, Forward 2. Financial Instruments and Risks Currency Contracts, Inflation Swaps, Interest Rate Swaps, OTC Options, Swaptions, Synthetic Caps, Total The Fund’s investment activities expose it to the various types of risk which are associated with the Return Swaps and Volatility Swaps; fair value is determined based on valuation pricing models which take financial instruments and markets in which it invests. The following information is not intended to be a into account relevant market inputs as well as the time values, liquidity and volatility factors underlying comprehensive summary of all risks and investors should refer to the Prospectus for a more detailed the positions. Amounts due to and from an individual counterparty which falls under a legally enforceable discussion of the risks inherent in investing in the Fund. master netting agreement are netted. Risk management framework The CFDs held in the portfolio are valued based on the price of the underlying security or index which they are purchased to reflect. The Manager has delegated the day-to-day administration of the investment programme to the Investment Manager. The Investment Manager is also responsible for ensuring that the Fund is managed within the Investments in single priced Collective Investment Schemes have been valued at market values, defined terms of its investment guidelines and limits set out in the Prospectus. The Manager reserves to itself the as fair value, which is usually the latest available price at the Fund’s 12 noon valuation point on the last investment performance, product risk monitoring and oversight and the responsibility for the monitoring business day of the accounting period. and oversight of regulatory and operational risk for the Fund. (i) Any transactions in foreign currencies are translated into Sterling at the rates of exchange ruling on the date of any such transaction. Assets and liabilities in foreign currencies are translated into Sterling at the The Manager has appointed a risk manager who has responsibility for the daily risk management process exchange rates ruling at 12 noon on the last business day of the accounting period. Revenue items in with assistance from key risk management personnel of the Investment Manager, including members of foreign currencies are translated into Sterling at the exchange rate when the revenue is received. the BlackRock Risk and Quantitative Analysis Group (“RQA Group”) which is a centralised group which performs an independent risk management function. The RQA Group independently identifies, measures (j) Where appropriate, certain permitted financial instruments such as derivatives are used for both efficient and monitors investment risk. The RQA Group tracks the actual risk management practices being portfolio management and for the purpose of achieving the investment objective of the Fund. Where deployed across the different funds. By breaking down the components of the process, the RQA Group such financial instruments are used to protect or enhance revenue, the revenue and expenses derived has the ability to determine if the appropriate risk management processes are in place for the Fund. This therefrom are included in ‘Revenue’ in the Statement of Total Return. Where such financial instruments are captures the risk management tools employed, how the levels of risk are controlled, ensuring risk/return is used to protect or enhance capital, the gains and losses derived therefrom are included in ‘Net capital considered in portfolio construction and reviewing outcomes. gains’ in the Statement of Total Return. (k) Cash and bank balances consist of deposits held on call with banks and cash held with clearing brokers The principal risk exposure of the Fund is set out as follows: and counterparties. Cash equivalents are short-term highly liquid investments that are readily convertible a) Market risk to known amounts of cash and which are subject to an insignificant risk of changes in value. Market risk arises mainly from uncertainty about future values of financial instruments influenced by other (l) Cash collateral provided by the Fund is identified on the Balance Sheet as pledged cash collateral and is price, currency and interest rate movements. It represents the potential loss the Fund may suffer through not included as a component of cash and cash equivalents. holding market positions in the face of market movements. The Fund is exposed to market risk by virtue of For collateral other than cash provided by the Fund, the party to whom the collateral is provided has the its investments in equities, corporate bonds, CFD’s and forward currency contracts. right by contract to sell or repledge the collateral but has an obligation to return equivalent securities to the Fund on maturity or sale of the contract. The Fund classifies these assets on its Balance Sheet A key metric the RQA Group uses to measure market risk is Value-at-Risk (“VaR”) which encompasses separately from other assets and identifies the asset as pledged investments. Such assets are valued price, currency and interest rate risk. VaR is a statistical risk measure that estimates the potential consistently with the accounting policies listed above. portfolio loss from adverse market moves in an ordinary market environment. VaR analysis reflects the interdependencies between risk variables, unlike a traditional sensitivity analysis. Cash collateral provided to the Fund by counterparties is identified in the Balance Sheet as cash collateral payable. The Fund may reinvest this cash collateral and the assets purchased are included in investment The VaR calculations are based on an adjusted historical simulation model with a confidence level of 99%, assets or cash equivalents on the Balance Sheet. a holding period of one day and a historical observation period of not less than one year (250 days). A For collateral received from counterparties other than cash, a disclosure of the collateral provided is VaR number is defined at a specified probability and a specified time horizon. A 99% one day VaR means made in the notes to the financial statements. that the expectation is that 99% of the time over a one day period the Fund will lose less than this number in percentage terms. Therefore, higher VaR numbers indicate higher risk. Distribution Policies (m) The ordinary element of stock dividends is treated as revenue and forms part of the distribution. (n) Special dividends and share buy backs recognised as revenue form part of the distribution. (o) The units in the Fund are accumulation units. All of the net revenue available for distribution at the final accounting period end will be accumulated by the Fund with a transfer from revenue to capital. In order to conduct a controlled dividend flow to unitholders, interim distributions may be made at the Manager’s discretion, up to a maximum of the distributable revenue available for the period. Should expenses and taxation together exceed revenue, there will be no distribution and the shortfall will be met from capital.
