JANUARY 31, 2017 ANNUAL REPORT. BlackRock Real Estate Securities Fund. of BlackRock Funds SM. Not FDIC Insured May Lose Value No Bank Guarantee

Transcription

1 JANUARY 31, 2017 ANNUAL REPORT BlackRock Real Estate Securities Fund of BlackRock Funds SM Not FDIC Insured May Lose Value No Bank Guarantee

2 The Markets in Review Dear Shareholder, The 12 months ended January 31, 2017 was an exceptionally strong period for risk assets (such as stocks and high yield bonds), while higher-quality assets generated muted returns after struggling in the latter part of As the period began, worries about slowing growth in China and the instability of oil prices had global equity prices sliding. However, the broad market momentum shifted in the second half of 2016 as reflationary expectations in the United States helped drive a pick-up in global growth. Markets were remarkably resilient during the period. Big surprises such as the United Kingdom s vote to leave the European Union and the outcome of the U.S. presidential election brought spikes in equity market volatility, but they were ultimately short-lived. Instead, investors used the sell-offs to seize upon buying opportunities, allowing markets to quickly rebound. We believe this reinforces the case for taking the long view rather than reacting to short-term market noise. The global reflationary theme rising nominal growth, wages and inflation was the dominant driver of asset returns during the period, outweighing significant political upheavals and uncertainty. This trend accelerated after the U.S. election and continued into the beginning of 2017, stoked by expectations for an extra boost to U.S. growth via fiscal policy. Although economic momentum is gaining traction, the capacity for rapid global growth is restrained by structural factors including an aging population, low productivity growth and excess savings. A tempered economic growth trend and high valuations across most assets have set the stage for muted investment returns going forward. Equity markets still have room to move, although the disparity between winners and losers is widening, making stock selection increasingly important. Fixed income investors are also facing challenges as bond markets recalibrate to accommodate rising rates and higher inflation expectations. And in a world where political risk and policy uncertainty abound, there is no lack of potential catalysts for higher volatility. 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. rely, Rob Kapito President, BlackRock Advisors, LLC Total Returns as of January 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 (BofA Merrill Lynch 3-Month U.S. Treasury Bill Index) U.S. Treasury securities (BofA Merrill Lynch 10- Year U.S. Treasury Index) 6-month 12-month 5.96% 20.04% (7.87) (3.26) Rob Kapito President, BlackRock Advisors, LLC 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) (2.95) 1.45 (2.94) Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. 2 THIS PAGE NOT PART OF YOUR FUND REPORT

3 Table of Contents Page The Markets in Review... 2 Annual Report: Fund Summary... 4 About Fund Performance... 6 Disclosure of Expenses... 6 Financial Statements: Schedule of Investments... 7 Statement of Assets and Liabilities... 9 Statement of Operations Statements of Changes in Net Assets Financial Highlights Notes to Financial Statements Report of Independent Registered Public Accounting Firm Important Tax Information Officers and Trustees Additional Information BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

4 Fund Summary as of January 31, 2017 Investment Objective BlackRock Real Estate Securities Fund s (the Fund ) investment objective is to seek total return comprised of long-term growth of capital and dividend income. Portfolio Management Commentary How did the Fund perform? Describe recent portfolio activity. For the 12-month period ended January 31, 2017, the Fund outperformed the benchmark, the FTSE EPRA/NAREIT United States Index. What factors influenced performance? During the period, all but two real estate investment trust ( REIT ) sectors were positive contributors relative to the benchmark. Principal contributors to relative performance included positions within health care (CareTrust, Inc. and Welltower Inc.), triple net lease (STAG Industrial, Inc. and Gramercy Property Trust), shopping centers (Equity One, Inc.) and residential (Essex Property Trust, Inc., various positions in the single family rental sub-sector and a lack of holdings in equity residential). Conversely, holdings in the office (Boston Properties, Inc. and SL Green Realty Corp.) and diversified (Howard Hughes Corp.) sectors detracted from relative performance compared with the benchmark. During the period, modest sector shifts were made as the broader market and the real estate securities market were buffeted by macroeconomic uncertainties due to oil price volatility, slowing growth in China and U.S. gateway cities, Brexit, and the U.S. election. The most significant changes to the portfolio were made on the stock level to reflect fundamentals and valuations, as well as factor exposures to macroeconomic events. In addition, the Fund recently increased exposure to the industrial and specialty REIT (primarily data centers) sectors and decreased exposure to the residential apartment and self-storage sectors. Describe portfolio positioning at period end. The Fund intentionally maintains relatively modest property type tilts at most times given the investment adviser s preference to deploy risk budget/risk-taking toward bottom-up stock selection in each market. As of period end, the Fund had overweight positions in the industrial, residential, retail and specialty REIT/data center sectors. 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. Portfolio Information Percent of Ten Largest Holdings Net Assets SimonPropertyGroup,Inc... 7% Boston Properties, Inc HCP, Inc Federal Realty Investment Trust... 4 Extra Space Storage, Inc Essex Property Trust, Inc UDR, Inc First Industrial Realty Trust, Inc Host Hotels & Resorts, Inc EPRProperties... 3 Percent of Industry Allocation Net Assets Retail... 22% Residential Office Health Care Triple Net Lease... 8 Industrial... 8 Lodging... 6 SelfStorage... 6 Specialty... 4 Diversified Short-Term Securities... 1 For Fund compliance purposes, the Fund s industry classifications refer to one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by the investment adviser. These definitions may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. 4 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

