DECEMBER 31, 2017 ANNUAL REPORT. BlackRock Funds III ishares Russell 1000 Large-Cap Index Fund. Not FDIC Insured May Lose Value No Bank Guarantee

Transcription

1 DECEMBER 31, 2017 ANNUAL REPORT BlackRock Funds III ishares Russell 1000 Large-Cap 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 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 Derivative Financial Instruments 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

4 Fund Summary as of December 31, 2017 ishares Russell 1000 Large-Cap Index Fund Investment Objective ishares Russell 1000 Large-Cap Index Fund s (the Fund ) investment objective is to match the performance of the Russell 1000 Index 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 Large Cap Index Fund to ishares Russell 1000 Large-Cap 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 21.46%, Investor A Shares returned 21.16%, and Class K Shares returned 21.60%. The benchmark Russell 1000 Index returned 21.69% for the same period. Returns for the Fund s respective share classes differ from the benchmark index based on individual share-class expenses. The Fund invests all of its assets in Large Cap Index Master Portfolio (the Master Portfolio ), a series of Master Investment Portfolio. Describe the market environment. The reflation trade in the United States continued to gain steam in the first quarter of the year. Macro data highlighted continued economic growth and a strengthening labor market, which supported the U.S. Federal Reserve s (the Fed ) decision to increase the federal funds rate by 25 basis points (0.25%) in March, marking the second rate hike in the past six months. The Fed s summary of economic projections indicated that they will maintain a gradual pace of tightening should current economic trends continue. Expectations of the new administration s policies also boosted market sentiment, sending several U.S. equity indices to record highs. The inauguration of President Trump in late January stoked risk-on appetite, as pledges of tax relief and increased fiscal spending were supportive of cyclical stocks. However, the final weeks of the first quarter saw some profit taking as investor optimism waned after the failed attempt to repeal the Affordable Care Act called into question whether the new administration will be able to push through further reforms in Despite these setbacks, U.S. equities in the first quarter finished strong and the 10-year Treasury yield added 31 basis points in the quarter. In the second quarter of 2017, political risk was a headwind to U.S. equities. President Trump s firing of FBI Director James Comey on May 9 and the subsequent developments regarding the investigation of pre-election correspondence between Trump administration members and Russian officials was an enduring source of negative market sentiment. The largest single day fall of the S&P 500 in the quarter came in the wake of the House Oversight Committee s request for all documents from the meetings between President Trump and Comey on May 17. Although the Fed continued their monetary policy normalization, the yield on the 10-year U.S. Treasury compressed by nine basis points to 2.31% in the second quarter. The Fed increased the federal funds rate by 25 basis points at the June meeting, to between 1% and 1.25%, citing strength in the labor market and business spending, despite relatively weak inflation trends throughout the quarter. Investors focused on sustained corporate earnings expansion, a subdued interest rate environment, and a healthy economic backdrop over threats from an increasingly hostile North Korea and a damaging hurricane season in the third quarter. This backdrop pushed volatility to the lowest levels in recorded history, with the Chicago Board Options Exchange Volatility Index averaging a record low of in the quarter. Domestic rates moved modestly higher as investors balanced news on the monetary, fiscal, and geopolitical fronts. In the September Federal Open Market Committee ( FOMC ) announcement, the committee revealed they would keep interest rates unchanged and initiate their balance sheet normalization in October. Additionally, amid short term hurricane related inflationary and economic growth pressures, the FOMC found inflation to remain somewhat below 2% in the near term, but expects it to stabilize around 2% by Real gross domestic product ( GDP ) growth was revised higher for 2017, from 2.2% to 2.4%. The 10-year U.S. Treasury yield ended the third quarter two basis points higher, at 2.33%. The U.S. economy continued to demonstrate strength throughout the fourth quarter. Unemployment fell to 4.1%, the lowest level since Additional highlights that helped strengthen investor confidence in the macro picture included that nominal third quarter GDP surged 4.1% year-over-year and real GDP increased 2.3% year-overyear. This optimism was expressed throughout many soft indicators. For example, both the University of Michigan Consumer Sentiment Survey and the National Federation of Independent Business Small Business Optimism Index reached 13-year highs in the quarter. Describe recent portfolio activity. During the period, as changes were made to the composition of the Russell 1000 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 Russell 1000 Large-Cap Index Fund TOTAL RETURN BASED ON A $10,000 INVESTMENT $24,000 22,000 $23,072 $22,878 $22,421 20,000 18,000 16,000 14,000 12,000 10,000 8,000 3/31/11 (d) Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Institutional Shares (a)(b) Investor A Shares (a)(b) Russell 1000 Index (c) (a) Assuming transaction costs and other operating expenses, 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 Russell 1000 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 Russell 1000 Index. (c) An index that measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market capitalization and current index membership. The index represents approximately 92% of the total market capitalization of the Russell 3000 Index. (d) Commencement of operations. Performance Summary for the Period Ended December 31, 2017 Average Annual Total Returns (a) 6-Month Total Returns 1 Year 5 Years Since Inception (b) Institutional % 21.46% 15.58% 13.03% Investor A Class K Russell 1000 Index (a) See About Fund Performance on Page 6 for a detailed description of share classes, including any related sales charges and fees. (b) The Fund commenced operations on March 31, 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) Ending Account Value (12/31/17) Hypothetical (b) Expenses Paid During the Period (a) Annualized Expense Ratio Institutional $ 1, $ 1, $ 0.69 $ 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 (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; 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 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 B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