31 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 32 Notes to Financial Statements continued
It is noted that the use of the VaR methodology has limitations, namely that the use of historical market iii) Market risk arising from interest rate risk data as a basis for estimating future events does not encompass all possible scenarios, particularly those Exposure to interest rate risk that are of an extreme nature and that the use of a specified confidence level (e.g. 99%) does not take Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate into account losses that occur beyond this level. There is some probability that the loss could be greater because of changes in market interest rates. than the VaR amounts. These limitations and the nature of the VaR measure mean that the Fund can neither guarantee that losses will not exceed the VaR amounts indicated, nor that losses in excess of the The Fund is exposed to interest rate risk on its cash and bank balances held at The Bank of New York VaR amounts will not occur more frequently. Mellon (International) Limited, amounts held at futures clearing houses and brokers, cash equivalent holdings and its investments in fixed and floating rate interest bearing securities where the value of these The one day VaR as at 28 February 2019 and 28 February 2018 based on a 99% confidence level was securities may fluctuate as a result of a change in interest rates. Cash held on deposit at The Bank of 0.56% and 0.50% respectively. New York Mellon (International) Limited receives/incurs interest at the prevailing daily rate which may be negative depending on the currency in which the cash is held. i) Market risk arising from foreign currency risk Exposure to foreign currency risk The interest rate risk profile of the Fund’s investments as at 28 February 2019 was as follows: Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Floating Rate Fixed Rate Non-interest Investments Investments Bearing Investments Total The Fund may invest in securities which may be denominated in currencies other than its reporting £000’s £000’s £000’s £000’s currency. 5,799 43,964 20,282 70,045 The Fund may also invest in forward currency contracts and thus gain further exposure to foreign currency risk. The interest rate risk profile of the Fund’s investments as at 28 February 2018 was as follows: The assets and liabilities of the Fund are denominated mainly in Sterling, therefore the Balance Sheet and Statement of Total Return are unlikely to be directly affected by currency movements. Floating Rate Fixed Rate Non-interest Investments Investments Bearing Investments Total ii) Market risk arising from other price risk £000’s £000’s £000’s £000’s Exposure to other price risk 1,820 21,482 13,139 36,441 Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), Management of interest rate risk whether those changes are caused by factors specific to the individual financial instrument or its issuer, or Interest rate risk exposure is managed by constantly monitoring the position for deviations outside a factors affecting similar financial instruments traded in the market. pre-determined tolerance level and, when necessary, rebalancing back to the original desired parameters.
The Fund is exposed to other price risk arising from its investments. The exposure of the Fund to other b) Counterparty credit risk price risk is the market value of the investments held as shown in the portfolio statement of the Fund. Exposure to counterparty credit risk Management of other price risk Counterparty credit risk is the risk that one party to a financial instrument will cause a financial loss for the The Investment Manager manages the Fund’s other price risk on a daily basis in accordance with the other party by failing to discharge an obligation. Fund’s investment objective. The Fund is exposed to counterparty credit risk from the parties with which it trades and will bear the risk By diversifying the portfolio, where this is appropriate and consistent with the Fund’s objectives, the risk of settlement default. that a price change of a particular investment will have a material impact on the Net Asset Value (“NAV”) Management of counterparty credit risk of the Fund is minimised. The investment concentrations within the portfolio are disclosed in the portfolio Counterparty credit risk is monitored and managed by BlackRock’s RQA Counterparty & Concentration statement by investment type. Risk Team. The team is headed by BlackRock’s Chief Counterparty Credit Officer who reports directly to the Global Head of RQA. Credit authority resides with the Chief Counterparty Credit Officer and selected team members to whom specific credit authority has been delegated. As such, counterparty approvals may be granted by the Chief Counterparty Credit Officer or by identified RQA Credit Risk Officers who have been formally delegated authority by the Chief Counterparty Credit Officer as deemed appropriate.
33 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 34 Notes to Financial Statements continued
BlackRock’s RQA Counterparty & Concentration Risk Team completes a formal review of each new The carrying value of financial assets together with cash best represents the Fund’s gross maximum counterparty, monitors and reviews all approved counterparties on an ongoing basis and maintains an exposure to counterparty credit risk at the reporting date, before including the effect of ISDA Master active oversight of counterparty exposures. Agreements and close-out netting, which would reduce the overall counterparty credit risk exposure.
The Manager maintains a list of approved counterparties. This list is regularly monitored and revised for The Fund’s maximum exposure to counterparty credit risk from holding forward currency contracts will be changes based on the counterparty’s creditworthiness, market reputation and expectations of future equal to the notional amount of the currency and any net unrealised gains or losses as disclosed in the financial performance. Transactions will only be opened with financial intermediaries on the approved portfolio statement. counterparties list. Management of counterparty credit risk related to OTC FDIs i) Exchange Traded Financial Derivative Instruments Forward currency contracts do not require variation margin and thus the counterparty credit risk is The Fund’s holdings in futures contracts expose the Fund to counterparty credit risk. monitored through the BlackRock RQA Counterparty & Concentration Risk Team which monitors the creditworthiness of the counterparty. The counterparties for forward currency contracts are disclosed Management of counterparty credit risk related to futures contracts in the portfolio statement. The exposure is limited by trading the contracts through a clearing house. The Fund’s exposure to For CFDs held by the Fund, cash movements take place on a daily basis, above a certain threshold for counterparty credit risk on contracts in which it currently has a gain position is reduced by such gains each counterparty. The risk is further mitigated as contracts are reset on a monthly basis (1 year rolling received in cash from the counterparty under the daily mark-to market mechanism on exchange traded maturity at each monthly reset) with the gain or loss being realised in the Fund. The Fund is required to futures contracts (variation margin). The Fund’s exposure to credit risk on contracts in which it currently maintain collateral with the counterparties to secure these financial instruments. has a loss position is equal to the amount of margin posted to the counterparty which has not been transferred to the exchange under the daily mark-to-market mechanism. The counterparty for futures The lowest credit rating of any one counterparty as at 28 February 2019 was BBB+ (28 February 2018: contracts is Goldman Sachs International. A-) (Standard & Poor’s rating).