5 Total Return Based on a $10,000 Investment $16,000 14,000 Institutional Shares 1, 2 Investor A Shares 1, 2 FTSE EPRA/NAREIT United States Index 3 $15,261 $15,101 $14,304 12,000 10,000 8,000 9/28/12 4 1/13 1/14 1/15 1/16 1/17 1 Assuming maximum sales charges, if any, transaction costs and other operating expenses, including investment advisory fees and administration fees, if any. Institutional Shares do not have a sales charge. 2 Under normal conditions, the Fund invests at least 80% of its net assets plus any borrowings for investment purposes (measured at the time of purchase) in a portfolio of equity investments in issuers that are primarily engaged in or related to the real estate industry inside the United States. 3 A subset of the EPRA/NAREIT Global Index and the EPRA/NAREIT North America Index containing publicly quoted real estate companies that meet the EPRA Ground Rules. 4 Commencement of operations. Performance Summary for the Period Ended January 31, 2017 Average Annual Total Returns 5 1 Year Inception 6 6-Month Total Returns w/o sales charge w/sales charge w/o sales charge w/sales charge Institutional... (8.30)% 12.84% N/A 10.22% N/A InvestorA... (8.43) % % InvestorC... (8.77) FTSE EPRA/NAREIT United States Index.... (8.98) N/A 9.97 N/A 5 Assuming maximum sales charges, if any. Average annual total returns with and without sales charges reflect reductions for distribution and service fees. See About Fund Performance on page 6 for a detailed description of share classes, including any related sales charges and fees. 6 The Fund commenced operations on September 28, N/A - Not applicable as share class and index do not have a sales charge. 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 August 1, 2016 Actual Hypothetical 8 Ending Account Value January 31, 2017 Expenses Paid During the Period 7 Beginning Account Value August 1, 2016 Ending Account Value January 31, 2017 Expenses Paid During the Period 7 Annualized Expense Ratio Institutional... $1, $ $5.06 $1, $1, $ % Investor A $1, $ $6.26 $1, $1, $ % Investor C $1, $ $9.85 $1, $1, $ % 7 For each class of the Fund, expenses are equal to the annualized expense ratio for the class, multiplied by the average account value over the period, multiplied by 184/ 366 (to reflect the one-half year period shown). 8 Hypothetical 5% annual return before expenses is calculated by prorating the number of days in the most recent fiscal half year divided by 366. See Disclosure of Expenses on page 6 for further information on how expenses were calculated. BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

6 About Fund Performance Institutional 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 subject to a maximum initial sales charge (frontend load) of 5.25% and a service fee of 0.25% per year (but no distribution fee). Certain redemptions of these shares may be subject to a contingent deferred sales charge ( CDSC ) where no initial sales charge was paid at the time of purchase. These shares are generally available through financial intermediaries. Investor C Shares are subject to a 1.00% CDSC if redeemed within one year of purchase. In addition, these shares are subject to a distribution fee of 0.75% per year and a 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 (the Manager ), the Fund s investment adviser, 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 Manager 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 investment advisory fees, 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 August 1, 2016 and held through January 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 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 any 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. 6 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

