SCHWABFUNDS
SCHWAB
BOND INDEX
FUNDS
ANNUAL REPORT
AUGUST 31, 1998
<PAGE>
SCHWAB BOND INDEX FUNDS
We're pleased to bring you this annual report for the following funds (the
Funds) for the one-year period ended August 31, 1998:
- Schwab Short-Term Bond Market Index Fund
- Schwab Total Bond Market Index Fund
During the reporting period, the Funds continued to provide a high level of
current income consistent with the preservation of capital. In addition to
performance and portfolio information, this report contains information
regarding dividends paid by the Funds during each fiscal year (or reporting
period) since their inceptions.
The Schwab Short-Term Bond Market Index Fund seeks to track the total return of
the Lehman Brothers Mutual Fund Short (1-5 Year) Government/Corporate Bond
Index, which represents the performance of U.S. government and corporate bonds
that have average maturities of between one and five years. The Schwab Total
Bond Market Index Fund seeks to track the total return of the Lehman Brothers
Aggregate Bond Index, a broadbased index that includes U.S. government and other
investment-grade debt securities, such as corporate and international (dollar-
denominated) bonds and asset-backed and mortgage-backed securities with
maturities greater than one year.
As you may recall from our previous annual and most recent semiannual reports
dated August 31, 1997, and February 28, 1998, respectively, changes to the
Funds' investment objectives were approved by shareholders last year.
Implementation of the change began on November 1, 1997, when the Funds converted
from an actively managed strategy to an index strategy. The transition was
completed as of March 1, 1998.
CONTENTS
<TABLE>
<S> <C>
- ----------------------------------------------------
A Message from the Chairman 1
- ----------------------------------------------------
What Every Bond Fund Investor Should Know 2
- ----------------------------------------------------
Market Overview 4
- ----------------------------------------------------
The Portfolio Management Team 7
- ----------------------------------------------------
Schwab Short-Term Bond Market Index Fund 8
- ----------------------------------------------------
Schwab Total Bond Market Index Fund 10
- ----------------------------------------------------
Dividends Paid 12
- ----------------------------------------------------
Fund Discussion 13
- ----------------------------------------------------
Portfolio Highlights 16
- ----------------------------------------------------
Financial Statements and Notes 17
- ----------------------------------------------------
</TABLE>
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
No doubt you've witnessed the extreme volatility in the stock market that you
frequently read about in shareholder communications such as this. The 12-month
reporting period ended August 31, 1998, has served as a clear example of how the
performance of different asset classes can vary substantially for a given
period. For the reporting period, domestic bonds generally outperformed both
domestic and international stocks. This was due to factors ranging from strong
bond total returns, which were fueled by declining interest rates all along the
yield curve, to August's drop in both domestic and
international equity valuations.
[PHOTO]
Despite the volatility, the U.S. economy, as measured by gross
domestic product (GDP), continued to provide a solid
foundation for U.S. business activity, though it was somewhat dampened during
the second quarter. But uncertainty persists as to the ultimate effect that
international economic crises and domestic political turmoil will have on the
U.S. economy. Corporate profitability and domestic consumers' responses to
recent stock market volatility may ultimately determine whether the economy will
continue on its current course.
Given all of these factors, this appears to be a good time to reaffirm one of
our primary investment principles: Regardless of short-term market trends, our
philosophy has always been that REGULAR INVESTING is the best strategy over the
long term. And your investment in a bond fund may play an important role in your
asset allocation. We've included some guidelines on the following pages that
address some things you should know about bond funds. You might also find that
more than one kind of bond fund may be appropriate for you, depending on your
goals and financial situation. As always, feel free to contact us if you have
any questions.
The support of investors like you has helped Charles Schwab Investment
Management, Inc. (CSIM) become one of the largest and fastest-growing mutual
fund families in the nation. CSIM now manages more than $71 billion in assets on
behalf of more than 3.2 million SchwabFunds-Registered Trademark- shareholders.
We offer a broad spectrum of 35 mutual funds for investors with varying
financial situations and goals.
Once again, thank you for your investment in SchwabFunds. We continue to do
everything we can to warrant the trust you have placed in us.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
August 31, 1998
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<PAGE>
WHAT EVERY BOND FUND INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a mutual fund helps reduce the risk that you might otherwise
encounter by owning just a few individual stocks or bonds.
Don't forget, however, that diversification across your portfolio is just as
important as diversification within one of the mutual funds you own. As you
probably know, stocks historically have offered higher long-term returns than
other asset classes, such as bonds or cash, but those returns have come at the
price of higher volatility. To help mitigate some of that risk, many investors
often include at least some bonds and cash in their portfolios.
