DECEMBER 31, 2017 ANNUAL REPORT. BlackRock Funds III ishares MSCI Total International Index Fund. Not FDIC Insured May Lose Value No Bank Guarantee

Transcription

1 DECEMBER 31, 2017 ANNUAL REPORT BlackRock Funds III ishares MSCI Total International Index Fund Not FDIC Insured May Lose Value No Bank Guarantee

2 The Markets in Review Dear Shareholder, In the 12 months ended December 31, 2017, risk assets, such as stocks and high-yield bonds, continued to deliver strong performance. The equity market advanced, month after month, despite geopolitical uncertainty and relatively high valuations, while bond returns were constrained by higher interest rates. Rising interest rates worked against high-quality assets with more interest rate sensitivity. Consequently, longer-term U.S. Treasuries posted modest returns, as rising energy prices, modest wage increases, and steady job growth led to expectations of higher inflation and interest rate increases by the U.S. Federal Reserve (the Fed ). The market s performance reflected reflationary expectations early in the reporting period, as investors began to sense that a global recovery was afoot. Thereafter, many countries throughout the world experienced sustained and synchronized growth for the first time since the financial crisis. Growth rates and inflation are still relatively low, but they are finally rising together. The Fed responded to these positive developments by increasing short-term interest rates three times and setting expectations for additional interest rate increases. The Fed also began reducing the vast balance sheet reserves that had accumulated in the wake of the financial crisis. In October 2017, the Fed reduced its $4.5 trillion balance sheet by only $10 billion, while setting expectations for additional modest reductions and rate hikes in By contrast, the European Central Bank ( ECB ) and the Bank of Japan ( BoJ ) both continued to expand their balance sheets despite nascent signs of sustained economic growth. The Eurozone and Japan are both approaching the limits of central banks ownership share of national debt, which is a structural pressure point that limits their capacity to deliver additional monetary stimulus. In October 2017, the ECB announced plans to cut the amount of its bond purchases in half for 2018, while the BoJ reiterated its commitment to economic stimulus until the inflation rate rises to its target of 2%. Emerging market growth also stabilized, as accelerating growth in China, the second largest economy in the world and the most influential of all developing economies, improved the outlook for corporate profits and economic growth across most developing nations. Chinese demand for commodities and other raw materials allayed concerns about the country s banking system, leading to rising equity prices and foreign investment flows. While escalating tensions between the United States and North Korea and our nation s divided politics are concerning, benign credit conditions, modest inflation, solid corporate earnings, and the positive outlook for growth in the world s largest economies have kept markets relatively tranquil. Rising consumer confidence and improving business sentiment are driving momentum for the U.S. economy. If the Fed maintains a measured pace of stimulus reduction, to the extent that inflation rises, it s likely to be accompanied by rising real growth and higher wages. That could lead to a favorable combination of moderately higher inflation, steadily rising interest rates, and improving growth in Further fueling optimism, Congress passed a sweeping tax reform bill in December The U.S. tax overhaul is likely to accentuate the reflationary themes already in place, including faster growth and rising interest rates. Changing the corporate tax rate to a flat 21% will create many winners and losers among high-and-low tax companies, while the windfall from lower taxes could boost business and consumer spending. In this environment, investors need to think globally, extend their scope across a broad array of asset classes, and be nimble as market conditions change. We encourage you to talk with your financial advisor and visit blackrock.com for further insight about investing in today s markets. Sincerely, Rob Kapito President, BlackRock Advisors, LLC Total Returns as of December 31, 2017 U.S. large cap equities (S&P 500 Index) U.S. small cap equities (Russell 2000 Index) International equities (MSCI Europe, Australasia, Far East Index) Emerging market equities (MSCI Emerging Markets Index) 3-month Treasury bills (ICE BofAML 3-Month U.S. Treasury Bill Index) U.S. Treasury securities (ICE BofAML 10-Year U.S. Treasury Index) U.S. investment grade bonds (Bloomberg Barclays U.S. Aggregate Bond Index) Tax-exempt municipal bonds (S&P Municipal Bond Index) U.S. high yield bonds (Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index) 6-month 12-month 11.42% 21.83% (0.01) Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Rob Kapito President, BlackRock Advisors, LLC 2 T HIS P A G E IS NO T P ART OF Y OUR F UND R EPORT

3 Table of Contents Page The Markets in Review Annual Report: Fund Summary About Fund Performance Disclosure of Expenses Derivative Financial Instruments... 6 Fund Financial Statements: Statement of Assets and Liabilities... 7 Statement of Operations Statements of Changes in Net Assets... 9 Fund Financial Highlights Fund Notes to Financial Statements Fund Report of Independent Registered Public Accounting Firm Important Tax Information Master Portfolio Information Master Portfolio Financial Statements: Schedule of Investments Statement of Assets and Liabilities Statement of Operations Statements of Changes in Net Assets Master Portfolio Financial Highlights Master Portfolio Notes to Financial Statements Master Portfolio Report of Independent Registered Public Accounting Firm Trustee and Officer Information Additional Information Glossary of Terms Used in this Report