7 Schedule of Investments January 31, 2017 (Percentages shown are based on Net Assets) Common Stocks Shares Value Diversified 1.5% Howard Hughes Corp. (a) 5,704 $ 608,103 Health Care 12.1% Brookdale Senior Living, Inc. (a) 19, ,451 CareTrust, Inc. 62, ,333 HCP, Inc. 73,223 2,220,121 Ventas, Inc. 10, ,288 Welltower, Inc. 10, ,652 4,765,845 Industrial 8.3% First Industrial Realty Trust, Inc. 53,925 1,393,961 Liberty Property Trust 26,499 1,017,297 Prologis, Inc. 7, ,544 Rexford Industrial Realty, Inc. 21, ,910 3,270,712 Lodging 6.4% DiamondRock Hospitality Co. 86, ,087 Hilton Worldwide Holdings, Inc. 6, ,189 Host Hotels & Resorts, Inc. 64,642 1,168,081 2,531,357 Office 14.0% Alexandria Real Estate Equities, Inc. 7, ,115 Boston Properties, Inc. 18,515 2,423,614 Highwoods Properties, Inc. 11, ,915 Kilroy Realty Corp. 13,427 1,005,011 SL Green Realty Corp. 6, ,978 5,522,633 Residential 17.3% American Campus Communities, Inc. 18, ,977 American Homes 4 Rent, Class A 27, ,524 AvalonBay Communities, Inc. 3, ,214 Essex Property Trust, Inc. 6,998 1,569,651 Mid-America Apartment Communities, Inc. 9, ,136 Sun Communities, Inc. 8, ,659 UDR, Inc. 42,327 1,479,329 6,840,490 Retail 21.7% Equity One, Inc. 29, ,066 Federal Realty Investment Trust 12,091 1,697,939 GGP, Inc. 44,307 1,100,586 Macerich Co. 12, ,467 Retail Properties of America, Inc., Class A 71,057 1,063,723 Simon Property Group, Inc. 15,839 2,910,733 8,570,514 Common Stocks Shares Value Self Storage 5.7% Extra Space Storage, Inc. 23,247 $ 1,674,946 Public Storage 2, ,420 2,274,366 Specialty 3.5% CyrusOne, Inc. 12, ,589 DuPont Fabros Technology, Inc. 17, ,148 1,397,737 Triple Net Lease 8.4% Agree Realty Corp. 8, ,233 EPR Properties 15,486 1,145,499 Gramercy Property Trust 29, ,028 STAG Industrial, Inc. 43,716 1,011,588 3,339,348 Total Long-Term Investments (Cost $36,059,226) 98.9% 39,121,105 Short-Term Securities BlackRock Liquidity Funds, T-Fund, Institutional Class, 0.40% (b)(c) 541, ,014 Total Short-Term Securities (Cost $541,014) 1.4% 541,014 Total Investments (Cost $36,600,240) 100.3% 39,662,119 Liabilities in Excess of Other Assets (0.3)% (133,068) Net Assets 100.0% $39,529,051 See Notes to Financial Statements. BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

8 Schedule of Investments (concluded) Notes to Schedule of Investments (a) Non-income producing security. (b) Current yield as of period end. (c) During the year ended January 31, 2017, investments in issuers considered to be affiliates of the Fund for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows: Shares Held at January 31, 2016 Shares Held at January 31, 2017 Value at January 31, 2017 Income Net Realized Gain 1 Change in Unrealized Appreciation (Depreciation) Net Affiliate Activity BlackRock Liquidity Funds, TempFund, Institutional Class 242,077 (242,077) $1,176 BlackRock Liquidity Funds, T-Fund, Institutional Class 541, ,014 $541, $1 Total $541,014 $1,954 $1 1 Includes net capital gain distributions. For Fund compliance purposes, the Fund s industry classifications refer to one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by the investment adviser. These definitions may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. Fair Value Hierarchy as of Period End Various inputs are used in determining the fair value of investments. For information about the Fund s policy regarding valuation of investments, refer to the Notes to Financial Statements. The following table summarizes the Fund s investments categorized in the disclosure hierarchy Level 1 Level 2 Level 3 Total Assets: Investments: Long-Term Investments 1...$ 39,121,105 $ 39,121,105 Short-TermSecurities , ,014 Total $ 39,662,119 $ 39,662,119 1 See above Schedule of Investments for values in each industry. During the year ended January 31, 2017, there were no transfers between levels. See Notes to Financial Statements. 8 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