THE ROLE OF BONDS IN A BALANCED PORTFOLIO
Maintaining the right mix of asset classes--stocks, bonds and cash--in your
portfolio is a smart strategy for every investor. In fact, asset allocation is
one of the most important factors in determining overall portfolio performance.
Over time, a portfolio composed of stocks and bonds can provide competitive
returns compared with an all-stock portfolio, but with less risk for you. And
over the long term, bond funds typically pay a higher return than even the
highest-yielding cash reserves, although with increased risk. Of course, past
performance is no guarantee of future returns.
WHY BOND FUNDS?
Investing in bond funds can provide several advantages over investing in
individual bonds:
DIVERSIFICATION: Bond funds can invest across a broad segment of the bond market
and can provide automatic diversification within one asset class.
PROFESSIONAL MANAGEMENT: Bond funds are managed by investment experts who know
and understand the intricacies of the bond market and its operations.
SIMPLICITY: Bond funds are ideal for investors who lack the time or expertise to
actively manage a bond portfolio.
LOW MINIMUM INITIAL INVESTMENT: At Schwab you can invest in a bond fund with
just $1,000.
CONVENIENCE: Bond fund investors can make purchases and redemptions at any time
without transaction fees and without having to wait until an individual bond
matures.
FLEXIBILITY: Dividends and/or capital gains can be reinvested or paid in cash.
BOND INDEX FUNDS
Schwab's Bond Index Funds seek to track the total returns of broadly diversified
bond indices. And because index funds generally result in lower portfolio
turnover and fewer transactions--and therefore lower trading costs--you could
potentially realize higher returns.
In addition to some of the same benefits of equity index funds, including broad
diversification, lower expenses, consistent investment style and straightforward
choices, bond index funds can also provide the added benefit of high
credit-quality investments. Schwab's Bond Index Funds are designed to maintain
high credit-quality standards because the indices they seek to track primarily
comprise U.S. Treasuries, government agency securities and government agency
mortgage-backed securities; the remaining bonds in the indices are
investment-grade corporate bonds rated AAA through BBB, the four highest credit
ratings.
TAX CONSIDERATIONS
If you're in a high tax bracket, investing in tax-free or municipal bond funds
may help take a bite out of your
2
<PAGE>
tax bill.(1) And, if you live in a state with a high personal state income tax
or other personal tax, you may be better served by choosing a double tax-free
fund that provides income free from federal, state and, in some cases, local
income taxes.
BOND FUNDS AT SCHWAB
Schwab offers a variety of bond funds, summarized below. When evaluating a bond
fund for potential investment, you should consider your attitude toward risk and
return, as well as your income tax bracket.
BOND INDEX FUNDS
SCHWAB SHORT-TERM BOND MARKET INDEX FUND seeks to track the Lehman Brothers
Short (1-5 Year) Government/ Corporate Index. This index represents the
performance of government and corporate bonds that have maturities between one
and five years.
SCHWAB TOTAL BOND MARKET INDEX FUND seeks to track the Lehman Brothers Aggregate
Bond Index. This index is a broadbased index covering investment-grade bonds
with maturities greater than one year.
TAX-FREE BOND FUNDS
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in municipal
bonds with dollar-weighted average maturities of two to five years. Its share
price will generally be less volatile than that of longer-term bond funds but
will generally provide lower returns.
SCHWAB LONG-TERM TAX-FREE BOND FUND invests in municipal bonds with
dollar-weighted average maturities of 10 years or more. It is designed to
provide higher tax-free income than is usually available with shorter-term
funds; however, its net asset value may be more volatile than that of
shorter-term bond funds.
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND invests primarily in
California municipal bonds with dollar-weighted average maturities of two to
five years. Its share price will generally be less volatile than that of longer-
term bond funds but will generally provide lower returns.
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND invests primarily in securities
issued by or on behalf of the State of California and its political
subdivisions, agencies and instrumentalities, and seeks to maintain a
dollar-weighted average maturity of 10 years or longer. It is designed to
provide higher tax-free income than is available with shorter-term funds;
however, its net asset value may be more volatile than that of shorter-term bond
funds.
If you would like more information on any of these funds, please call us toll
free at 1-800-435-4000 and request a free prospectus, which contains more
information, including fees and expenses. Please be sure to read the prospectus
before investing.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in our
SchwabFunds.-Registered Trademark- In addition to our automated methods that
allow you to invest or transfer money to your Schwab account on a regular basis,
you can also invest through our Web site at WWW. SCHWAB.COM; through our
automated touchtone telephone service, TeleBroker,-Registered Trademark- by
calling 1-800-272-4922; or in person at any of our nationwide branches.