Margin is paid or received on futures to cover any exposure by the counterparty or the Fund to each The following tables detail the number of counterparties the Fund is exposed to by OTC FDIs type and the other. Margin receivable from the Fund’s clearing brokers and various counterparties is included in “Cash maximum exposure (which is calculated on a net basis) to any one counterparty. and bank balances” on the Balance Sheet. Margin payable to the Fund’s clearing brokers and various counterparties is included in “Amounts held at futures clearing houses and brokers” on the Balance Sheet. 28 February 2019
Counterparty exposure has not been disclosed for exchange traded derivatives as the exchange Contracts for Total requirements in respect of collateral mean that, in the opinion of the Manager, the counterparty risk is Differences Forwards Exposure mitigated. Counterparty £000’s £000’s £000’s Bank of New York Mellon – 142 142 ii) Over-the-Counter (“OTC”) Financial Derivative Instruments (“FDIs”) CitiGroup Global Markets Limited (21) 26 5 The Fund’s holdings in OTC FDIs expose the Fund to counterparty credit risk. Deutsche Bank AG 53 – 53 Counterparty credit risk arises from the failure of the counterparty to perform according to the terms of Goldman Sachs International – 79 79 the contract. The Fund’s exposure to counterparty credit risk is limited to the contracts in which it currently J.P. Morgan Securities Plc (381) – (381) has a gain position reduced by the cash collateral received from the counterparty or to counterparties which have received collateral from the Fund. Merrill Lynch International (259) – (259) Toronto-Dominion Bank – 36 36 All OTC FDIs are entered into by the Fund under an International Swaps and Derivatives Associations, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement. An ISDA Master Agreement is a bilateral agreement between the Fund and a counterparty that governs OTC FDIs (including CFDs) entered into by the parties. The parties’ exposures under the ISDA Master Agreement are netted and collateralised together, therefore any collateral disclosures provided are in respect of all OTC FDIs entered into by the Fund under the ISDA Master Agreement, not just CFDs. All non-cash collateral received/posted by the Fund under the ISDA Master Agreement is transferred bilaterally under a title transfer arrangement.
Cash held as security by the counterparty to derivative contracts is subject to the credit risk of the counterparty.
35 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 36 Notes to Financial Statements continued
28 February 2018 Management of counterparty credit risk related to Counterparties The Manager monitors the credit rating and financial position of the brokers used to further mitigate Contracts for Total this risk. Differences Forwards Exposure Counterparty £000’s £000’s £000’s v) Debt securities Bank of America Merrill Lynch – 14 14 Issuer credit risk is the default risk of one of the issuers of any securities held by the Fund. Bank of New York Mellon – (56) (56) Bonds or other debt securities involve credit risk to the issuer which may be evidenced by the issuer’s Citigroup Global Markets Limited 28 – 28 credit rating. Securities which are subordinated and/or have a higher credit risk have a greater possibility Deutsche Bank AG 13 – 13 of default than more highly rated securities. The Fund invests into sovereign debt which exposes the Fund HSBC Bank Plc – 15 15 to the risk that the issuer of the bonds may default on interest or principal payments. J.P. Morgan Securities Plc 21 (2) 19 Management of counterparty credit risk related to debt securities Merrill Lynch International (8) – (8) To manage this risk the Investment Manager invests in a wide range of securities, subject to the investment objective of the Fund and monitors the credit ratings of the investments as disclosed in the portfolio statement. The ratings of the debt securities are continually monitored by the BlackRock Portfolio iii) Trustee and Custodian Management Group. The Fund’s Trustee and Custodian is The Bank of New York Mellon (International) Limited (the “Trustee” and “Custodian”). The following tables detail the credit rating profile of the debt securities held by the Fund as a percentage of the NAV as at the Balance Sheet date: Substantially all of the investments other than FDIs of the Fund are held by the Custodian at year end. Investments are segregated from the assets of the Custodian, with ownership rights remaining with 28 February 2019 the Fund. Bankruptcy or insolvency of the Custodian may cause the Fund’s rights with respect to its investments held by the Custodian to be delayed or limited. The maximum exposure to this risk is the Investment grade Non-investment grade Not rated Total total amount of equity and bond investments disclosed in the portfolio statement. % % % % 59.04 – 3.78 62.82 The Fund will be exposed to the credit risk of the Custodian, or any depositary used by the Trustee regarding cash balances held in accounts with same. In the event of insolvency or bankruptcy of the Custodian or any depositary used by the Trustee, the Fund will be treated as a general creditor of the 28 February 2018 Trustee. Investment grade Non-investment grade Not rated Total Management of counterparty credit risk related to the Trustee and Custodian % % % % To mitigate the Fund’s credit risk with respect to the Trustee, the Investment Manager of the Fund employs 54.87 0.95 0.53 56.35 specific procedures to ensure that the Trustee employed is a reputable institution and that the associated credit risk is acceptable to the Fund. The Fund only transacts with counterparties that are regulated entities vi) Securities lending subject to prudential supervision, or with high credit-ratings assigned by international credit-rating agencies. The Fund engages in security lending activities which expose the Fund to counterparty credit risk. The The long term credit rating of the parent company of the Trustee and Custodian, The Bank of New York maximum exposure to the Fund is equal to the value of the securities loaned. Mellon Corporation, as at 28 February 2019 was A (28 February 2018: A) (Standard & Poor’s rating). Securities lending transactions entered into by the Fund are subject to a written legal agreement between iv) Counterparties the Fund and the Securities Lending Agent, BlackRock Advisors (UK) Limited, a related party to the All transactions in listed securities are settled/paid for upon delivery using approved brokers. The risk of Fund, and separately between the Securities Lending Agent and the approved borrowing counterparty. default is considered minimal, as delivery of securities sold is only made once the broker has received Collateral received in exchange for securities lent is transferred under a title transfer arrangement and is payment. Payment is made on a purchase once the securities have been received by the broker. The delivered to and held in an account with a tri-party collateral manager in the name of The Bank of New trade will fail if either party fails to meet its obligation. York Mellon (International) Limited on behalf of the Fund. Collateral received is segregated from the assets belonging to the Fund’s Trustee or the Lending Agent. Counterparty credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered small due to the short settlement period involved and the high credit quality of the brokers used.