4 Fund Summary as of December 31, 2017 ishares MSCI Total International Index Fund Investment Objective ishares MSCI Total International Index Fund s (the Fund ) investment objective is to match the performance of the MSCI All Country World ex USA Index (the MSCI ACWI ex USA Index ) in U.S. dollars with net dividends as closely as possible before the deduction of Fund expenses. On February 24, 2017, the Board approved a proposal to change the name of BlackRock Total International ex U.S. Index Fund to ishares MSCI Total International Index Fund, which was effective on June 19, Portfolio Management Commentary How did the Fund perform? For the 12-month period ended December 31, 2017, the Fund s Institutional Shares returned 27.57%, Investor A Shares returned 27.32% and Class K Shares returned 27.62%. The benchmark MSCI ACWI ex USA Index returned 27.19% for the same period. The Fund invests all of its assets in (the Master Portfolio ), a series of Master Investment Portfolio. Describe the market environment. Japanese equities posted solid gains in the first quarter. Some success can be attributed to Japanese companies having a higher exposure to global growth, which has been trending upward over the past few quarters fourth-quarter earnings reports were among the strongest in Japan in nearly a decade. Continued yield curve management from the central bank, better corporate governance and domestic investor buying have also been supportive of Japanese stocks. In the case of Europe, economic data improved in the first quarter of 2017, particularly in large export-driven economies like Germany. Additionally, inflation in the region has started to stabilize, although not a major reversal, with headline CPI hitting 1.8% year-over-year and core inflation firming to 0.9% year-over-year in January. Political anxiety over elections in the Netherlands and France in the first half of the year, as well as fears over the European Central Bank ( ECB ) tapering its asset purchase program too soon, weighed on investor sentiment to some extent. In the United Kingdom, Prime Minister Theresa May triggered Article 50 at the end of March, marking the start of the two-year period in which the United Kingdom must leave the European Union. While the initial impact of Brexit appeared to be inconsequential, recent economic data has shown the first signs of stress. January retail sales and average earnings missed expectations. Furthermore, a continued weakening of the pound sterling could continue to squeeze consumers further through increasing costs of imports. In such an environment, large-cap multinationals listed on the London Stock Exchange would likely remain better positioned than domestically focused small caps. The FTSE 100 Index hit a new record high against currency weakness. Australia also experienced a positive first quarter, as the country benefited from global reflation, rising metal prices, and strong domestic and Chinese economic indicators. In the second quarter, the Japanese yen was relatively volatile throughout the period, as the Bank of Japan made no changes to their policy, but revised upward their assessment of economic prospects. Japan s strengthening economy translated into strong corporate earnings growth and positive earnings revisions. Investor interest accelerated in European equities in the second quarter, leading to solid, broad-based returns across the region. The defeat of anti-european Union populists in France and the Netherlands diminished political risk for the region overall. This allowed investors to focus on the strongest European earnings season in seven years amid both a strengthening regional economy and global economy. French President Emmanuel Macron s victory was positively felt across the continent and unsurprisingly had the largest impact within France. Gains in Eurozone equities were capped, as some investors looked cautiously at ECB developments for signs of monetary tightening. The United Kingdom did experience some volatility ahead and in the immediate wake of the snap election in June. In Europe, the positive tailwinds of strong corporate profit and economic growth sustained the equity market rally. The euro area real effective exchange rate increased roughly 2% in the third quarter, as the improved growth picture in the region led markets to expect ECB President Mario Draghi to announce a further reduction in the pace of quantitative easing purchases, which could provide upward pressure on anemically low eurozone bond yields. However, the momentum behind the Franco-German drive to promote a deeper eurozone was slightly challenged in the German elections. While Chancellor Angela Merkel won a fourth term, the euro-skeptic right-wing Alternative for Germany party won a larger-than-expected share of the parliament. In response to growing ambitions of a Catalonian separatist movement, Spanish authorities arrested Catalan officials and raided several ministries ahead of an independence vote on October 1. In the fourth quarter, Prime Minister Shinzo Abe s victory at the October 22 snap election diminished uncertainty in the market, which helped investors focus on an improved earnings outlook, the benefits of increased global trade, and a strengthening domestic economy. In Europe, robust economic and corporate earnings growth helped the region post respectable gains despite recent headline noise around Spain and stubbornly low inflation. Describe recent portfolio activity. During the period, as changes were made to the composition of the MSCI ACWI ex USA Index, the Master Portfolio purchased and sold securities to maintain its objective of replicating the risks and return of the benchmark index. Describe portfolio positioning at period end. The Master Portfolio remains positioned to match the risk characteristics of its benchmark index, irrespective of the market s future direction. The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