KEEPING YOU INFORMED
One of our top priorities at Charles Schwab is to keep you informed about your
investments and potential opportunities in the marketplace. For a wealth of
information about our investment philosophy and funds, as well as about the
market and economic environment, visit our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS
(1)Some investors may be subject to the alternative minimum tax; consult your
tax advisor.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
Although somewhat dampened during the second quarter, the U.S. economy, as
measured by gross domestic product (GDP), grew at a strong real rate of 3.7%
during the first half of 1998--well in excess of the Federal Reserve's estimated
noninflationary growth rate of 2.0% to 2.75%.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED
RATE)
<S> <C>
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 0.1%
Q2 1993 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 0.9%
Q2 1995 0.3%
Q3 1995 3.0%
Q4 1995 2.2%
Q1 1996 1.8%
Q2 1996 6.0%
Q3 1996 1.0%
Q4 1996 4.3%
Q1 1997 4.9%
Q2 1997 3.3%
Q3 1997 3.1%
Q4 1997 3.7%
Q1 1998 5.5%
Q2 1998 1.8%
Source: Bloomberg L.P.
</TABLE>
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for continued growth throughout 1998--perhaps at a more
moderate rate than over the previous six months, but nonetheless further
extending the current economic expansion that began in 1991. High levels of
consumer confidence, low interest rates, rising real wages and strong gains in
stock prices have been the engines continuing this lengthy expansion. Many
economists believe that the brunt of the economic crises in Asia and elsewhere
may be yet to come. Uncertainties persist as to the ultimate effect on the U.S.
economy, particularly on corporate earnings. Going forward, the behavior of
domestic consumers in response to recent stock market volatility may also be a
key determinant of whether the economy continues on its current course or
softens in 1999.
UNEMPLOYMENT
The U.S. unemployment rate stood at 4.5% in August, after declining to 4.3% in
April and May--the lowest level in 28 years. Labor markets have become extremely
tight, growth in the labor force has slowed and wage increases are beginning to
put more pressure on labor costs (see Employment Cost Index, below).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.6%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.1%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.4%
Apr-95 5.7%
May-95 5.6%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.7%
Sep-95 5.7%
Oct-95 5.6%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.7%
Feb-96 5.5%
Mar-96 5.5%
Apr-96 5.5%
May-96 5.5%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.2%
Sep-96 5.2%
Oct-96 5.3%
Nov-96 5.4%
Dec-96 5.3%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.2%
Apr-97 5.0%
May-97 4.8%
Jun-97 5.0%
Jul-97 4.9%
Aug-97 4.9%
Sep-97 4.9%
Oct-97 4.8%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.7%
Feb-98 4.6%
Mar-98 4.7%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Source: Bloomberg L.P.
</TABLE>
INFLATION
Price inflation remained remarkably well contained.
The Consumer Price Index (CPI) rose just 1.6% for the year ended August
1998--reaching levels during the reporting period that were the lowest since
January 1987. Its core rate (which excludes the more volatile food and energy
components) rose 2.5%--also very low, but somewhat higher than the rates we have
seen since the second quarter of 1997.
The Employment Cost Index (ECI), which measures inflation in wages, salaries and
benefits, also remained in check, increasing 3.5% for the year ended June 30,
1998.
4
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
MONTHLY CONSUMER PRICE INDEX QUARTERLY EMPLOYMENT COST INDEX
<S> <C> <C>
Jan-90 5.2% 5.5%
Feb-90 5.3% 5.5%
Mar-90 5.2% 5.5%
Apr-90 4.7% 5.4%
May-90 4.4% 5.4%
Jun-90 4.7% 5.4%
Jul-90 4.8% 5.2%
Aug-90 5.6% 5.2%
Sep-90 6.2% 5.2%
Oct-90 6.3% 4.9%
Nov-90 6.3% 4.9%
Dec-90 6.1% 4.9%
Jan-91 5.7% 4.6%
Feb-91 5.3% 4.6%
Mar-91 4.9% 4.6%
Apr-91 4.9% 4.6%