7 Statement of Assets and Liabilities December 31, 2017 ishares Russell 1000 Large-Cap Index Fund ASSETS Investments at value Master Portfolio (cost $150,653,151)... $211,536,278 Receivables: Capital shares sold ,950 From the Administrator ,560 Prepaid expenses ,115 Total assets ,185,903 LIABILITIES Payables: Contributions to the Master Portfolio ,139 Capital shares redeemed ,811 Service fees ,190 Administration fees ,770 Officer s and Directors fees Income dividends Total liabilities ,949 NET ASSETS $211,556,954 NET ASSETS CONSIST OF Paid-in capital $133,433,698 Distributions in excess of net investment income... (240,334) Accumulated net realized gain allocated from the Master Portfolio... 17,480,463 Net unrealized appreciation (depreciation) allocated from the Master Portfolio ,883,127 NET ASSETS $211,556,954 NET ASSET VALUE Institutional Based on net assets of $45,732,836 and 2,565,744 shares outstanding, unlimited number of shares authorized, no par value $ Investor A Based on net assets of $66,674,956 and 3,762,139 shares outstanding, unlimited number of shares authorized, no par value $ Class K Based on net assets of $99,149,162 and 5,583,379 shares outstanding, unlimited number of shares authorized, no par value $ See notes to financial statements. F INANCIAL S TATEMENTS 7

8 Statement of Operations Year Ended December 31, 2017 ishares Russell 1000 Large-Cap Index Fund INVESTMENT INCOME Net investment income allocated from the Master Portfolio: Dividends unaffiliated $ 4,129,190 Securities lending income affiliated net ,113 Dividends affiliated ,442 Foreign taxes withheld (415) Expenses (79,155) Fees waived ,546 Total investment income ,152,721 FUND EXPENSES Administration ,712 Service and distribution class specific ,915 Transfer agent class specific ,686 Registration ,608 Printing ,363 Professional ,191 Recoupment of past waived fees class specific... 5,964 Trustee and Officer Miscellaneous ,571 Total expenses ,147 Less: Fees waived by the Administrator.... (18,968) Transfer agent fees waived class specific (158,169) Other expenses reimbursed by the Administrator... (21,805) Total expenses after fees waived and/or reimbursed ,205 Net investment income ,879,516 REALIZED AND UNREALIZED GAIN (LOSS) ALLOCATED FROM THE MASTER PORTFOLIO Net realized gain (loss) allocated from: Investments unaffiliated... 1,014,388 Futures contracts ,246 1,503,634 Net change in unrealized appreciation (depreciation) from: Investments unaffiliated... 36,625,043 Futures contracts ,955 36,652,998 Net realized and unrealized gain... 38,156,632 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $42,036,148 See notes to financial statements B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