5 Fund Summary as of December 31, 2017 (continued) ishares MSCI Total International Index Fund TOTAL RETURN BASED ON A $10,000 INVESTMENT $14,000 13,000 $13,496 $12,984 $12,774 12,000 11,000 10,000 9,000 8,000 6/30/11 (d) Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Institutional Shares (a)(b) Investor A Shares (a)(b) MSCI ACWI ex USA Index (c) (a) Assuming transaction costs and other operating expense, including administration fees, if any. (b) The Fund invests all of its assets in the Master Portfolio. The Master Portfolio will be substantially invested in equity securities in the MSCI ACWI ex USA Index, and will invest, under normal circumstances, at least 80% of its assets in securities or other financial instruments that are components of or have economic characteristics similar to the securities included in the MSCI ACWI ex USA Index. (c) The index is a free float-adjusted market capitalization index designed to measure the combined equity market performance of developed and emerging market countries, excluding the United States. (d) Commencement of operations. Performance Summary for the Period Ended December 31, Month Total Returns Average Annual Total Returns (e) 1 Year 5 Years Since Inception (f) Institutional % 27.57% 6.32% 4.09% Investor A Class K MSCI ACWI ex USA Index (e) See About Fund Performance on page 6 for a detailed description of share classes, including any related sales charges and fees. (f) The Fund commenced operations on June 30, Past performance is not indicative of future results. Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles. Expense Example Beginning Account Value (07/01/17) Actual Ending Account Value (12/31/17) Expenses Paid During the Period (a) Beginning Account Value (07/01/17) Hypothetical (b) Ending Account Value (12/31/17) Expenses Paid During the Period (a) Annualized Expense Ratio Institutional $ 1, $ 1, $ 0.85 $ 1, $ 1, $ % Investor A , , , , Class K , , , , (a) (b) For each class of the Fund, expenses are equal to the annualized net expense ratio for the class, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period shown). Because the Fund invests all of its assets in the Master Portfolio, the expense example reflects the net expenses of both the Fund and the Master Portfolio in which it invests. Hypothetical 5% annual return before expenses is calculated by prorating the number of days in the most recent fiscal half year divided by 365. See Disclosure of Expenses on page 6 for further information on how expenses were calculated. F UND S UMMARY 5

6 About Fund Performance Institutional and Class K Shares are not subject to any sales charge. These shares bear no ongoing distribution or service fees and are available only to certain eligible investors. Investor A Shares are not subject to any sales charge and bear no ongoing distribution fee. These shares are subject to an ongoing service fee of 0.25% per year. These shares are generally available through financial intermediaries. Performance information reflects past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. Refer to to obtain performance data current to the most recent month-end. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Figures shown in the performance table on the previous page assume reinvestment of all distributions, if any, at net asset value ( NAV ) on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Distributions paid to each class of shares will vary because of the different levels of service, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders. BlackRock Advisors, LLC ( BAL or the Administrator ), the Fund s administrator, has contractually agreed to waive and/or reimburse a portion of the Fund s expenses. Without such waiver and/or reimbursement, the Fund s performance would have been lower. The Administrator is under no obligation to continue waiving and/or reimbursing its fees after the applicable termination date of such agreement. See Note 4 of the Notes to Financial Statements for additional information on waivers and/or reimbursements. Disclosure of Expenses Shareholders of the Fund may incur the following charges: (a) transactional expenses, such as sales charges; and (b) operating expenses, including administration fees, service and distribution fees, including 12b-1 fees, acquired fund fees and expenses and other fund expenses. The expense example on the previous page (which is based on a hypothetical investment of $1,000 invested on July 1, 2017 and held through December 31, 2017) is intended to assist shareholders both in calculating expenses based on an investment in the Fund and in comparing these expenses with similar costs of investing in other mutual funds. The expense example provides information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number corresponding to their Fund and share class under the heading entitled Expenses Paid During the Period. The expense example also provides information about hypothetical account values and hypothetical expenses based on the Fund s actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in the Fund and other funds, compare the 5% hypothetical example with the 5% hypothetical examples that appear in shareholder reports of other funds. The expenses shown in the expense example are intended to highlight shareholders ongoing costs only and do not reflect transactional expenses, such as sales charges, if any. Therefore, the hypothetical example is useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher. Derivative Financial Instruments The Master Portfolio may invest in various derivative financial instruments. These instruments are used to obtain exposure to a security, commodity, index, market, and/or other assets without owning or taking physical custody of securities, commodities and/or other referenced assets or to manage market, equity, credit, interest rate, foreign currency exchange rate, commodity and/or other risks. Derivative financial instruments may give rise to a form of economic leverage and involve risks, including the imperfect correlation between the value of a derivative financial instrument and the underlying asset, possible default of the counterparty to the transaction or illiquidity of the instrument. The Master Portfolio s successful use of a derivative financial instrument depends on the investment adviser s ability to predict pertinent market movements accurately, which cannot be assured. The use of these instruments may result in losses greater than if they had not been used, may limit the amount of appreciation the Master Portfolio can realize on an investment and/or may result in lower distributions paid to shareholders. The Master Portfolio s investments in these instruments, if any, are discussed in detail in the Notes to Financial Statements B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