37 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 38 Notes to Financial Statements continued
The following table details the value of securities on loan and associated collateral received, analysed c) Liquidity risk by borrowing counterparty as at 28 February 2018. There were no securities on loan or related collateral Exposure to liquidity risk outstanding as at 28 February 2019. Liquidity risk is the risk that the Fund will encounter difficulties in meeting its obligations associated with financial liabilities. 28 February 2019 28 February 2018 Liquidity risk to the Fund arises from the redemption requests of unitholders and the liquidity of the Counterparty’s Securities Collateral Securities Collateral country of on loan received on loan received underlying investments the Fund is invested in. The Fund’s unitholders may redeem their units on the Counterparty establishment £000’s £000’s £000’s £000’s close of any daily dealing deadline for cash equal to a proportionate share of the Fund’s NAV. The Fund is Deutsche Bank AG Germany – – 157 171 therefore potentially exposed to the liquidity risk of meeting the unitholders’ redemptions and may need to sell assets at prevailing market prices to meet liquidity demands. Société Générale SA France – – 278 298 Total – – 435 469 The Fund is also exposed to the liquidity risk of daily margin calls on derivatives.
All non-derivative financial liabilities held by the Fund as at 28 February 2019 and 28 February 2018, At 28 February 2018, collateral received from these borrowing counterparties comprised 5.18% in debt based on contractual maturities, fall due within one to three months. securities and 94.82% in equity securities. As at 28 February 2019 there were no securities on loan or related collateral outstanding. Management of liquidity risk Liquidity risk is minimised by holding sufficient liquid investments which can be readily realised to meet Collateral accepted is non-cash in the form of sovereign debt rated AA or better from approved liquidity demands. governments only, supranational debt obligations rated AAA or better, equity securities and exchange traded funds listed on a recognised exchange. At times of excessive redemptions the Manager may decide to defer redemptions at any valuation point to the next valuation point where the requested aggregate redemptions exceed 10 per cent of the Fund’s Management of counterparty credit risk related to securities lending NAV. This will therefore allow the Manager to protect the interests of continuing unitholders by allowing To mitigate this risk, the Fund receives either cash or securities as collateral equal to a certain percentage the Manager to match the sale of scheme property to the level of redemptions. This should reduce the in excess of the fair value of the securities loaned. The Investment Manager monitors the fair value of the impact of dilution on the Fund. All unitholders who have sought to redeem units at any valuation point at securities loaned and additional collateral is obtained, if necessary. As at 28 February 2018, all non-cash which redemptions are deferred will be treated consistently and any redemption requests received in the collateral received consisted of securities admitted to or dealt on a recognised exchange. meantime will not be processed until the redemption requests that have been deferred to the subsequent The Fund also benefits from a borrower default indemnity provided by BlackRock Inc. The indemnity valuation points have been processed. allows for full replacement of securities lent. BlackRock Inc. bears the cost of indemnification against The Fund’s liquidity risk is managed on a daily basis by the Investment Manager in accordance with borrower default. established policies and procedures in place. The portfolio managers review daily forward looking cash reports which project cash obligations. These reports allow them to manage the Fund’s cash obligations. vii) Collateral The Fund engages in activities which may require collateral to be provided to a counterparty (“collateral d) Valuation of financial instruments posted”) or may hold collateral received (“collateral received”) from a counterparty. The Fund classifies financial instruments measured at fair value using a fair value hierarchy. The fair value Management of counterparty credit risk related to collateral hierarchy has the following categories: The Fund uses collateral received from a counterparty to reduce the credit risk associated with any Level 1 – Unadjusted quoted prices for identical instruments in active markets trading activity the Fund has engaged in. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly Cash collateral posted by the Fund is separately identified on the Balance Sheet as cash collateral posted available and those prices represent actual and regularly occurring market transactions on an arm’s and is not included as a component of cash and cash equivalents. Cash collateral received by the Fund is length basis. The Fund does not adjust the quoted price for these instruments. reflected on the Balance Sheet as cash collateral payable. Level 2 – Valuation techniques using observable inputs other than quoted prices in level 1 As at 28 February 2019, collateral posted by the Fund in respect of OTC FDIs was £1,105,000. Collateral This category includes instruments valued using quoted prices in active markets for similar instruments; received by the Fund in respect of OTC FDIs was £Nil. quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. As at 28 February 2018, collateral posted by the Fund in respect of OTC FDIs was £Nil. Collateral received by the Fund in respect of OTC FDIs was £365,000 in the form of cash.
39 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 40 Notes to Financial Statements continued
Valuation techniques used for non-standardised financial instruments such as OTC derivatives, include the e) Global exposure use of comparable recent arm’s length transactions, reference to other instruments that are substantially The Manager is required by the COLL Sourcebook to employ a risk management process in respect of the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly the Fund which enables it to accurately monitor and manage the global exposure from FDIs. used by market participants making the maximum use of market inputs and relying as little as possible on entity determined inputs. The Manager uses the Absolute VaR methodology to measure the Fund’s global exposure.