9 Statements of Changes in Net Assets ishares Russell 1000 Large-Cap Index Fund Year Ended December 31, INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income $ 3,879,516 $ 3,285,156 Net realized gain ,503,634 2,821,304 Net change in unrealized appreciation (depreciation)... 36,652,998 20,495,722 Net increase in net assets resulting from operations... 42,036,148 26,602,182 DISTRIBUTIONS TO SHAREHOLDERS (a) From net investment income: Institutional (697,527) (1,114,048) Investor A (983,763) (355,715) Class K (2,277,346) (1,854,469) From net realized gain: Institutional (338,712) (663,823) Investor A (519,568) (580,368) Class K (841,937) (2,456,195) From return of capital: Institutional (9,370) Investor A (13,661) Class K (20,316) Decrease in net assets resulting from distributions to shareholders... (5,702,200) (7,024,618) CAPITAL SHARE TRANSACTIONS Net increase in net assets derived from capital share transactions... 9,596,509 47,588,252 NET ASSETS Total increase in net assets ,930,457 67,165,816 Beginning of year ,626,497 98,460,681 End of year $211,556,954 $165,626,497 Distributions in excess of net investment income, end of year... $ (240,334) $ (161,214) (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 Russell 1000 Large-Cap Index Fund Institutional Year Ended December 31, Net asset value, beginning of year... $ $ $14.72 $13.49 $10.62 Net investment income (a) Net realized and unrealized gain (loss) (0.16) Net increase from investment operations Distributions: (b) From net investment income... (0.35) (0.29) (0.29) (0.25) (0.23) From net realized gain (0.11) (0.38) (0.47) (0.27) (0.39) From return of capital (0.00) (c) Total distributions... (0.46) (0.67) (0.76) (0.52) (0.62) Net asset value, end of year... $ $ $14.08 $14.72 $13.49 Total Return (d) Based on net asset value % 11.92% 0.82% 13.07% 33.09% Ratios to Average Net Assets (e) Total expenses % (f)(g) 0.13% (f) 0.27% (h) 0.59% 0.56% (i) Total expenses after fees waived and/or reimbursed % (f) 0.09% (f) 0.13% (h) 0.16% 0.23% (i) Net investment income % (f) 2.14% (f) 1.93% (h) 1.81% 1.80% (i) Supplemental Data Net assets, end of year (000)..... $45,733 $18,964 $3,431 $ 363 $ 183 Portfolio turnover rate of the Master Portfolio... 12% 13% 6% 6% 14% (a) (b) (c) (d) (e) (f) (g) (h) (i) 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 net expenses and/or net investment income. Includes the Fund s share of the Master Portfolio s allocated fees waived of less than 0.01%. Includes recoupment of past waived and/or reimbursed fees with no financial impact to the expense ratios. Includes the Fund s share of the Master Portfolio s allocated fees waived of 0.01%. Excludes expenses incurred indirectly as a result of investments in underlying funds of approximately 0.01% for the year ended December 31, 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 Russell 1000 Large-Cap Index Fund (continued) Investor A Year Ended December 31, Net asset value, beginning of year... $ $ $ $ $10.61 Net investment income (a) Net realized and unrealized gain (loss) (0.16) Net increase from investment operations Distributions: (b) From net investment income... (0.31) (0.25) (0.25) (0.22) (0.20) From net realized gain (0.11) (0.38) (0.47) (0.27) (0.39) From return of capital (0.00) (c) Total distributions (0.42) (0.63) (0.72) (0.49) (0.59) Net asset value, end of year... $ $ $ $ $13.43 Total Return (d) Based on net asset value % 11.61% 0.56% 12.79% 32.35% Ratios to Average Net Assets (e) Total expenses % (f)(g) 0.48% (f) 0.54% (h) 0.57% 0.66% (i) Total expenses after fees waived and/or reimbursed % (f) 0.38% (f) 0.39% (h) 0.41% 0.48% (i) Net investment income % (f) 1.76% (f) 1.62% (h) 1.56% 1.56% (i) Supplemental Data Net assets, end of year (000)..... $66,675 $23,939 $17,397 $17,507 $6,454 Portfolio turnover rate of the Master Portfolio... 12% 13% 6% 6% 14% (a) (b) (c) (d) (e) (f) (g) (h) (i) 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 net expenses and/or net investment income. Includes the Fund s share of the Master Portfolio s allocated fees waived of less than 0.01%. Includes recoupment of past waived and/or reimbursed fees. Excluding the recoupment of past waived and/or reimbursed fees for the year ended December, 31, 2017 the expense ratio would have been 0.67%. Includes the Fund s share of the Master Portfolio s allocated fees waived of 0.01%. Excludes expenses incurred indirectly as a result of investments in underlying funds of approximately 0.01% for the year ended December 31, See notes to financial statements. F INANCIAL H IGHLIGHTS 11