7 Statement of Assets and Liabilities December 31, 2017 ishares MSCI Total International Index Fund ASSETS Investments at value Master Portfolio (cost $509,858,045)... $625,478,926 Receivables: Capital shares sold ,059 From the Administrator ,787 Withdrawals from the Master Portfolio... 2,200 Prepaid expenses ,483 Total assets ,439,455 LIABILITIES Payables: Capital shares redeemed ,259 Service fees ,397 Professional fees ,120 Administration fees ,671 Other accrued expenses ,482 Total liabilities ,071,929 NET ASSETS $625,367,526 NET ASSETS CONSIST OF: Paid-in capital $517,001,731 Distributions in excess of net investment income... (1,794,004) Accumulated net realized loss allocated from the Master Portfolio... (5,461,082) Net unrealized appreciation (depreciation) allocated from the Master Portfolio ,620,881 NET ASSETS $625,367,526 NET ASSET VALUE Institutional Based on net assets of $73,404,629 and 7,690,676 shares outstanding, unlimited shares authorized, no par value $ 9.54 Investor A Based on net assets of $288,431,276 and 30,299,971 shares outstanding, unlimited shares authorized, no par value $ 9.52 Class K Based on net assets of $263,531,621 and 26,830,495 shares outstanding, unlimited shares authorized, no par value $ 9.82 See notes to financial statements. F INANCIAL S TATEMENTS 7

8 Statement of Operations Year Ended December 31, 2017 ishares MSCI Total International Index Fund INVESTMENT INCOME Net investment income allocated from the Master Portfolio : Dividends unaffiliated.... $ 17,370,095 Dividends affiliated ,691 Interest unaffiliated Securities lending income affiliated net ,304 Foreign taxes withheld..... (2,036,934) Expenses... (375,426) Fees waived ,493 Total investment income ,213,623 FUND EXPENSES Service and distribution class specific ,599 Transfer agent class specific ,760 Registration ,818 Administration ,360 Printing ,825 Recoupment of past fees waived and/or reimbursed... 29,972 Professional ,169 Recoupment of past fees waived and/or reimbursed class specific ,166 Officer Miscellaneous ,774 Total expenses ,074,749 Less: Fees waived and/or reimbursed by the Administrator... (12,501) Transfer agent fees waived and/or reimbursed class specific... (6,103) Total expenses after fees waived and/or reimbursed... 1,056,145 Net investment income ,157,478 REALIZED AND UNREALIZED GAIN (LOSS) ALLOCATED FROM THE MASTER PORTFOLIO Net realized gain (loss) from: Investments (including $3,327 foreign capital gain tax) unaffiliated (2,685,847) Futures contracts ,041 Foreign currency transactions ,155 (1,595,651) Net change in unrealized appreciation (depreciation) on: Investments (including $55,138 foreign capital gain tax) unaffiliated ,923,272 Futures contracts ,274 Foreign currency translations , ,098,489 Net realized and unrealized gain ,502,838 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $127,660,316 See notes to financial statements B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

9 Statements of Changes in Net Assets ishares MSCI Total International Index Fund Year Ended December 31, INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income $ 14,157,478 $ 7,008,197 Net realized gain (loss) (1,595,651) 2,730,185 Net change in unrealized appreciation (depreciation) ,098,489 3,278,725 Net increase in net assets resulting from operations ,660,316 13,017,107 DISTRIBUTIONS TO SHAREHOLDERS (a) From net investment income: Institutional (1,868,415) (1,271,110) Investor A (7,168,995) (3,962,291) Class K.... (6,583,878) (1,899,693) From net realized gain: Institutional (13,875) (588,534) Investor A (60,633) (2,049,998) Class K.... (49,032) (816,291) Decrease in net assets resulting from distributions to shareholders... (15,744,828) (10,587,917) CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from capital share transactions... 86,220, ,611,891 NET ASSETS Total increase in net assets ,135, ,041,081 Beginning of year ,231, ,190,559 End of year..... $625,367,526 $427,231,640 Distributions in excess of net investment income, end of year... $ (1,794,004) $ (330,185) (a) Distributions for annual periods determined in accordance with U.S. federal income tax regulations. See notes to financial statements. F INANCIAL S TATEMENTS 9

10 Financial Highlights (For a share outstanding throughout each period) ishares MSCI Total International Index Fund Institutional Year Ended December 31, Net asset value, beginning of year... $ 7.70 $ 7.65 $ 8.43 $ $ 9.06 Net investment income (a) Net realized and unrealized gain (loss) (0.69) (0.75) 1.02 Net increase (decrease) from investment operations (0.48) (0.45) 1.24 Distributions: (b) From net investment income... (0.26) (0.21) (0.17) (0.29) (0.24) From net realized gain (0.00) (c) (0.07) (0.13) (0.89) Total distributions (0.26) (0.28) (0.30) (1.18) (0.24) Net asset value, end of year... $ 9.54 $ 7.70 $ 7.65 $ 8.43 $ Total Return (d) Based on net asset value % 4.31% (5.89)% (4.78)% 13.94% Ratios to Average Net Assets (e)(f) Total expenses % 0.19% 0.45% 0.83% (g) 1.25% Total expenses after fees waived and/or reimbursed % 0.16% 0.17% 0.21% (g) 0.35% Net investment income % 2.74% 2.49% 3.00% (g) 2.35% Supplemental Data Net assets, end of year (000).... $73,405 $76,001 $40,716 $17,380 $15,013 Portfolio turnover rate of the Master Portfolio... 57% 15% 6% 49% 36% (a) (b) (c) (d) (e) (f) Based on average shares outstanding. Distributions for annual periods determined in accordance with U.S. federal income tax regulations. Amount is greater than $(0.005) per share. Where applicable, assumes the reinvestment of distributions. Includes the Fund s share of the Master Portfolio s allocated expenses and/or net investment income. Includes the Fund s share of the Master Portfolio s allocated fees waived as follows: Year Ended December 31, Allocated fees waived % 0.00% 0.00% 0.03% 0.01% (g) Excludes expenses incurred indirectly as a result of investments in underlying funds of approximately 0.01%. See notes to financial statements B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