Level 3 – Valuation techniques using significant unobservable inputs For Absolute VaR, the monthly VaR will not exceed 20% of the Fund’s NAV. Where a VaR calculation is performed using a horizon other than the one month regulatory limit, this 20% limit will be rescaled to This category includes all instruments where the valuation techniques used include inputs not based on reflect the appropriate risk horizon period as directed by the relevant regulatory guidelines. Utilisation market data and these inputs could have a significant impact on the instrument’s valuation. refers to the level of risk taken in this context. This category also includes instruments that are valued based on quoted prices for similar instruments The tables below detail the highest, lowest and average utilisation of the VaR limit, expressed as a where significant entity determined adjustments or assumptions are required to reflect differences percentage of the respective absolute VaR regulatory limit. between the instruments and instruments for which there is no active market. 28 February 2019 The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its Highest utilisation of the Lowest utilisation of the Average utilisation of the entirety. For this purpose, the significance of an input is assessed against the fair value measurement in VaR limit VaR limit VaR limit its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. 13.42% 8.50% 11.03%
Assessing the significance of a particular input to the fair value measurement in its entirety requires 28 February 2018 judgement, considering factors specific to the asset or liability. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager. The Investment Manager Highest utilisation of the Lowest utilisation of the Average utilisation of the considers observable inputs to be that market data that is readily available, regularly distributed or VaR limit VaR limit VaR limit updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. 36.67% 8.27% 10.69%
The table below is an analysis of the Fund’s investment assets and investment liabilities measured at fair The exposures to FDIs at year end are marked on the portfolio statement. value at the Balance Sheet date. f) Leverage Level 1 Level 2 Level 3 Total The use of derivatives may expose the Fund to a higher degree of risk. In particular, derivative contracts £000’s £000’s £000’s £000’s can be highly volatile and the amount of initial margin is generally small relative to the size of the contract 28 February 2019 so that transactions may be leveraged in terms of market exposure. A relatively small market movement may have a potentially larger impact on derivatives than on standard bonds or equities. Leveraged Investment assets 20,607 50,687 –* 71,294 derivative positions can therefore increase a fund’s volatility. Investment liabilities – (1,249) – (1,249) The leverage is calculated on a gross exposure basis, by taking the sum of the notional values of the 28 February 2018 derivatives used by the Fund, without netting, and is expressed as a percentage of the NAV. Investment assets 13,114 23,844 – 36,958 The average level of leverage employed by the Fund during the year was 103.98% (28 February 2018: Investment liabilities – (517) – (517) 107.40%).
* Includes delisted securities. These securities are identified on the portfolio statement.
Securities with a value less than £500 are not disclosed in the table above. These securities are identified on the portfolio statement.
41 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 42 Notes to Financial Statements continued
3. Net Capital Gains 5. Expenses
For the year For the year For the year For the year to 28.2.2019 to 28.2.2018 to 28.2.2019 to 28.2.2018 £000’s £000’s £000’s £000’s The net capital gains comprise: Payable to the Manager or associates of the Manager: (Losses)/gains on non-derivative securities (309) 4,650 – Manager’s charge 522 561 Gains/(losses) on derivative securities 4,000 (431) – Performance fees† 392 26 Currency losses (32) (181) – Registrar’s fees 76 96 Custodian transaction costs (14) (24) 990 683 Net capital gains 3,645 4,014 Other expenses: – Audit fee 8 8 4. Revenue – Legal and other professional fees – 2
For the year For the year – Safe custody fees 3 5 to 28.2.2019 to 28.2.2018 – Trustee’s fees 12 14 £000’s £000’s 23 29 Interest from certificates of deposit 83 76 Total expenses 1,013 712 Interest from overseas fixed interest securities 32 72 † A performance fee is payable in respect of Class P Accumulation units and Class D Accumulation units with regards to any outperformance as per the calculation Interest from UK bank deposits 3 1 methodology outlined in the Prospectus. Interest from UK fixed interest securities 24 6 Overseas dividends 228 399 6. Interest Payable and Similar Charges
Overseas REIT dividends – 1 For the year For the year Revenue from Contracts for Differences 157 382 to 28.2.2019 to 28.2.2018 Revenue from short-term money market funds 34 17 £000’s £000’s Securities lending revenue 2 3 Contracts for Differences financing charges 257 281 Total revenue 563 957 Interest on bank overdrafts 2 2 Interest on collateral 56 – Interest paid on margin deposits – 3 Returns from short Contracts for Differences 707 801 Total interest payable and similar charges 1,022 1,087
43 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 44 Notes to Financial Statements continued
7. Taxation 10. Cash Equivalents (a) Analysis of tax charge 28.2.2019 28.2.2018 For the year For the year £000’s £000’s to 28.2.2019 to 28.2.2018 Investment in short-term money market funds 7,556 3,943 £000’s £000’s Total cash equivalents 7,556 3,943 Overseas tax 24 22 Total tax charge [see note 7(b)] 24 22 11. Other Creditors
(b) Factors affecting the tax charge 28.2.2019 28.2.2018 £000’s £000’s The tax assessed for the year is higher than the standard rate of corporation tax in the UK for an authorised unit trust. The differences are explained below: Accrued Audit fee 8 8 Accrued FCA fee 1 1 For the year For the year Accrued Manager’s charge 154 56 to 28.2.2019 to 28.2.2018 £000’s £000’s Accrued Performance fees 419 26 Net expense before taxation (1,472) (842) Accrued Registrar’s fee 23 23 Corporation tax at 20% (28 February 2018: 20%) (294) (168) Accrued Safe custody fees 1 2 Effects of: Accrued Trustee’s fee payable 3 2 Contracts for Differences short stock dividends – 22 Amounts payable for cancellation of units 1,512 22 Movement in unrecognised tax losses 328 221 Amounts payable to broker on CFDs 29 197 Overseas tax 24 22 Currency purchases awaiting settlement – 9,098 Revenue not subject to tax (34) (75) Custodian transaction costs 1 9 Total tax charge [see note 7(a)] 24 22 Purchases awaiting settlement 2,241 2 Total other creditors 4,392 9,446 At 28 February 2019 the Fund had tax losses of £10,129,000 (28 February 2018: £8,490,000). It is unlikely that the Fund will generate sufficient taxable profits in the future to utilise these expenses and therefore a deferred tax asset of £2,026,000 (28 February 2018: £1,698,000) has not been recognised. 12. Contingent Assets and Liabilities 8. Distributions There were no contingent assets or liabilities at the Balance Sheet date (28 February 2018: Nil). A net shortfall after taxation arose in the current and prior year because the expenses and taxation of the Fund exceeded the Fund’s revenue. Accordingly, no distribution has been made (please refer to note 1(o) for further details).