12 Financial Highlights (continued) (For a share outstanding throughout each period) ishares Russell 1000 Large-Cap Index Fund (continued) Class K Year Ended December 31, Net asset value, beginning of year... $ $ $ $ $10.61 Net investment income (a) Net realized and unrealized gain (loss) (0.15) Net increase from investment operations Distributions: (b) From net investment income... (0.36) (0.30) (0.30) (0.27) (0.23) From net realized gain (0.11) (0.38) (0.47) (0.26) (0.39) From return of capital (0.00) (c) Total distributions.... (0.47) (0.68) (0.77) (0.53) (0.62) Net asset value, end of year... $ $ $ $ $13.44 Total Return (d) Based on net asset value % 11.92% 0.86% 13.17% 32.80% Ratios to Average Net Assets (e) Total expenses % (f)(g) 0.12% (f) 0.19% (h) 0.24% 0.33% (i) Total expenses after fees waived and/or reimbursed % (f) 0.08% (f) 0.09% (h) 0.12% 0.18% (i) Net investment income % (f) 2.06% (f) 1.91% (h) 1.83% 1.85% (i) Supplemental Data Net assets, end of year (000)... $99,149 $122,724 $77,632 $70,348 $6,746 Portfolio turnover rate of the Master Portfolio... 12% 13% 6% 6% 14% (a) (b) (c) (d) (e) (f) (g) (h) (i) 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 net expenses and/or net investment income. Includes the Fund s share of the Master Portfolio s allocated fees waived of less than 0.01%. Includes recoupment of past waived and/or reimbursed fees with no financial impact to the expense ratios. Includes the Fund s share of the Master Portfolio s allocated fees waived of 0.01%. Excludes expenses incurred indirectly as a result of investments in underlying funds of approximately 0.01% for the year ended December 31, See notes to financial statements B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

13 Notes to Financial Statements ishares Russell 1000 Large-Cap 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 Russell 1000 Large-Cap Index Fund (formerly known as BlackRock Large Cap 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 Large Cap Index Master Portfolio (the Master Portfolio ), a series of Master Investment Portfolio ( MIP ), an affiliate of the Fund, 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 3.2%. 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. Institutional and Class K Shares are sold without a sales charge and only to certain eligible investors. Investor A Shares are generally sold without a sales charge. Investor A Shares bear certain expenses related to shareholder servicing of such shares. Investor A 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. 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 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 portion of distributions, if any, that exceeds a fund s current and accumulated earnings and profits, as measured on a tax basis, constitute a nontaxable return of capital. 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. 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 the Administrator a monthly fee at an 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. N OTES TO F INANCIAL S TATEMENTS 13

