Certified Semi-annual Shareholder Report for Management Investment Companies (n-csrs)

Dear Shareholder

Despite continued global headwinds, risk assets (such as equities) have generated strong performance as investors sought meaningful yields in the ongoing low-interest-rate environment. About this time one year ago, concerns about Europe’s debt crisis dominated the markets as political instability in Greece and severe deficit and liquidity problems in Spain raised the specter of a full-blown euro collapse. Investors were also discouraged by gloomy economic reports from various parts of the world, particularly in China. As the outlook for the global economy worsened, however, investors grew increasingly optimistic that the world’s largest central banks would intervene to stimulate growth. This theme, along with the European Central Bank’s (“ECB’s”) firm commitment to preserve the euro currency bloc, drove most asset classes higher through the summer of 2012. In early September, the ECB announced it would purchase unlimited amounts of short term sovereign bonds to support the region’s debt-laden countries. Days later, the US Federal Reserve announced its own much-anticipated stimulus package.

Although financial markets world-wide were buoyed by these aggressive policy actions, risk assets weakened in the fall of 2012. Global trade began to slow as many European countries fell into recession and growth continued to decelerate in China. In the United States, stocks slid on lackluster corporate earnings and volatility rose in advance of the US Presidential election. In the post-election environment, investors grew increasingly concerned over the “fiscal cliff,” the automatic tax increases and spending cuts that had been scheduled to take effect at the beginning of 2013. There was widespread fear that the fiscal cliff would push the United States into recession unless politicians could agree upon alternate measures to reduce the nation’s deficit. Worries that bipartisan gridlock would preclude a timely budget deal triggered high levels of volatility in financial markets around the world in the months leading up to the last day of the year. Ultimately, the worst of the fiscal cliff was averted with a last-minute tax deal, although the postponement of decisions relating to spending cuts and the debt ceiling left some lingering uncertainty.

Investors shook off the nerve-wracking finale to 2012 and the New Year began with a powerful relief rally in risk assets. Money that had been pulled to the sidelines amid year-end tax-rate uncertainty poured back into the markets in January. Key indicators signaling modest but broad-based improvements in the world’s major economies underpinned the rally. Underlying this aura of comfort was the absence of negative headlines out of Europe. Against this backdrop, global equities surged through January while rising US Treasury yields pressured high quality fixed income assets (as prices move in the opposite direction as yields).

However, bond markets regained strength in February when economic momentum slowed and investors toned down their risk appetite. US stocks continued to rise, but at a more moderate pace. Uncertainty about how long the Federal Reserve would maintain its monetary easing bias drove high levels of volatility later in the month, but these fears abated as the budget sequester (automatic spending cuts scheduled to take effect March 1) began to appear imminent and was deemed likely to deter any near-term changes in the central bank’s policy stance. Improving labor market data and rising home prices pushed US stocks higher at the end of the period, with major indices reaching new all-time highs. Outside the United States, equity prices weakened in the final two months of the period due to a resurgence of macro risk out of Europe. Italy’s February presidential election ended in a stalemate, further propagating the ongoing theme of political instability in the eurozone. In March, a severe banking crisis in Cyprus underscored the fragility of the broader European banking system.

For the 6- and 12-month periods ended March 31, 2013, US and international stocks and high yield bonds posted strong gains, while emerging market equities lagged as the pace of global growth failed to impress investors. US Treasury yields were highly volatile over the past 12 months. While remaining relatively low from a historical standpoint, yields began inching higher in the later part of the period, pressuring Treasuries and investment-grade bonds. Tax-exempt municipal bonds, however, benefited from favorable supply-and-demand dynamics. Near-zero short term interest rates continued to keep yields on money market securities near their all-time lows.

Markets have always been unpredictable, but that does not mean investors can delay taking action. At BlackRock, we believe it’s time for a different approach to investing. One that seeks out more opportunities in more places across a broader array of investments in a portfolio designed to move freely as the markets move up and down. People everywhere are asking, “So what do I do with my money?” Visit www.blackrock.com for answers.

Sincerely,

 

Rob Kapito

President, BlackRock Advisors, LLC

“Despite continued global headwinds, risk assets (such as equities) have generated strong performance as investors sought meaningful yields in the ongoing low-interest-rate environment.”

Rob Kapito

President, BlackRock Advisors, LLC

 

 

Total Returns as of March 31, 2013

 

		6-month				12-month
US large cap equities (S&P 500 ® Index)			10.19	%			13.96	%
US small cap equities (Russell 2000 ® Index)			14.48				16.30
International equities (MSCI Europe, Australasia, Far East Index)			12.04				11.25
Emerging market equities (MSCI Emerging Markets Index)			3.87				1.96
3-month Treasury bill (BofA Merrill Lynch 3-Month US Treasury Bill Index)			0.06				0.12
US Treasury securities (BofA Merrill Lynch 10- Year US Treasury Index)			(0.55	)			6.19
US investment grade bonds (Barclays US Aggregate Bond Index)			0.09				3.77
Tax-exempt municipal bonds (S&P Municipal Bond Index)			1.26				5.82
US high yield bonds (Barclays US Corporate High Yield 2% Issuer Capped Index)			6.28				13.08

Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

 

 

How did the Fund perform?

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For the six-month period ended March 31, 2013, the Fund underperformed its custom benchmark, which is a blend of 70% Wilshire 5000 Modified Energy Cap Weighted Index and 30% MSCI All-Country World Energy Index. The Fund also underperformed the S&P 500 ® Index. The following discussion of relative performance pertains to the Fund’s custom blended benchmark.

What factors influenced performance?

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The Fund’s exposure to gold and silver producers was the leading detractor from relative performance as gold and silver prices declined 10% in a rising equity market. In this environment, precious metals-related stocks dramatically underperformed, including key portfolio holdings Silver Wheaton Corp. and Goldcorp, Inc. Additionally, the Fund’s underweight to the oil & gas refining & marketing segment significantly hindered results relative to the benchmark index as refiners generally benefited from the dynamics of US versus global oil prices during the period. Selection among integrated oil & gas stocks also detracted from results as oil-related holdings such as Occidental Petroleum Corp., Cenovus Energy, Inc. and Suncor Energy, Inc. declined due to deteriorating revenues for North American crude oil production.

 

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Conversely, stock selection among oil & gas exploration & production companies contributed positively to Fund performance. Several holdings within this group rallied toward the end of the period as natural gas prices began to rise. Following a period during which a glut of North American supply and warmer-than-normal winter weather had pressured

gas prices, these conditions were finally alleviated, allowing gas prices to rise. Gas-related holdings such as EQT Corp., Range Resources Corp. and Cabot Oil & Gas Corp. generated double-digit gains during the period. Additionally, one of the Fund’s largest holdings, Plains Exploration & Production Co., rose more than 25% following the announcement that the company would be acquired by Freeport-McMoRan Copper & Gold, Inc.

Describe recent portfolio activity.

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During the six-month period, the Fund reduced its overall number of positions, but made a new investment in Cairn Energy Plc, an oil & gas exploration & production company based in the United Kingdom. The Fund also increased its existing position in US exploration & production company Anadarko Petroleum Corp., which has attained access to a valuable natural gas resource in the Rovuma Basin off the coast of Mozambique.

Describe portfolio positioning at period end.

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As of period end, the Fund continued to maintain its focus on energy stocks, with a slight bias toward oil versus gas. Over half of the Fund’s net assets were invested in exploration & production stocks. The Fund remained overweight in coal producers and underweight in the larger integrated oil & gas companies, the refining segment and storage & transportation companies, while maintaining a neutral weighting in the oil services space.