9. Debtors
28.2.2019 28.2.2018 £000’s £000’s Accrued revenue 31 26 Amounts receivable for issue of units 2,374 41 Amounts receivable from brokers on CFDs – 434 Currency sales awaiting settlement 3 9,119 Overseas tax recoverable 42 40 Sales awaiting settlement – 45 Total debtors 2,450 9,705
45 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 46 Notes to Financial Statements continued
13. Related Parties 14. Portfolio Transaction Costs Parties are considered to be related if one party has the ability to control the other party or exercise For the year ended 28 February 2019 significant influence over the other party in making financial or operational decisions. Direct Transaction Costs The following entities were related parties of the Fund during the year ended 28 February 2019: Transaction Value Commissions Taxes Manager/Registrar: BlackRock Fund Managers Limited Purchases (excluding derivatives) £000’s £000’s % £000’s % Investment Manager: BlackRock Investment Management (UK) Limited Equity instruments 14,426 4 0.03 4 0.03 Securities lending agent: BlackRock Advisors (UK) Limited Debt instruments 220,656 – – – – The ultimate holding company of the Manager, Registrar, Investment Manager and securities lending Total purchases 235,082 4 4
agent is BlackRock Inc. (“BlackRock”), a company incorporated in Delaware, USA. PNC Financial Total purchases including Services Group Inc. PNC Financial Services Group Inc. (“PNC”) is a substantial shareholder in BlackRock transaction costs 235,090 – Inc. PNC did not provide any services to the Fund during the years ended 28 February 2019 and 28 February 2018. Direct Transaction Costs
The Manager acts as either principal or agent for the Trustee in respect of all transactions of units of Transaction Value Commissions Taxes the Fund. The aggregate monies received through issue and paid through cancellation of units are Sales (excluding derivatives) £000’s £000’s % £000’s % disclosed in the Statement of Change in Net Assets Attributable to Unitholders. Any amounts due to or Equity instruments 6,540 3 0.05 – – from the Manager at the year end are disclosed in notes 9 and 11. Management fees, registration fees and Debt instruments 194,303 – – – – performance fees paid to the Manager are shown in note 5. The balances due at the year end in respect Total sales 200,843 3 – of these fees are shown in note 11. Securities lending revenue earned by the Fund is disclosed in note 4. Total sales net of transaction For holdings in Institutional Cash Series plc (“ICS”), there will be no initial charges or redemption charges costs 200,840 payable on investments in the Fund, however, duties and charges may apply. ICS will be subject to fees and expenses which may include fixed management fees, performance fees, administration fees and Total transaction costs 7 4 custodial fees. Total transaction costs The Fund may invest in other CIS, which may or may not be operated and/or managed by an affiliate as a % of average net assets 0.01% 0.01% of the Manager. As an investor in such other CIS, in addition to the fees, costs and expenses payable by a unitholder in the Funds, each unitholder may also indirectly bear a portion of the fees, costs and expenses of the underlying CIS, including management, investment management and administration and other expenses. However, in respect of investments made in any other investment fund whose manager is an affiliate of the Manager, the Fund will invest, where possible, in classes of the underlying funds which are not subject to any management charges. Alternatively, where this is not possible, the Manager will rebate management charges to the Fund. The Fund will not be subject to any preliminary/initial sales fee in respect of investments made in any other investment fund whose manager is an affiliate of the Manager, although it may be subject to duties and charges in respect of subscriptions and redemptions in such investment funds.
As at 28 February 2019 and 28 February 2018, none of the unitholders:
(i) are funds managed by the BlackRock Group or are affiliates of BlackRock Inc. or
(ii) are investors, other than those included in (i) above, who held 51% or more of the voting units in issue in the Fund and are as a result, considered to be related parties to the Fund.
47 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 48 Notes to Financial Statements continued
14. Portfolio Transaction Costs continued 14. Portfolio Transaction Costs continued For the year ended 28 February 2018 Transaction costs for derivatives positions will be either incurred as direct costs or form part of the dealing spread for the instruments. Any direct costs are identified in the analysis above. Dealing spread costs Direct Transaction Costs incurred by the Fund vary considerably for the different asset/instrument types depending on a number of Transaction Value Commissions Taxes factors including transaction value and market sentiment. Purchases (excluding derivatives) £000’s £000’s % £000’s % At the Balance Sheet date the average portfolio dealing spread (difference between bid and offer prices Equity instruments 15,418 7 0.04 10 0.07 of all investments expressed as a percentage of the offer price value) was 0.04% (28 February 2018: Debt instruments 101,714 – – – – 0.08%). Total purchases 117,132 7 10 15. Units in Issue Total purchases including transaction costs 117,149 The movement in units in issue for the year ended 28 February 2019 is as follows:
P Accumulation D Accumulation Direct Transaction Costs Units Units Transaction Value Commissions Taxes Balance at the beginning of the year 3,235,226 27,690,254 Sales (excluding derivatives) £000’s £000’s % £000’s % Issued during the year 4,455,203 32,328,092 Equity instruments 35,225 18 0.05 – – Cancelled during the year (3,192,912) (8,000,226) Debt instruments 126,433 – – – – Converted during the year 9,560,273 (8,998,323) Total sales 161,658 18 – Balance at the end of the year 14,057,790 43,019,797 Total sales net of transaction costs 161,640 Revenue is allocated each day pro rata to the capital value of assets attributable to each class and taxation is computed by reference to the net revenue after expenses attributable to each class. The Derivative transaction costs 2 – distribution per unit class is given in the distribution table. All unit classes have the same rights on Total transaction costs 27 10 winding up.