May-91 5.0% 4.6%
Jun-91 4.7% 4.6%
Jul-91 4.4% 4.3%
Aug-91 3.8% 4.3%
Sep-91 3.4% 4.3%
Oct-91 2.9% 4.3%
Nov-91 3.0% 4.3%
Dec-91 3.1% 4.3%
Jan-92 2.6% 4.0%
Feb-92 2.8% 4.0%
Mar-92 3.2% 4.0%
Apr-92 3.2% 3.6%
May-92 3.0% 3.6%
Jun-92 3.1% 3.6%
Jul-92 3.2% 3.5%
Aug-92 3.1% 3.5%
Sep-92 3.0% 3.5%
Oct-92 3.2% 3.5%
Nov-92 3.0% 3.5%
Dec-92 2.9% 3.5%
Jan-93 3.3% 3.5%
Feb-93 3.2% 3.5%
Mar-93 3.1% 3.5%
Apr-93 3.2% 3.6%
May-93 3.2% 3.6%
Jun-93 3.0% 3.6%
Jul-93 2.8% 3.6%
Aug-93 2.8% 3.6%
Sep-93 2.7% 3.6%
Oct-93 2.8% 3.5%
Nov-93 2.7% 3.5%
Dec-93 2.7% 3.5%
Jan-94 2.5% 3.2%
Feb-94 2.5% 3.2%
Mar-94 2.5% 3.2%
Apr-94 2.4% 3.2%
May-94 2.3% 3.2%
Jun-94 2.5% 3.2%
Jul-94 2.8% 3.2%
Aug-94 2.9% 3.2%
Sep-94 3.0% 3.2%
Oct-94 2.6% 3.0%
Nov-94 2.7% 3.0%
Dec-94 2.7% 3.0%
Jan-95 2.8% 2.9%
Feb-95 2.9% 2.9%
Mar-95 2.9% 2.9%
Apr-95 3.1% 2.9%
May-95 3.2% 2.9%
Jun-95 3.0% 2.9%
Jul-95 2.8% 2.7%
Aug-95 2.6% 2.7%
Sep-95 2.5% 2.7%
Oct-95 2.8% 2.7%
Nov-95 2.6% 2.7%
Dec-95 2.5% 2.7%
Jan-96 2.7% 2.8%
Feb-96 2.7% 2.8%
Mar-96 2.8% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.8% 2.9%
Jul-96 3.0% 2.8%
Aug-96 2.9% 2.8%
Sep-96 3.0% 2.8%
Oct-96 3.0% 2.9%
Nov-96 3.3% 2.9%
Dec-96 3.3% 2.9%
Jan-97 3.0% 2.9%
Feb-97 3.0% 2.9%
Mar-97 2.8% 2.9%
Apr-97 2.5% 2.8%
May-97 2.2% 2.8%
Jun-97 2.3% 2.8%
Jul-97 2.2% 3.0%
Aug-97 2.2% 3.0%
Sep-97 2.2% 3.0%
Oct-97 2.1% 3.3%
Nov-97 1.8% 3.3%
Dec-97 1.7% 3.3%
Jan-98 1.6% 3.3%
Feb-98 1.4% 3.3%
Mar-98 1.4% 3.3%
Apr-98 1.4% 3.5%
May-98 1.7% 3.5%
Jun-98 1.7% 3.5%
Jul-98 1.7%
Aug-98 1.6%
Source: Bloomberg L.P. and Bureau of Labor
Statistics
</TABLE>
Although inflation has been well contained, the combination of a tight labor
market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains allow companies to pay higher wages without raising prices.
Although strong in the first quarter, productivity growth was essentially flat
for the second quarter of 1998.
ASSET CLASS PERFORMANCE
The 12-month reporting period served as a textbook example of the benefits of
asset allocation and how asset classes can exhibit markedly different returns
for a given period.
In classic tortoise-and-hare fashion, domestic bond returns, as represented by
the Lehman Brothers Aggregate Bond Index, outperformed both domestic and
international stock returns for the reporting period--achieving a total return
of 10.6% for the period. This was a result of several factors, including strong
bond total returns fueled by declining interest rates all along the yield curve,
as well as August's drop in both domestic and international equity valuations.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1 INVESTMENT
SCHWAB SCHWAB LEHMAN
S&P 500-R- SMALL-CAP INTERNATIONAL AGGREGATE
INDEX INDEX-R- INDEX-R- BOND INDEX
<S> <C> <C> <C> <C>
8/97 $1.00 $1.00 $1.00 $1.00
1.055 1.078 1.063 1.015
10/97 1.019 1.031 0.977 1.03
1.067 1.022 0.973 1.034
12/97 1.085 1.043 0.987 1.045
1.097 1.027 1.027 1.058
2/98 1.176 1.112 1.089 1.057
1.236 1.162 1.117 1.061
4/98 1.249 1.17 1.125 1.066
1.227 1.101 1.122 1.076
6/98 1.277 1.104 1.129 1.086
1.264 1.019 1.137 1.088
8/98 1.081 0.823 0.993 1.106
Compiled by Charles Schwab & Co., Inc.
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
represent returns of specific market sectors during the reporting period and do
not reflect the performance of any fund. Indices are unmanaged and, unlike a
fund, do not reflect the payment of advisory fees and other expenses associated
with an investment in a fund. Investors cannot invest in an index directly.
Not surprisingly, domestic equity returns were negatively impacted by August's
significant stock market declines. The difference in performance between
large-cap stocks and small-cap stocks, however, was truly remarkable. Large-cap
stocks as represented by the S&P 500-Registered Trademark- Index, achieved a
total return of 8.1% for the 12-month period. Small-cap stocks, as represented
by the Schwab Small-Cap Index,-Registered Trademark- experienced a total DECLINE
in value of 17.7%-- resulting in a difference of 25.8% between the 12-month
returns for the two asset classes.