11 Financial Highlights (continued) (For a share outstanding throughout each period) ishares MSCI Total International Index Fund (continued) Investor A Year Ended December 31, Net asset value, beginning of year... $ 7.68 $ 7.63 $ 8.41 $10.06 $ 9.06 Net investment income (a) Net realized and unrealized gain (loss) (0.62) (0.71) 1.00 Net increase (decrease) from investment operations (0.49) (0.49) 1.21 Distributions: (b) From net investment income... (0.24) (0.19) (0.16) (0.27) (0.21) From net realized gain (0.00) (c) (0.07) (0.13) (0.89) Total distributions (0.24) (0.26) (0.29) (1.16) (0.21) Net asset value, end of year... $ 9.52 $ 7.68 $ 7.63 $ 8.41 $10.06 Total Return (d) Based on net asset value % 4.07% (6.05)% (5.19)% 13.63% Ratios to Average Net Assets (e)(f) Total expenses % 0.46% 0.43% 1.30% (g) 1.91% Total expenses after fees waived and/or reimbursed % 0.41% 0.38% 0.46% (g) 0.64% Net investment income % 2.48% 1.63% 2.28% (g) 2.21% Supplemental Data Net assets, end of year (000).... $288,431 $247,732 $144,177 $ 372 $ 65 Portfolio turnover rate of the Master Portfolio % 15% 6% 49% 36% (a) (b) (c) (d) (e) (f) Based on average shares outstanding. Distributions for annual periods determined in accordance with U.S. federal income tax regulations. Amount is greater than $(0.005) per share. Where applicable, assumes the reinvestment of distributions. Includes the Fund s share of the Master Portfolio s allocated expenses and/or net investment income. Includes the Fund s share of the Master Portfolio s allocated fees waived as follows: Year Ended December 31, Allocated fees waived % 0.00% 0.00% 0.03% 0.01% (g) Excludes expenses incurred indirectly as a result of investments in underlying funds of approximately 0.01%. See notes to financial statements. F INANCIAL H IGHLIGHTS 11

12 Financial Highlights (continued) (For a share outstanding throughout each period) ishares MSCI Total International Index Fund (continued) Class K Year Ended December 31, Net asset value, beginning of year... $ 7.92 $ 7.86 $ 8.65 $10.30 $ 9.27 Net investment income (a) Net realized and unrealized gain (loss) (0.71) (0.65) 1.04 Net increase (decrease) from investment operations (0.48) (0.46) 1.27 Distributions: (b) From net investment income (0.26) (0.21) (0.18) (0.30) (0.24) From net realized gain (0.00) (c) (0.07) (0.13) (0.89) Total distributions (0.26) (0.28) (0.31) (1.19) (0.24) Net asset value, end of year... $ 9.82 $ 7.92 $ 7.86 $ 8.65 $10.30 Total Return (d) Based on net asset value % 4.37% (5.83)% (4.84)% 13.96% Ratios to Average Net Assets (e)(f) Total expenses % 0.14% 0.46% 0.81% (g) 1.36% Total expenses after fees waived and/or reimbursed % 0.11% 0.13% 0.15% (g) 0.34% Net investment income % 2.68% 2.71% 2.02% (g) 2.40% Supplemental Data Net assets, end of year (000) $263,532 $103,498 $7,297 $6,267 $ 80 Portfolio turnover rate of the Master Portfolio... 57% 15% 6% 49% 36% (a) (b) (c) (d) (e) (f) Based on average shares outstanding. Distributions for annual periods determined in accordance with U.S. federal income tax regulations. Amount is greater than $(0.005) per share. Where applicable, assumes the reinvestment of distributions. Includes the Fund s share of the Master Portfolio s allocated expenses and/or net investment income. Includes the Fund s share of the Master Portfolio s allocated fees waived as follows: Year Ended December 31, Allocated fees waived % 0.00% 0.00% 0.03% 0.01% (g) Excludes expenses incurred indirectly as a result of investments in underlying funds of approximately 0.01%. See notes to financial statements B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