Total transaction costs 16. Post Balance Sheet Events as a % of average net assets 0.04% 0.02% There have been no significant events subsequent to the year end, which, in the opinion of the Manager, The above analysis covers direct transaction costs incurred by the Fund during the year. However it is may have had an impact on the financial statements for the year ended 28 February 2019. important to understand the nature of other transaction costs associated with different investment asset classes and instruments types.
Separately identifiable direct transaction costs (such as commissions and taxes) are attributable to the Fund’s purchase and sale of equity instruments. Additionally, for equity shares there is a dealing spread cost (the difference between the buying and selling prices) which will be incurred on purchase and sale transactions.
For the Fund’s investment transactions in debt and money market instruments any applicable transaction charges form part of the dealing spread for these instruments. Transactions in money market instruments to manage the Fund’s daily liquidity position are excluded from the analysis.
During the year the Fund utilised FDIs including contract for differences and futures contracts, covering different underlying asset classes. The settlement values for opening and closing derivative positions are not comparable to principal values for transactions in direct holding investments and therefore purchase and sale amounts for derivative transactions are not quantified in the analysis above.
49 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 50 Statement of Manager’s Responsibilities Statement of the Trustee’s Responsibilities in Respect of the Fund and Report of the Trustee to the Unitholders of the Fund The Manager is required by the rules of the COLL Sourcebook to prepare the financial statements for for the Year Ended 28 February 2019 each financial year. These financial statements must be prepared in accordance with generally accepted accounting standards in the United Kingdom to give a true and fair view of the state of affairs of the Fund at the year end and of the net expense and net gains for the year. The Depositary in its capacity as Trustee of the Fund must ensure that the Fund is managed in accordance with the Financial Conduct Authority’s Collective Investment Schemes Sourcebook, the Financial Services and The financial statements should comply with the disclosure requirements of the Statement of Recommended Markets Act 2000, as amended, (together “the Regulations”), the Trust Deed and Prospectus (together “the Practice (the “SORP”) for Authorised Funds issued by the Investment Management Association (subsequently Scheme documents”) as detailed below. The Investment Association) and must comply with any relevant provisions of the Trust Deed. The Trustee must in the context of its role act honestly, fairly, professionally, independently and in the interests The Manager is responsible for keeping such accounting records as are necessary to enable it to ensure that of the Fund and its investors. the financial statements comply with the COLL Sourcebook, the SORP and the Trust Deed. The Trustee is responsible for the safekeeping of all the custodial assets and maintaining a record of all other assets of the Fund in accordance with the Regulations.
The Trustee must ensure that:
• the Fund’s cash flows are properly monitored and that cash of the Fund is booked in cash accounts in accordance with the Regulations; • the sale, issue, repurchase, redemption and cancellation of units are carried out in accordance with the Regulations; • the value of units of the Fund are calculated in accordance with the Regulations; • any consideration relating to transactions in the Fund’s assets is remitted to the Fund within the usual time limits • the Fund’s income is applied in accordance with the Regulations; and • the instructions of the Authorised Fund Manager (“the AFM”), which is the UCITS Management Company, are carried out (unless they conflict with the Regulations).
The Trustee also has a duty to take reasonable care to ensure that the Fund is managed in accordance with the Regulations and the Scheme documents of the Fund in relation to the investment and borrowing powers applicable to the Fund.
Having carried out such procedures as we considered necessary to discharge our responsibilities as Trustee of the Fund, it is our opinion, based on the information available to us and the explanations provided, that, in all material respects the Fund, acting through the AFM:
(i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Fund’s units and the application of the Fund’s income in accordance with the Regulations and the Scheme documents of the Fund; and
(ii) has observed the investment and borrowing powers and restrictions applicable to the Fund in accordance with the Regulations and the Scheme documents of the Fund.