9 Statement of Assets and Liabilities January 31, 2017 Assets Investments at value unaffiliated (cost $36,059,226)... $ 39,121,105 Investments at value affiliated (cost $541,014) ,014 Receivables: Investmentssold ,808 Capital shares sold ,702 Dividends affiliated Dividends unaffiliated ,365 From the Manager ,641 Prepaidexpenses... 21,700 Total assets... 40,116,609 Liabilities Payables: Investmentspurchased ,636 Capital shares redeemed ,102 Investmentadvisoryfees... 11,378 Officer s and Trustees fees ,721 Other accrued expenses ,811 Other affiliates ,742 Professional fees ,164 Serviceanddistributionfees... 7,469 Transferagentfees... 15,535 Total liabilities ,558 Net Assets... $ 39,529,051 Net Assets Consist of Paid-incapital... $ 36,717,177 Distributions in excess of net investment income... (1,151) Accumulatednetrealizedloss... (248,854) Net unrealized appreciation (depreciation)... 3,061,879 Net Assets... $ 39,529,051 NetAssetValue Institutional Based on net assets of $15,041,336 and 1,210,454 shares outstanding, unlimited number of shares authorized, $0.001 par value... $ Investor A Based on net assets of $20,949,044 and 1,688,656 shares outstanding, unlimited number of shares authorized, $0.001 par value $ Investor C Based on net assets of $3,538,671 and 287,084 shares outstanding, unlimited number of shares authorized, $0.001 par value..... $ See Notes to Financial Statements. BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

10 Statement of Operations Year Ended January 31, 2017 Investment Income Dividends unaffiliated $ 992,944 Dividends affiliated... 1,954 Total investment income ,898 Expenses Investmentadvisory ,776 Service and distribution class specific... 90,680 Professional... 77,047 Transfer agent class specific ,906 Registration... 43,451 Printing... 29,556 Administration... 15,854 Administration class specific... 7,459 Accounting services ,284 OfficerandTrustees... 11,360 Custodian... 7,067 Miscellaneous... 13,700 Total expenses ,140 Less: Fees waived by the Manager... (101,637) Administration fees waived class specific.... (7,430) Transfer agent fees reimbursed class specific..... (44,440) Transfer agent fees waived class specific... (2,318) Total expenses after fees waived and/or reimbursed ,315 Netinvestmentincome ,583 Realized and Unrealized Gain Net realized gain from: Investments... 2,072,925 Capital gain distributions from investment companies affiliated ,072,926 Net change in unrealized appreciation (depreciation) on investments ,300,060 Netrealizedandunrealizedgain... 3,372,986 Net Increase in Net Assets Resulting from Operations... $ 3,885,569 See Notes to Financial Statements. 10 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

11 Statements of Changes in Net Assets Year Ended January 31, Increase (Decrease) in Net Assets: Operations Netinvestmentincome... $ 512,583 $ 496,743 Netrealizedgain... 2,072, ,392 Net change in unrealized appreciation (depreciation).... 1,300,060 (4,763,831) Net increase (decrease) in net assets resulting from operations ,885,569 (3,601,696) Distributions to Shareholders 1 From net investment income: Institutional (189,050) (196,762) InvestorA... (279,984) (284,107) InvestorC... (21,976) (18,859) From net realized gain: Institutional (653,379) (588,295) InvestorA... (1,104,837) (1,045,809) InvestorC... (200,335) (160,465) Decrease in net assets resulting from distributions to shareholders... (2,449,561) (2,294,297) Capital Share Transactions Net increase (decrease) in net assets derived from capital share transactions ,684,163 (6,895,631) Net Assets Total increase (decrease) in net assets ,120,171 (12,791,624) Beginningofyear... 32,408,880 45,200,504 Endofyear... $ 39,529,051 $ 32,408,880 Distributions in excess of net investment income, end of year..... $ (1,151) $ (22,724) 1 Distributions for annual periods determined in accordance with federal income tax regulations. See Notes to Financial Statements. BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