13 Notes to Financial Statements ishares MSCI Total International Index Fund 1. ORGANIZATION BlackRock Funds III (the Trust ) is registered under the Investment Company Act of 1940, as amended (the 1940 Act ), as an open-end management investment company. ishares MSCI Total International Index Fund (the Fund ) is a series of the Trust. The Fund is classified as diversified. The Trust is organized as a Delaware statutory trust. The Fund seeks to achieve its investment objective by investing all of its assets in (the Master Portfolio ), a series of Master Investment Portfolio ( MIP ), an affiliate of the Trust, which has the same investment objective and strategies as the Fund. The value of the Fund s investment in the Master Portfolio reflects the Fund s proportionate interest in the net assets of the Master Portfolio. The performance of the Fund is directly affected by the performance of the Master Portfolio. At December 31, 2017, the percentage of the Master Portfolio owned by the Fund was 59.6%. The financial statements of the Master Portfolio, including the Schedule of Investments, are included elsewhere in this report and should be read in conjunction with the Fund s financial statements. The Fund offers multiple classes of shares. All classes of shares have identical voting, dividend, liquidation and other rights and are subject to the same terms and conditions, except that Investor A Shares bear certain expenses related to the shareholder servicing and distribution of such shares. Institutional and Class K Shares are sold without a sales charge and only to certain eligible investors. Investor A Shares are sold without a sales charge and generally available through financial intermediaries. Each class has exclusive voting rights with respect to matters relating to its shareholder servicing and distribution expenditures. The Board of Trustees of the Trust and Board of Trustees of MIP are referred to throughout this report as the Board of Trustees or the Board and the members are referred to as Trustees. Share Class Initial Sales Charge CDSC Conversion Privilege Institutional Shares No No None Investor A Shares No No None Class K Shares No No None On February 24, 2017, the Board approved a proposal to change the name of BlackRock Total International ex U.S. Index Fund to ishares MSCI Total International Index Fund, which was effective on June 19, The Fund, together with certain other registered investment companies advised by BlackRock Advisors, LLC ( BAL or the Administrator ) or its affiliates, is included in a complex of open-end funds referred to as the Equity-Liquidity Complex. 2. SIGNIFICANT ACCOUNTING POLICIES The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. Below is a summary of significant accounting policies: Investment Transactions and Income Recognition: For financial reporting purposes, contributions to and withdrawals from the Master Portfolio are accounted for on a trade date basis. The Fund records its proportionate share of the Master Portfolio s income, expenses and realized and unrealized gains and losses on a daily basis. Realized and unrealized gains and losses are adjusted utilizing partnership tax allocation rules. In addition, the Fund accrues its own expenses. Income, expenses and realized and unrealized gains and losses are allocated daily to each class based on its relative net assets. Distributions: Distributions paid by the Fund are recorded on the ex-dividend date. Distributions of capital gains are recorded on the ex-dividend date and made at least annually. The character and timing of distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Indemnifications: In the normal course of business, the Fund enters into contracts that contain a variety of representations that provide general indemnification. The Fund s maximum exposure under these arrangements is unknown because it involves future potential claims against the Fund, which cannot be predicted with any certainty. Other: Expenses directly related to the Fund or its classes are charged to the Fund or the applicable class. Other operating expenses shared by several funds, including other funds managed by the Administrator, are prorated among those funds on the basis of relative net assets or other appropriate methods. Expenses directly related to the Fund and other shared expenses prorated to the Fund are allocated daily to each class based on its relative net assets or other appropriate methods. 3. INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS Investment Valuation Policies: The Fund s policy is to value its financial instruments at fair value. The Fund records its investment in the Master Portfolio at fair value based on the Fund s proportionate interest in the net assets of the Master Portfolio. Valuation of securities held by the Master Portfolio is discussed in Note 3 of the Master Portfolio s Notes to Financial Statements, which are included elsewhere in this report. 4. ADMINISTRATION AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES The PNC Financial Services Group, Inc. is the largest stockholder and an affiliate of BlackRock, Inc. ( BlackRock ) for 1940 Act purposes. N OTES TO F INANCIAL S TATEMENTS 13