14 Notes to Financial Statements (continued) ishares Russell 1000 Large-Cap Index Fund 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 Administrator. 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 an annual rate of 0.25% based upon the average daily net assets of the 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. 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 $ 244 $ 2,425 $ 337 $3,006 For the year ended December 31, 2017, the following table shows the class specific transfer agent fees borne directly by each share class of the Fund: Institutional Investor A Class K Total $ 19,360 $ 172,548 $ 1,778 $193,686 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 limitation ). The expense limitations as a percentage of average daily net assets are as follows: Institutional Investor A Class K 0.13% 0.38% 0.08% The Administrator 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. These amounts waived and/or reimbursed are included in fees waived and/or reimbursed by the Administrator, other expenses reimbursed by the Administrator and transfer agent fees waived class specific, respectively, in the Statement of Operations. For the year ended December 31, 2017, class specific transfer agent fees waived are as follows: Institutional Investor A Class K Total $ 5,580 $ 150,849 $ 1,740 $158,169 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 the share class or the expense limitation of that share class in effect at the time that the share class received the applicable waiver and/or reimbursement provided that: 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 the contractual investment advisory fee waiver described above or 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: Institutional Investor A Class K $ 1,409 $ 4,419 $ 136 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 $63,167 $ 40,773 Institutional ,376 5,580 Investor A , ,849 Class K , B LACKR OCK A NNUAL R EPORT TO S HAREHOLDERS

15 Notes to Financial Statements (continued) ishares Russell 1000 Large-Cap Index Fund The following Fund level and class specific waivers and/or reimbursements previously recorded by the Fund, which were subject to recoupment by the Administrator, expired on December 31, 2017: Fund level $95,615 Institutional Investor A ,327 Class K 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 trustees and/or officers of BlackRock or its affiliates. The Fund reimburses the Administrator for a portion of the compensation paid to the Fund s Chief Compliance Officer, which is included in Trustee and 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. The tax character of distributions paid was as follows: 12/31/17 12/31/16 (a) Ordinary income $4,827,732 $4,865,814 Long-term capital gains ,121 2,930,355 Return of capital ,347 $5,702,200 $7,796,169 (a) Distribution amounts include a portion of the proceeds from redeemed shares. As of period end, the tax components of accumulated net earnings (losses) were as follows: Net unrealized gains (losses) (b)... $78,123,256 (b) The difference between book-basis and tax-basis net unrealized gains was attributable primarily to the timing and recognition of partnership income. 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 ,918,726 $ 31,654,047 7,841,863 $ 105,033,185 Shares issued in reinvestment of distributions... 60,273 1,041, ,458 1,777,334 Shares redeemed (671,795) (11,130,054) (6,948,515) (103,217,765) Net increase ,307,204 $ 21,565,478 1,014,806 $ 3,592,754 N OTES TO F INANCIAL S TATEMENTS 15

16 Notes to Financial Statements (continued) ishares Russell 1000 Large-Cap Index Fund Year Ended, 12/31/17 Year Ended, 12/31/16 Shares Amount Shares Amount Investor A Shares sold ,242,135 $ 68,837, ,111 $ 9,305,027 Shares issued in reinvestment of distributions... 88,140 1,513,776 62, ,833 Shares redeemed (2,165,076) (36,295,029) (352,647) (5,053,491) Net increase ,165,199 $ 34,056, ,228 $ 5,186,369 Class K Shares sold ,485,759 $ 92,178,523 3,193,953 $ 46,717,150 Shares issued in reinvestment of distributions ,429 2,739, ,647 4,310,663 Shares redeemed (8,237,363) (140,943,521) (842,604) (12,218,684) Net increase (decrease)..... (2,591,175) $ (46,025,556) 2,640,996 $ 38,809,129 Total Net Increase ,228 $ 9,596,509 4,011,030 $ 47,588, 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 Russell 1000 Large-Cap Index Fund To the Board of Trustees of BlackRock Funds III and the Shareholders of ishares Russell 1000 Large-Cap Index Fund Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of ishares Russell 1000 Large-Cap 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, 2017: January December 2017 Qualified Dividend Income for Individuals (a) % Dividends Qualifying for the Dividend Received Deductions for Corporations (a) Qualified Short Term Capital Gains for Non-U.S. Residents (b) (a) (b) The Fund hereby designates the percentage indicated above or the maximum amount allowable by law. Represents the portion of the taxable ordinary income dividends eligible for exemption from U.S. withholdings for nonresident aliens and foreign corporations. Additionally, the Fund distributed long-term capital gains of $ per share to shareholders on record December 15, R EPORT OF I NDEPENDENT R EGISTERED P UBLIC A CCOUNTING F IRM / IMPORTANT T AX I NFORMATION 17