5
<PAGE>
MARKET OVERVIEW (continued)
Similar to the domestic equity situation, international stock returns were
characterized by the markedly divergent performance of Asian countries, which
experienced significant declines, and European countries, which experienced
healthy gains for the period. Combined, international stock returns, as
represented by the Schwab International Index,-Registered Trademark- experienced
a slightly negative total return of -0.7% for the 12-month reporting period.
U.S. EQUITY VALUATION
The price/earnings ratio for the S&P 500-Registered Trademark- Index reached
28.5 during the reporting period--its highest value ever--before declining
sharply to 22.8 at the end of August. Nonetheless, this ratio is still well
above 15.0, its 30-year average. The price/earnings ratio, also known as a
multiple, is the price of a stock divided by its earnings per share and
generally indicates how much investors are willing to pay for a company's
earning potential. Based on other traditional market valuation measures, such as
the price-to-book value ratio or dividend yield, the U.S. stock market continues
to remain at high valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
30 Year Average 15.00
Source: Bloomberg L.P.
</TABLE>
TREASURY BOND YIELDS
Treasury yields fell significantly during the 12-month reporting period--by
1.27% to 5.34% for 30-year bonds and by 1.32% to 4.90% for five-year notes.
International economic problems were a major factor contributing to the decline
in yields. Investors seeking a safe haven from the volatile stock market
increased demand for U.S. Treasury securities and bid up prices, thereby
decreasing Treasury bond yields. Throughout the reporting period, the Federal
Reserve's decision to leave rates unchanged--in part due to international market
turbulence, as well as to acceptable domestic economic statistics showing strong
growth coupled with contained inflation--also contributed to favorable
fixed-income market conditions.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR TREASURY BOND
YIELDS
30-YEAR FIVE-YEAR
TREASURY BOND YIELD TREASURY NOTE YIELD
<S> <C> <C>
8/29/97 6.61% 6.22%
9/5/97 6.64% 6.23%
9/12/97 6.59% 6.17%
9/19/97 6.38% 6.01%
9/26/97 6.37% 5.99%
10/3/97 6.29% 5.87%
10/10/97 6.43% 6.02%
10/17/97 6.44% 6.08%
10/24/97 6.27% 5.90%
10/31/97 6.15% 5.71%
11/7/97 6.16% 5.81%
11/14/97 6.11% 5.80%
11/21/97 6.03% 5.75%
11/28/97 6.05% 5.84%
12/5/97 6.08% 5.88%
12/12/97 5.93% 5.69%
12/19/97 5.92% 5.71%
12/26/97 5.90% 5.71%
1/2/98 5.84% 5.61%
1/9/98 5.73% 5.25%
1/16/98 5.81% 5.40%
1/23/98 5.97% 5.52%
1/30/98 5.80% 5.38%
2/6/98 5.92% 5.47%
2/13/98 5.85% 5.42%
2/20/98 5.87% 5.49%
2/27/98 5.92% 5.59%
3/6/98 6.02% 5.65%
3/13/98 5.89% 5.53%
3/20/98 5.89% 5.55%
3/27/98 5.96% 5.68%
4/3/98 5.79% 5.49%
4/10/98 5.88% 5.56%
4/17/98 5.88% 5.56%
4/24/98 5.95% 5.63%
5/1/98 5.93% 5.62%
5/8/98 5.98% 5.65%
5/15/98 5.97% 5.67%
5/22/98 5.90% 5.64%
5/29/98 5.80% 5.55%
6/5/98 5.79% 5.59%
6/12/98 5.66% 5.45%
6/19/98 5.67% 5.51%
6/26/98 5.63% 5.49%
7/3/98 5.60% 5.41%
7/10/98 5.63% 5.40%
7/17/98 5.75% 5.49%
7/24/98 5.69% 5.48%
7/31/98 5.71% 5.50%
8/7/98 5.63% 5.38%
8/14/98 5.54% 5.33%
8/21/98 5.43% 5.19%
8/28/98 5.34% 4.90%
Source: Bloomberg L.P.
</TABLE>
On September 29, 1998, following the close of the reporting period, the Federal
Reserve did lower the Federal Funds rate from 5.50% to 5.25%. This rate
reduction, widely anticipated by financial markets, was viewed as a pre-emptive
step to cushion the effects of increasing weakness in foreign economies on
prospective U.S. economic growth.