12 Financial Highlights Institutional Year Ended January 31, Period September 28, to January 31, 2013 Per Share Operating Performance Net asset value, beginning of period $ $13.71 $ $10.44 $10.00 Net investment income Net realized and unrealized gain (loss) (1.27) Net increase (decrease) from investment operations (1.06) Distributions: 3 From net investment income (0.20) (0.20) (0.17) (0.21) (0.04) From net realized gain (0.70) (0.64) (0.11) (0.21) (0.01) Total distributions (0.90) (0.84) (0.28) (0.42) (0.05) Net asset value, end of period $ $11.81 $ $10.47 $10.44 Total Return4 Based on net asset value % (7.85)% 33.92% 4.45% 4.91% 5 Ratios to Average Net Assets Total expenses % 1.39% 1.67% 4.44% 7.77% 6,7 Total expenses after fees waived and/or reimbursed % 1.04% 1.05% 1.06% 1.05% 6,7 Net investment income % 1.66% 1.67% 1.54% 1.32% 7 Supplemental Data Net assets, end of period (000) $15,041 $9,593 $17,862 $5,594 $5,273 Portfolio turnover rate % 86% 74% 59% 25% 1 Commencement of operations. 2 Based on average shares outstanding. 3 Distributions for annual periods determined in accordance with federal income tax regulations. 4 Where applicable, assumes the reinvestment of distributions. 5 Aggregate total return. 6 Organization costs were not annualized in the calculation of the expense ratios. If these expenses were annualized, the total expenses would have been 8.36%. 7 Annualized. See Notes to Financial Statements. 12 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

13 Financial Highlights (continued) Investor A Year Ended January 31, Period September 28, to January 31, 2013 Per Share Operating Performance Net asset value, beginning of period $ $ $ $10.44 $10.00 Net investment income Net realized and unrealized gain (loss) (1.25) Net increase (decrease) from investment operations (1.09) Distributions: 3 From net investment income (0.17) (0.17) (0.15) (0.20) (0.03) From net realized gain (0.70) (0.64) (0.11) (0.21) (0.01) Total distributions (0.87) (0.81) (0.26) (0.41) (0.04) Net asset value, end of period $ $ $ $10.46 $10.44 Total Return4 Based on net asset value % (8.10)% 33.61% 4.17% 4.85% 5 Ratios to Average Net Assets Total expenses % 1.76% 1.88% 4.82% 7.96% 6,7 Total expenses after fees waived and/or reimbursed % 1.30% 1.30% 1.30% 1.30% 6,7 Net investment income % 1.27% 1.10% 0.94% 1.17% 7 Supplemental Data Net assets, end of period (000) $20,949 $19,641 $23,792 $1,808 $ 357 Portfolio turnover rate % 86% 74% 59% 25% 1 Commencement of operations. 2 Based on average shares outstanding. 3 Distributions for annual periods determined in accordance with federal income tax regulations. 4 Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions. 5 Aggregate total return. 6 Organization costs were not annualized in the calculation of the expense ratios. If these expenses were annualized, the total expenses would have been 8.55%. 7 Annualized. See Notes to Financial Statements. BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

14 Financial Highlights (concluded) Investor C Year Ended January 31, Period September 28, to January 31, 2013 Per Share Operating Performance Net asset value, beginning of period $11.72 $13.61 $10.42 $10.43 $10.00 Net investment income (loss) (0.00) Net realized and unrealized gain (loss) (1.23) Net increase (decrease) from investment operations (1.18) Distributions: 4 From net investment income (0.08) (0.07) (0.09) (0.14) (0.02) From net realized gain (0.70) (0.64) (0.11) (0.20) (0.01) Total distributions (0.78) (0.71) (0.20) (0.34) (0.03) Net asset value, end of period $12.33 $11.72 $13.61 $10.42 $10.43 Total Return5 Based on net asset value % (8.76)% 32.65% 3.34% 4.57% 6 Ratios to Average Net Assets Total expenses % 2.61% 2.70% 5.72% 8.90% 7,8 Total expenses after fees waived and/or reimbursed % 2.05% 2.05% 2.05% 2.05% 7,8 Net investment income (loss) % 0.43% 0.15% (0.01)% 0.43% 8 Supplemental Data Net assets, end of period (000) $3,539 $3,175 $3,546 $ 303 $ 24 Portfolio turnover rate % 86% 74% 59% 25% 1 Commencement of operations. 2 Based on average shares outstanding. 3 Amount is greater than $(0.005) per share. 4 Distributions for annual periods determined in accordance with federal income tax regulations. 5 Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions. 6 Aggregate total return. 7 Organization costs were not annualized in the calculation of the expense ratios. If these expenses were annualized, the total expenses would have been 9.48%. 8 Annualized. See Notes to Financial Statements. 14 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