The Bank of New York Mellon London (International) Limited 2 May 2019
51 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 52 Independent Auditor’s Report to the Unitholders of BlackRock European Absolute Alpha Other information
Fund The other information comprises the information included in the annual report, other than the
financial statements and our auditor’s report thereon. The manager is responsible for the other Opinion information. We have audited the financial statements of BlackRock European Absolute Alpha Fund (“the Fund”) for the year ended 28 February 2019 which comprise the Statement of Total Return and Our opinion on the financial statements does not cover the other information and, except to Statement of Change in Net Assets Attributable to Unitholders together with the Balance Sheet, the extent otherwise explicitly stated in this report, we do not express any form of assurance the accounting policies of the Fund and the related notes. The financial reporting framework conclusion thereon. that has been applied in their preparation is applicable law and United Kingdom Accounting In connection with our audit of the financial statements, our responsibility is to read the other Standards (United Kingdom Generally Accepted Accounting Practice) including FRS 102 ‘The information and, in doing so, consider whether the other information is materially inconsistent Financial Reporting Standard applicable to the UK and Republic of Ireland’. with the financial statements or our knowledge obtained in the audit or otherwise appears In our opinion, the financial statements: to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the • give a true and fair view of the financial position of the Fund as at 28 February 2019 and of financial statements or a material misstatement of the other information. If, based on the work the net expense and the net capital gains on the scheme property of the Fund for the year we have performed, we conclude that there is a material misstatement of the other information, then ended; and we are required to report that fact. • have been properly prepared in accordance with United Kingdom Generally Accepted We have nothing to report in this regard. Accounting Practice including FRS 102 ‘The Financial Reporting standard applicable in the UK and Republic of Ireland’. Opinions on other matters prescribed by the rules of the Collective Investment Schemes Sourcebook of the Financial Conduct Authority Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs In our opinion: (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. • the financial statements have been properly prepared in accordance with the Statement of We are independent of the fund in accordance with the ethical requirements that are relevant Recommended Practice relating to Authorised Funds, the rules of the Collective Investment to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we Schemes Sourcebook of the Financial Conduct Authority and the Trust Deed; have fulfilled our other ethical responsibilities in accordance with these requirements. • the information given in the manager’s report for the financial year for which the financial statements are prepared is consistent with the financial statements; and We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. • there is nothing to indicate that proper accounting records have not been kept or that the financial statements are not in agreement with those records. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) Matters on which we are required to report by exception require us to report to you where: We have nothing to report in respect of the following matter in relation to which the Collective Investment Schemes Sourcebook of the Financial Conduct Authority rules requires us to report • the manager’s use of the going concern basis of accounting in the preparation of the to you if, in our opinion: financial statements is not appropriate; or • we have not received all the information and explanations which, to the best of our • the manager has not disclosed in the financial statements any identified material knowledge and belief, are necessary for the purposes of our audit. uncertainties that may cast significant doubt about the fund’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
53 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 54 Supplementary Information
Efficient Portfolio Management Techniques The Manager may, on behalf of the Fund and subject to the conditions and within the limits laid down by the FCA and the Prospectus, employ techniques and instruments relating to transferable securities, including Responsibilities of the manager investments in OTC FDIs provided that such techniques and instruments are used for efficient portfolio As explained more fully in the manager’s responsibilities statement set out on page 51, the management purposes or to provide protection against exchange risk or for direct investment purposes,
manager is responsible for the preparation of the financial statements and for being satisfied where applicable. that they give a true and fair view, and for such internal control as the manager determines is necessary to enable the preparation of financial statements that are free from material In addition to the investments in OTC FDIs, the Fund may employ other techniques and instruments relating misstatement, whether due to fraud or error. to transferable securities and money market instruments, subject to the conditions set out in the Fund’s Prospectus, as amended from time to time, and the relevant ESMA Guidelines, such as repurchase/reverse In preparing the financial statements, the manager is responsible for assessing the fund’s ability repurchase transactions (“repo transactions”) and securities lending. to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the manager either intends to liquidate the CFDs fund or to cease operations, or has no realistic alternative but to do so. The following table details the value of CFDs as a proportion of the Fund’s NAV, as at 28 February 2019 Auditor’s responsibilities for the audit of the financial statements and the income/returns earned for the year ended 28 February 2019. The value of CFDs is based on the underlying exposure value on a gross absolute basis. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, CFDs but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect % of NAV Returns earned £000's a material misstatement when it exists. Misstatements can arise from fraud or error and are 57.88 (802) considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The following tables detail the underlying exposure value on a gross absolute basis for CFDs, analysed by A further description of our responsibilities for the audit of the financial statements is located on counterparty as at 28 February 2019. the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. CFDs Counterparty’s country Use of our report Counterparty of establishment Underlying exposure This report is made solely to the unitholders of the fund, as a body, pursuant to Paragraph £000’s 4.5.12 of the rules of the Collective Investment Schemes Sourcebook of the Financial Conduct Citigroup Global Markets Ltd UK 13,867 Authority. Our audit work has been undertaken so that we might state to the unitholders of Deutsche Bank AG Germany 3,371 the fund those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to Merrill Lynch International UK 13,686 anyone other than the fund and the unitholders of the fund as a body, for our audit work, for this J.P. Morgan Securities Plc UK 14,918 report, or for the opinions we have formed. All CFDs have an open maturity tenor as they are recallable or terminable on a daily basis.
Ernst & Young LLP Edinburgh Statutory Auditor 2 May 2019
55 BlackRock European Absolute Alpha Fund BlackRock European Absolute Alpha Fund 56 Supplementary Information continued About us Collateral The Fund engages in activities which may require collateral to be provided to a counterparty (“collateral BlackRock is a premier provider of asset management, risk management, and advisory services to institutional, posted”) or may hold collateral received (“collateral received”) from a counterparty. intermediary, and individual clients worldwide. As of 31 March 2019, the fi rm manages £4.99 trillion across asset classes in separate accounts, mutual funds, other pooled investment vehicles, and the industry-leading The following table provides an analysis by currency of the cash collateral posted by way of title transfer iShares® exchange-traded funds. collateral arrangement by the Fund, in respect of OTC FDIs (including CFDs), as at 28 February 2019. Through BlackRock Solutions®, the fi rm offers risk management and advisory services that combine capital Cash Cash Non-cash Non-cash markets expertise with proprietarily-developed analytics, systems, and technology. Through BlackRock collateral collateral collateral collateral Solutions, the Firm provides risk management and enterprise investment services for over 200 clients. Currency received posted received posted BlackRock serves clients in North and South America, Europe, Asia, Australia, Africa, and the Middle East. £000’s £000’s £000’s £000’s Headquartered in New York, the fi rm maintains offi ces in over 30 countries around the world. OTC FDIs GBP – 1,105 – – Total – 1,105 – –
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57 BlackRock European Absolute Alpha Fund