6
<PAGE>
PORTFOLIO MANAGEMENT
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD, senior vice president and chief investment officer, has overall
responsibility for the management of each Fund's portfolio. Steve joined CSIM as
vice president and portfolio manager in April 1991 and was promoted to his
current position in August 1993. Prior to joining CSIM, Steve was vice president
and portfolio manager at Federated Investors.
KIM DAIFOTIS, vice president and senior portfolio manager, has had primary
responsibility for the day-to-day management of each Fund's portfolio since he
joined CSIM in November 1997. Prior to joining CSIM, Kim spent five years at
Lehman Brothers, where he served as vice president and fixed income
institutional salesperson, as well as senior portfolio strategist. Prior to
that, Kim spent three years as senior portfolio manager for Barclays Global
Investors.
7
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION 30-DAY
ONE YEAR FIVE YEARS (11/5/91) SEC YIELD
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
SCHWAB SHORT-TERM BOND
MARKET INDEX FUND(1),(2) 7.64% 4.73% 6.01% 5.23%
- --------------------------------------------------------------------------------
Benchmark Indices(3) 7.54% 5.79% 6.18% --
- --------------------------------------------------------------------------------
Lehman Brothers Mutual
Fund Short (1-3 Year) U.S.
Government Bond Index (Prior) 7.31% 5.74% 6.09% --
- --------------------------------------------------------------------------------
Lehman Brothers Mutual
Fund Short (1-5
Year) Government/
Corporate Bond Index (New) 8.01% 5.89% 6.68% --
- --------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 6/30/98. As of 6/30/98, the Fund's one-year, five-year and
since-inception average annual total returns were 7.03%, 4.73% and 5.90%,
respectively. The 30-day SEC yield as of 6/30/98 was 5.46%.(4)
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB LEHMAN MF SHORT LEHMAN MF SHORT
SHORT-TERM (1--3) U.S. (1--5)GOVERNMENT/
BOND MARKET GOVERNMENT BOND CORPORATE BOND BENCHMARK
INDEX FUND INDEX (PRIOR) INDEX (NEW) INDICES
<S> <C> <C> <C> <C>
11/5/91 $10,000 $10,000 $10,000
11/30/91 $10,117 $10,059 $10,097
12/31/91 $10,381 $10,212 $10,287
1/31/92 $10,241 $10,199 $10,243
2/29/92 $10,240 $10,229 $10,272
3/31/92 $10,190 $10,226 $10,251
4/30/92 $10,282 $10,319 $10,349
5/31/92 $10,440 $10,415 $10,477
6/30/92 $10,595 $10,521 $10,614
7/31/92 $10,794 $10,642 $10,778
8/31/92 $10,898 $10,728 $10,884
9/30/92 $11,053 $10,829 $11,012
10/31/92 $10,924 $10,767 $10,903
11/30/92 $10,868 $10,751 $10,868
12/31/92 $11,012 $10,851 $10,990
1/31/93 $11,202 $10,965 $11,164
2/28/93 $11,355 $11,052 $11,298
3/31/93 $11,395 $11,087 $11,339
4/30/93 $11,499 $11,154 $11,428
5/31/93 $11,462 $11,128 $11,394
6/30/93 $11,622 $11,211 $11,518
7/31/93 $11,661 $11,236 $11,541
8/31/93 $11,823 $11,329 $11,679
9/30/93 $11,851 $11,365 $11,718
10/31/93 $11,892 $11,390 $11,748
11/30/93 $11,819 $11,392 $11,725
12/31/93 $11,873 $11,438 $11,773
1/31/94 $11,973 $11,509 $11,873
2/28/94 $11,780 $11,439 $11,754
3/31/94 $11,628 $11,380 $11,637
4/30/94 $11,527 $11,337 $11,569
5/31/94 $11,485 $11,353 $11,582
6/30/94 $11,500 $11,381 $11,602
7/31/94 $11,599 $11,484 $11,732
8/31/94 $11,628 $11,522 $11,770
9/30/94 $11,585 $11,495 $11,708
10/31/94 $11,593 $11,522 $11,722
11/30/94 $11,528 $11,473 $11,662
12/31/94 $11,540 $11,495 $11,688
1/31/95 $11,697 $11,654 $11,867
2/28/95 $11,852 $11,815 $12,072
3/31/95 $11,919 $11,883 $12,141
4/30/95 $12,018 $11,989 $12,268
5/31/95 $12,232 $12,197 $12,553
6/30/95 $12,281 $12,263 $12,627
7/31/95 $12,308 $12,314 $12,657
8/31/95 $12,396 $12,388 $12,747
9/30/95 $12,470 $12,449 $12,820
10/31/95 $12,572 $12,552 $12,943
11/30/95 $12,696 $12,659 $13,080
12/31/95 $12,799 $12,754 $13,194
1/31/96 $12,900 $12,862 $13,315
2/29/96 $12,817 $12,812 $13,225
3/31/96 $12,778 $12,803 $13,184
4/30/96 $12,776 $12,816 $13,173
5/31/96 $12,777 $12,844 $13,182
6/30/96 $12,878 $12,938 $13,298
7/31/96 $12,917 $12,988 $13,346
8/31/96 $12,940 $13,036 $13,380
9/30/96 $13,072 $13,155 $13,528
10/31/96 $13,235 $13,304 $13,717
11/30/96 $13,368 $13,402 $13,849
12/31/96 $13,311 $13,405 $13,813
1/31/97 $13,378 $13,469 $13,877