15 Notes to Financial Statements 1. Organization: BlackRock Funds SM (the Trust ) is registered under the Investment Company Act of 1940, as amended (the 1940 Act ), as an open-end management investment company. The Trust is organized as a Massachusetts business trust. BlackRock Real Estate Securities Fund (the Fund ) is a series of the Trust. The Fund is classified as non-diversified. 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 certain classes bear expenses related to the shareholder servicing and distribution of such shares. Institutional Shares are sold only to certain eligible investors. Investor A and Investor C Shares are generally available through financial intermediaries. Each class has exclusive voting rights with respect to matters relating to its shareholder servicing and distribution expenditures. Share Class Initial Sales Charge CDSC Conversion Privilege Institutional Shares No No None Investor A Shares Yes No 1 None Investor C Shares... No Yes None 1 Investor A Shares may be subject to a contingent deferred sales charge ( CDSC ) for certain redemptions where no initial sales charge was paid at the time of purchase. The Fund, together with certain other registered investment companies advised by BlackRock Advisors, LLC (the Manager ) 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 Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend date. Upon notification from issuers, some of the dividend income received from a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain. 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. The character and timing of distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Recent Accounting Standard: In November 2016, the Financial Accounting Standards Board issued Accounting Standards Update Restricted Cash which will require entities to include the total of cash, cash equivalents, restricted cash, and restricted cash equivalents in the beginning and ending cash balances in the Statement of Cash Flows. The guidance will be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Management is evaluating the impact, if any, of this guidance on the Fund s presentation in the Statement of Cash Flows. 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 Manager, 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. The Fund has an arrangement with its custodian whereby credits are earned on uninvested cash balances, which could be used to reduce custody fees and/or overdraft charges. The Fund may incur charges on certain uninvested cash balances and overdrafts, subject to certain conditions. 3. Investment Valuation and Fair Value Measurements: Investment Valuation Policies: The Fund s investments are valued at fair value (also referred to as market value within the financial statements) as of the close of trading on the New York Stock Exchange ( NYSE ) (generally 4:00 p.m., Eastern time). U.S. GAAP defines fair value as the price the Fund BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

16 Notes to Financial Statements (continued) would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Fund determines the fair values of its financial instruments using various independent dealers or pricing services under policies approved by the Board of Trustees of the Trust (the Board ). The BlackRock Global Valuation Methodologies Committee (the Global Valuation Committee ) is the committee formed by management to develop global pricing policies and procedures and to oversee the pricing function for all financial instruments. Fair Value Inputs and Methodologies: The following methods and inputs are used to establish the fair value of the Fund s assets and liabilities: Equity investments traded on a recognized securities exchange are valued at the official closing price each day, if available. For equity investments traded on more than one exchange, the official closing price on the exchange where the stock is primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day may be valued at the last available bid (long positions) or ask (short positions) price. Investments in open-end U.S. mutual funds are valued at net asset value ( NAV ) each business day. If events (e.g., a company announcement, market volatility or a natural disaster) occur that are expected to materially affect the value of such investments, or in the event that the application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value ( Fair Valued Investments ). The fair valuation approaches that may be used by the Global Valuation Committee will include Market approach, Income approach and the Cost approach. Valuation techniques such as discounted cash flow, use of market comparables and matrix pricing are types of valuation approaches and typically used in determining fair value. When determining the price for Fair Valued Investments, the Global Valuation Committee, or its delegate, seeks to determine the price that the Fund might reasonably expect to receive or pay from the current sale or purchase of that asset or liability in an arm s-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation Committee, or its delegate, deems relevant and consistent with the principles of fair value measurement. The pricing of all Fair Valued Investments is subsequently reported to the Board or a committee thereof on a quarterly basis. Fair Value Hierarchy: Various inputs are used in determining the fair value of investments. These inputs to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial statement purposes as follows: Level 1 unadjusted price quotations in active markets/exchanges for identical assets or liabilities that the Fund has the ability to access Level 2 other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assetsor liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other marketcorroborated inputs) Level 3 unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Fund s own assumptions used in determining the fair value of investments) The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Investments classified within Level 3 have significant unobservable inputs used by the Global Valuation Committee in determining the price for Fair Valued investments. Level 3 investments include equity or debt issued by privately held companies or funds. There may not be a secondary market, and/or there are a limited number of investors. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Global Valuation Committee in the absence of market information. Changes in valuation techniques may result in transfers into or out of an assigned level within the hierarchy. In accordance with the Fund s policy, transfers between different levels of the fair value hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of a value determined for investments is based on the pricing transparency of the investments and is not necessarily an indication of the risks associated with investing in those securities. 4. Investment Advisory 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. 16 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