14 Notes to Financial Statements (continued) ishares MSCI Total International Index Fund Administration: The Trust, on behalf of the Fund, entered into an Administration Agreement with BAL, an indirect, wholly-owned subsidiary of BlackRock, to provide administrative services (other than investment advice and related portfolio activities). For such services, the Fund pays BAL a monthly fee at the annual rate of 0.01% of the average daily net assets of the Fund. The Fund does not pay an investment advisory fee or investment management fee. Service and Distribution Fees: The Trust, on behalf of the Fund, entered into a Distribution Agreement and a Distribution Plan with BlackRock Investments, LLC ( BRIL ), an affiliate of the Administrator. Pursuant to the Distribution Plan and in accordance with Rule 12b-1 under the 1940 Act, the Fund pays BRIL ongoing service and distribution fees. The fees are accrued daily and paid monthly at annual rates of 0.25% based upon the average daily net assets of Investor A Shares. BRIL and broker-dealers, pursuant to sub-agreements with BRIL, provide shareholder servicing and distribution services to the Fund. The ongoing service and/or distribution fee compensates BRIL and each broker-dealer for providing shareholder servicing and/or distribution related services to shareholders. For the year ended December 31, 2017, the class specific service and distribution fees borne directly by Investor A Shares was $670,599. Transfer Agent: The Administrator maintains a call center that is responsible for providing certain shareholder services to the Fund. Shareholder services include responding to inquiries and processing subscriptions and redemptions based upon instructions from shareholders. For the year ended December 31, 2017, the Fund reimbursed the Administrator the following amounts for costs incurred in running the call center, which are included in transfer agent class specific in the Statement of Operations: Institutional Investor A Class K Total $ 253 $ 1,846 $ 122 $2,221 For the year ended December 31, 2017, the following table shows the class specific transfer agent fees borne directly by each class of the Fund: Institutional Investor A Class K Total $ 31,436 $ 135,621 $ 4,703 $171,760 Expense Limitations, Waivers, Reimbursements and Recoupments: With respect to the Fund, BAL contractually agreed to waive and/or reimburse fees or expenses in order to limit expenses, excluding interest expense, dividend expense, tax expense, acquired fund fees and expenses, and certain other fund expenses, which constitute extraordinary expenses not incurred in the ordinary course of the Fund s business ( expense limitations ). The expense limitations as a percentage of average daily net assets are as follows: Institutional Investor A Class K Rate % 0.41% 0.11% BAL has agreed not to reduce or discontinue these contractual expense limitations through April 30, 2018, unless approved by the Board, including a majority of the trustees who are not interested persons of the Trust, as defined in the 1940 Act ( Independent Trustees ) or by a vote of a majority of the outstanding voting securities of the Fund. For the year ended December 31, 2017, BAL waived and/or reimbursed $12,501. These amounts waived and/or reimbursed are included in transfer agent fees waived and/or reimbursed class specific, in the Statement of Operations. For the year ended December 31, 2017, class specific expense waivers and/or reimbursements are as follows: Transfer agent fees waived and/or reimbursed Institutional Investor A Class K Total $ 672 $ 4,023 $ 1,408 $6,103 With respect to the contractual expense limitation, if during the Fund s fiscal year the operating expenses of a share class, that at any time during the prior two fiscal years received a waiver and/or reimbursement from the Administrator, are less than the current expense limitation for that share class, the Administrator is entitled to be reimbursed by such share class up to the lesser of: (a) the amount of fees waived and/or expenses reimbursed during those prior two fiscal years under the agreement and (b) an amount not to exceed either the current expense limitation of that share class or the expense limitation of the share class in effect at the time that the share class received the applicable waiver and/or reimbursement, provided that: (1) (2) the Fund, of which the share class is a part, has more than $50 million in assets for the fiscal year, and BAL or an affiliate continues to serve as the Fund s investment adviser or administrator. This repayment applies only to the contractual expense limitation on net expenses and does not apply to any voluntary waivers that may be in effect from time to time. For the year ended December 31, 2017, BAL recouped the following fund level and class specific waivers and/or reimbursements previously recorded by the Fund: Fund Level Institutional Investor A Class K $ 29,972 $ 634 $ 10,806 $ B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

15 Notes to Financial Statements (continued) ishares MSCI Total International Index Fund On December 31, 2017, the fund level and class specific waivers and/or reimbursements subject to possible future recoupment under the expense limitation agreement are as follows: Expiring December 31, Fund level $70,072 $12,501 Institutional Investor A ,362 4,023 Class K ,408 The fund level waivers and/or reimbursements previously recorded by the Fund of $85,781, which were subject to recoupment by the Administrator, expired on December 31, Interfund Lending: In accordance with an exemptive order (the Order ) from the U.S. Securities and Exchange Commission ( SEC ), the Fund may participate in a joint lending and borrowing facility for temporary purposes (the Interfund Lending Program ), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the Fund s investment policies and restrictions. The Fund is currently permitted to borrow and lend under the Interfund Lending Program. A lending BlackRock fund may lend in aggregate up to 15% of its net assets, but may not lend more than 5% of its net assets to any one borrowing fund through the Interfund Lending Program. A borrowing BlackRock fund may not borrow through the Interfund Lending Program or from any other source more than 33 1/3% of its total assets (or any lower threshold provided for by the fund s investment restrictions). If a borrowing BlackRock fund s total outstanding borrowings exceed 10% of its total assets, each of its outstanding interfund loans will be subject to collateralization of at least 102% of the outstanding principal value of the loan. All interfund loans are for temporary or emergency purposes and the interest rate to be charged will be the average of the highest current overnight repurchase agreement rate available to a lending fund and the bank loan rate, as calculated according to a formula established by the Board. During the year ended December 31, 2017, the Fund did not participate in the Interfund Lending Program. Officers and Trustees: Certain trustees and/or officers of the Trust are directors and/or officers of BlackRock or its affiliates. The Fund reimburses the Administrator fora portion of the compensation paid to the Fund s Chief Compliance Officer, which is included in Officer in the Statement of Operations. 5. INCOME TAX INFORMATION It is the Fund s policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies, and to distribute substantially all of its taxable income to its shareholders. Therefore, no U.S. federal income tax provision is required. The Fund files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Fund s U.S. federal tax returns generally remains open for each of the four years ended December 31, The statutes of limitations on the Fund s state and local tax returns may remain open for an additional year depending upon the jurisdiction. Management has analyzed tax laws and regulations and their application to the Fund as of December 31, 2017, inclusive of the open tax return years, and does not believe that there are any uncertain tax positions that require recognition of a tax liability in the Fund s financial statements. U.S. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. As of period end, the following permanent differences attributable to reclassifications of distributions were reclassified to the following accounts: Distributions in excess of net investment income... $ (9) Accumulated net unrealized loss... 9 The tax character of distributions paid was as follows: 12/31/17 12/31/16 Ordinary income $15,744,828 $ 9,036,649 Long-term capital gains ,551,268 As of period end, the tax components of accumulated net earnings (losses) were as follows: $15,744,828 $10,587,917 Undistributed ordinary income..... $ 83,269 Qualified late-year losses (a)... (463,215) Net unrealized gains (b) ,745,741 $108,365,795 (a) The Fund has elected to defer certain qualified late-year losses and recognize such losses in the next taxable year. (b) The difference between book-basis and tax-basis net unrealized gains (losses) was attributable primarily to the timing and recognition of partnership income. N OTES TO F INANCIAL S TATEMENTS 15