2/28/97 $13,397 $13,501 $13,904
3/31/97 $13,355 $13,491 $13,860
4/30/97 $13,477 $13,601 $13,994
5/31/97 $13,575 $13,696 $14,097
6/30/97 $13,680 $13,791 $14,208
7/31/97 $13,874 $13,941 $14,418
8/31/97 $13,841 $13,955 $14,398
9/30/97 $13,964 $14,061 $14,532
10/31/97 $14,091 $14,165 $14,663
11/30/97 $14,130 $14,201 $14,691
12/31/97 $14,228 $14,296 $14,798
1/31/98 $14,383 $14,433 $14,969
2/28/98 $14,358 $14,446 $14,969 $14,358
3/31/98 $14,415 $14,502 $15,022 $14,408
4/30/98 $14,479 $14,572 $15,095 $14,479
5/31/98 $14,563 $14,649 $15,188 $14,567
6/30/98 $14,643 $14,725 $15,273 $14,649
7/31/98 $14,697 $14,795 $15,337 $14,710
8/31/98 $14,898 $14,975 $15,551 $14,916
3/1/1998: Completed transition of approved change in investment objective
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Short-Term Bond Market Index Fund, made at its inception, with a similar
investment in three indices: the Lehman Brothers Mutual Fund Short (1-3 Year)
U.S. Government Bond Index, which was the Fund's index until 2/28/98; the Lehman
Brothers Mutual Fund Short (1-5 Year) Government/Corporate Bond Index, the
Fund's index beginning on 3/31/98; and a Benchmark Index that combines the
performance of these two indices for their respective periods. The change in the
index is a result of the Fund's conversion from a government bond fund to a bond
index fund, as discussed in previous shareholder reports, which was completed as
of 3/1/98.
(1)Prior to 11/1/97, the Schwab Short-Term Bond Market Index Fund was known as
the Schwab Short/Intermediate Government Bond Fund. As reported in the Fund's
annual report dated 8/31/97, at the shareholders meeting held on 9/22/97,
shareholders approved the proposed change to the Fund's investment objective
from an actively managed government bond strategy to an index strategy.
(2)A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 8/31/98, the Fund's one-year, five-year and
since-inception average annual total returns would have been 7.17%, 4.41%
and 5.65%, respectively. The 30-day SEC yield as of 8/31/98 would have been
4.80%.
(3)This index represents the Lehman Brothers Mutual Fund Short (1-3 Year) U.S.
Government Bond Index for the period from the Fund's inception (11/5/91)
through 2/28/98 and the Lehman Brothers Mutual Fund Short (1-5 Year)
Government/Corporate Bond Index from 3/1/98 through the end of the reporting
period. This benchmark is designed to show investors how a hypothetical
$10,000 investment in the Fund has performed since its inception to the end
of the reporting period by comparing it with the Fund's prior and new
indices.
(4)A portion of the Fund's expenses was reduced during the reporting
period. Without such reductions, as of 6/30/98, the Fund's one-year,
five-year and since-inception average annual total returns would have been
6.58%, 4.42% and 5.54%, respectively. The 30-day SEC yield as of 6/30/98
would have been 5.02%.
THE INFORMATION PRESENTED IN THE GRAPH TO THE LEFT IS HISTORICAL AND DOES NOT
REPRESENT FUTURE RESULTS. TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND
CAPITAL GAIN DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL
FLUCTUATE, SO AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. Indices are unmanaged and do not reflect advisory fees
and other expenses associated with an investment in the Fund. Investors cannot
invest in an index directly.
8
<PAGE>
PORTFOLIO COMPOSITION
The Schwab Short-Term Bond Market Index Fund invests primarily in U.S. Treasury
obligations, corporate obligations and other U.S. government securities. The
chart below illustrates the composition of the Fund's portfolio as of 8/31/98
and is not indicative of its holdings after that date. A complete list of the
securities in the Fund's portfolio as of 8/31/98 is provided in the Schedule of
Investments later in this report.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
PORTFOLIO COMPOSITION AS A PERCENTAGE OF FUND INVESTMENTS(1)
as of 8/31/98
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Government Securities 78.0%
Corporate Bonds(2) 21.4%
Short-term Investments 0.6%
</TABLE>
(1)These percentages do not take into account other assets and liabilities.