17 Notes to Financial Statements (continued) Investment Advisory: The Trust, on behalf of the Fund, entered into an Investment Advisory Agreement with the Manager, the Fund s investment adviser, an indirect, wholly-owned subsidiary of BlackRock, to provide investment advisory and administration services. The Manager is responsible for the management of the Fund s portfolio and provides the personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays the Manager a monthly fee at an annual rate equal to the following percentage of the average daily value of the Fund s net assets: Average Daily Net Assets Investment Advisory Fee First $1 Billion % $1 Billion - $3 Billion % $3 Billion - $5 Billion % $5 Billion - $10 Billion % Greater than $10 Billion % With respect to the Fund, the Manager entered into separate sub-advisory agreements with BlackRock International Limited ( BIL ) and BlackRock (Singapore) Limited ( BRS ), affiliates of the Manager. The Manager pays BIL and BRS, for services they provide, a monthly fee that is a percentage of the investment advisory fees paid by the Fund to the Manager. Service and Distribution Fees: The Trust, on behalf of the Fund, entered into a Distribution Agreement and a Distribution and Service Plan with BlackRock Investments, LLC ( BRIL ), an affiliate of the Manager. Pursuant to the Distribution and Service 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 based upon the average daily net assets of the relevant share class of the Fund as follows. Investor A Investor C ServiceFee % 0.25% DistributionFee % 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 the shareholders. For the year ended January 31, 2017, the following table shows the class specific service and distribution fees borne directly by each share class of the Fund: Investor A Investor C Total $53,882 $36,798 $90,680 Administration: The Trust, on behalf of the Fund, entered into an Administration Agreement with the Manager, an indirect, wholly-owned subsidiary of BlackRock, to provide administrative services. For these services, the Manager receives an administration fee computed daily and payable monthly, based on a percentage of the average daily net assets of the Fund. The administration fee, which is shown as administration in the Statement of Operations, is paid at the annual rates below: Average Daily Net Assets Administration Fee First $500 Million % $500 Million - $1 Billion % $1 Billion - $2 Billion % $2 Billion - $4 Billion % $4 Billion - $13 Billion % Greater than $13 Billion % In addition, the Manager charges each of the share classes an administration fee, which is shown as administration class specific in the Statement of Operations, at an annual rate of 0.02% of the average daily net assets of each respective class. For the year ended January 31, 2017, the following table shows the class specific administration fees borne directly by each share class of the Fund: Institutional Investor A Investor C Total $2,413 $4,310 $736 $ 7,459 The Manager may have, at its discretion, voluntarily waived all or any portion of its administration fees for the Fund or a share class, which are shown as administration fees waived class specific in the Statement of Operations. BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,