16 Notes to Financial Statements (continued) ishares MSCI Total International Index Fund 6. CAPITAL SHARE TRANSACTIONS Transactions in capital shares for each class were as follows: Year Ended 12/31/17 Year Ended 12/31/16 Shares Amount Shares Amount Institutional Shares sold ,118,654 $ 45,807,256 6,367,264 $ 48,657,164 Shares issued in reinvestment of distributions ,049 1,882, ,230 1,849,084 Shares redeemed (7,506,340) (63,896,434) (2,063,411) (15,727,749) Net increase (decrease)..... (2,175,637) $ (16,206,888) 4,545,083 $ 34,778,499 Investor A Shares sold ,267,282 $ 188,387,590 15,959,069 $122,888,120 Shares issued in reinvestment of distributions ,484 7,229, ,744 6,012,289 Shares redeemed (24,025,404) (211,729,585) (3,395,147) (25,937,946) Net increase (decrease)..... (1,940,638) $ (16,112,428) 13,350,666 $102,962,463 Class K Shares sold ,752,786 $ 228,037,341 12,867,026 $100,673,978 Shares issued in reinvestment of distributions ,653 6,632, ,410 2,715,984 Shares redeemed (12,709,806) (116,130,538) (1,074,617) (8,519,033) Net increase ,765,633 $ 118,539,714 12,136,819 $ 94,870,929 Total Net Increase ,649,358 $ 86,220,398 30,032,568 $232,611, SUBSEQUENT EVENTS Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment or additional disclosure in the financial statements B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

17 Report of Independent Registered Public Accounting Firm ishares MSCI Total International Index Fund To the Board of Trustees of BlackRock Funds III and the Shareholders of ishares MSCI Total International Index Fund Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of ishares MSCI Total International Index Fund (one of the funds constituting BlackRock Funds III, referred to hereafter as the Fund ) as of December 31, 2017, the related statement of operations for the year ended December 31, 2017, the statement of changes in net assets for each of the two years in the period ended December 31, 2017, including the related notes, and the financial highlights for each of the five years in the period ended December 31, 2017 (collectively referred to as the financial statements ). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of December 31, 2017, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period ended December 31, 2017 and the financial highlights for each of the five years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Fund s management. Our responsibility is to express an opinion on the Fund s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB ) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of December 31, 2017 by correspondence with the administrator of the Master Portfolio. We believe that our audits provide a reasonable basis for our opinion. /s/pricewaterhousecoopers LLP Philadelphia, Pennsylvania February 26, 2018 We have served as the auditor of one or more BlackRock investment companies since Important Tax Information (unaudited) The following information is provided with respect to the ordinary income distributions paid during the taxable year ended December 31, Payable Dates Qualified Dividend Income for Individuals (a)... Quarterly % Qualified Short-Term Capital Gains for Non U.S. residents (b)... Quarterly 0.68 Foreign Source Income (c)... Quarterly Foreign Taxes Paid Per Share (d)... 3/30/2017 $ /29/ /28/ /14/ (a) The Fund hereby designates the percentage indicated above or the maximum amount allowable by law. (b) Represents the portion of the taxable ordinary income dividends eligible for exemption from U.S. withholdings for nonresident aliens and foreign corporations. (c) Expressed as a percentage of distributions grossed up for foreign taxes. (d) The foreign taxes paid represent taxes paid by the Fund on income received by the Fund from foreign sources. Foreign taxes paid may be included in taxable income with an offsetting deduction from gross income or may be taken as a credit for taxes paid to foreign governments. You should consult your tax advisor regarding the appropriate treatment of foreign taxes paid. R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM / IMPORTANT T AX I NFORMATION 17