18 Notes to Financial Statements (continued) Transfer Agent: Pursuant to written agreements, certain financial intermediaries, some of which may be affiliates, provide the Fund with sub-accounting, recordkeeping, sub-transfer agency and other administrative services with respect to sub-accounts they service. For these services, these entities receive an asset-based fee or an annual fee per shareholder account, which will vary depending on share class and/or net assets. For the year ended January 31, 2017, the Fund did not pay any amount to affiliates in return for these services. The Manager 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 January 31, 2017, the Fund reimbursed the Manager 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 Investor C Total $213 $1,445 $709 $2,367 For the year ended January 31, 2017, the following table shows the class specific transfer agent fees borne directly by each class of the Fund: Institutional Investor A Investor C Total $2,418 $37,127 $8,361 $47,906 Other Fees: For the year ended January 31, 2017, affiliates earned underwriting discounts, direct commissions and dealer concessions on sales of the Fund s Investor A Shares of $6,762. For the year ended January 31, 2017, affiliates received CDSCs as follows: InvestorA... $ 300 InvestorC... $1,962 Expense Limitations, Waivers, Reimbursements and Recoupments: With respect to the Fund, the Manager 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 limitation ). The expense limitations as a percentage of average daily net assets are as follows: Institutional % InvestorA % InvestorC % The Manager has agreed not to reduce or discontinue these contractual expense limitations prior to June 1, 2017 unless, approved by the Board, including a majority of the Independent Trustees who are not interested persons of the Fund, as defined in the 1940 Act ( Independent Trustee ) or by a majority of the outstanding voting securities of the Fund. These amounts waived and/or reimbursed are included in fees waived by the Manager, and shown as administration fees waived class specific, transfer agent fees waived class specific and transfer agent fees reimbursed class specific, respectively, in the Statement of Operations. For the year ended January 31, 2017, the amount included in fees waived by the Manager was $101,261. Class specific expense waivers and/or reimbursements are as follows: Institutional Investor A Investor C Total Administration Fees Waived $2,384 $ 4,310 $ 736 $ 7,430 Transfer Agent Fees Waived $ 200 $ 1,409 $ 709 $ 2,318 Transfer Agent Fees Reimbursed $1,888 $35,008 $7,544 $44,440 With respect to the Fund, the Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees the Fund pays to the Manager indirectly through its investment in affiliated money market funds. This amount is included in fees waived by the Manager in the Statement of Operations. The amount of waivers and/or reimbursements of fees and expenses made pursuant to the expense limitation caps, as applicable, will be reduced by the amount of the affiliated money market fund waiver. For the year ended January 31, 2017, the amount waived was $376. Effective September 1, 2016, the Manager voluntarily agreed to waive its investment advisory fee with respect to any portion of the Fund s assets invested in affiliated equity or fixed-income mutual funds or affiliated exchange-traded funds that have a contractual management fee. Prior to September 1, 2016, the Manager did not waive such fees. This voluntary waiver may be reduced or discontinued at any time without notice. With respect to the contractual expense caps, 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 Manager, are less than the expense cap for that share class, the Manager is entitled 18 BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31, 2017

19 Notes to Financial Statements (continued) to be reimbursed by such share class up to the lesser of the following expenses: (a) The amount of fees waived and/or expenses reimbursed during those prior two fiscal years under the agreement. (b) The amount by which the expense cap for that share class exceeds the operating expenses of the share class for the current fiscal year, provided that: The Fund, of which the share class is a part, has more than $50 million in assets for the fiscal year; and The Manager or an affiliate continues to serve as the Fund s investment adviser or administrator. In the event the expense cap for a share class is changed subsequent to a fiscal year in which the Manager becomes entitled to reimbursement for fees waived and/or reimbursed, the amount available to reimburse the Manager shall be calculated by reference to the expense cap for that share class in effect at the time the Manager became entitled to receive such reimbursement, rather than the subsequently changed expense cap for that share class. On January 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: Expires January 31, FundLevel... $106,406 $101,261 Institutional... $ 9,811 $ 4,472 InvestorA... $ 36,278 $ 40,727 InvestorC... $ 8,529 $ 8,989 The following fund level and class specific waivers and/or reimbursements previously recorded by the Fund, which were subject to recoupment by the Manager, expired on January 31, 2017: FundLevel... $126,079 Institutional... $ 10,290 InvestorA... $ 20,581 InvestorC... $ 3,901 Interfund Lending: In accordance with an exemptive order (the Order ) from the U.S. Securities and Exchange Commission, 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. The 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. The 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 the 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 period ended January 31, 2017, the Fund did not participate in the Interfund Lending Program. Officers and Trustees: Certain officers and/or trustees of the Trust are officers and/or trustees of BlackRock or its affiliates. The Fund reimburses the Manager for a portion of the compensation paid to the Trust s Chief Compliance Officer, which is included in Officer and Trustees in the Statement of Operations. 5. Purchases and Sales: For the year ended January 31, 2017, purchases and sales of investments, excluding short-term securities, were $47,316,764 and $43,585,858, respectively. 6. 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 federal income tax provision is required. BLACKROCK REAL ESTATE SECURITIES FUND JANUARY 31,