(2)The credit quality of the securities, based on published ratings from
Standard & Poor's or Moody's Investors Service, is as follows: AA--6.0%;
A--77.2%; BAA-- 16.8%.
9
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION 30-DAY
ONE YEAR FIVE YEARS (3/5/93) SEC YIELD
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
SCHWAB TOTAL BOND MARKET
INDEX FUND(1,2) 10.83% 6.06% 7.10% 5.73%
- --------------------------------------------------------------------------------
Benchmark Indices(3) 11.02% 6.40% 6.87% --
- --------------------------------------------------------------------------------
Lehman Brothers General
U.S. Government Bond
Index (Prior) 12.28% 6.64% 6.98% --
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index (New) 10.56% 6.78% 7.07% --
- --------------------------------------------------------------------------------
</TABLE>
NASD regulations require that we report performance data as of the most recent
calendar quarter--in this case, the quarter ended 6/30/98. As of 6/30/98, the
Fund's one-year, five-year and since-inception average annual total returns were
10.41%, 6.70% and 6.89%, respectively. The 30-day SEC yield as of 6/30/98 was
6.04%.(4)
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB TOTAL LEHMAN GENERAL LEHMAN
BOND MARKET U.S. GOVERNMENT AGGREGATE
INDEX FUND BOND INDEX BOND INDEX BENCHMARK
(PRIOR) (NEW) INDICES
<S> <C> <C> <C> <C>
3/5/93 $10,000 $10,000 $10,000
3/31/93 $9,784 $9,926 $9,979
4/30/93 $9,890 $10,002 $10,048
5/31/93 $9,927 $9,991 $10,061
6/30/93 $10,314 $10,213 $10,244
7/31/93 $10,441 $10,276 $10,302
8/31/93 $10,863 $10,505 $10,482
9/30/93 $10,901 $10,545 $10,511
10/31/93 $10,952 $10,585 $10,550
11/30/93 $10,688 $10,468 $10,460
12/31/93 $10,738 $10,509 $10,517
1/31/94 $10,938 $10,653 $10,659
2/28/94 $10,544 $10,427 $10,474
3/31/94 $10,220 $10,193 $10,216
4/30/94 $10,112 $10,112 $10,134
5/31/94 $10,060 $10,099 $10,133
6/30/94 $10,027 $10,076 $10,110
7/31/94 $10,239 $10,261 $10,311
8/31/94 $10,233 $10,263 $10,324
9/30/94 $10,050 $10,118 $10,172
10/31/94 $10,036 $10,111 $10,163
11/30/94 $10,031 $10,093 $10,140
12/31/94 $10,122 $10,155 $10,210
1/31/95 $10,347 $10,344 $10,412
2/28/95 $10,647 $10,566 $10,660
3/31/95 $10,718 $10,633 $10,726
4/30/95 $10,887 $10,772 $10,875
5/31/95 $11,429 $11,206 $11,296
6/30/95 $11,445 $11,292 $11,379
7/31/95 $11,348 $11,250 $11,354
8/31/95 $11,566 $11,382 $11,491
9/30/95 $11,711 $11,491 $11,602
10/31/95 $11,931 $11,666 $11,753
11/30/95 $12,173 $11,848 $11,929
12/31/95 $12,395 $12,016 $12,096
1/31/96 $12,438 $12,090 $12,176
2/29/96 $12,075 $11,843 $11,964
3/31/96 $11,934 $11,745 $11,881
4/30/96 $11,766 $11,669 $11,814
5/31/96 $11,722 $11,650 $11,790
6/30/96 $11,885 $11,800 $11,948
7/31/96 $11,890 $11,829 $11,981
8/31/96 $11,830 $11,803 $11,960
9/30/96 $12,112 $11,999 $12,168
10/31/96 $12,451 $12,263 $12,439
11/30/96 $12,763 $12,477 $12,651
12/31/96 $12,537 $12,349 $12,534
1/31/97 $12,533 $12,363 $12,572
2/28/97 $12,556 $12,380 $12,604
3/31/97 $12,353 $12,249 $12,464
4/30/97 $12,606 $12,425 $12,651
5/31/97 $12,732 $12,532 $12,771
6/30/97 $12,918 $12,673 $12,923
7/31/97 $13,363 $13,033 $13,272
8/31/97 $13,152 $12,904 $13,159
9/30/97 $13,397 $13,097 $13,354
10/31/97 $13,687 $13,324 $13,548
11/30/97 $13,700 $13,392 $13,610
12/31/97 $13,778 $13,532 $13,747
1/31/98 $13,977 $13,735 $13,923
2/28/98 $13,938 $13,698 $13,912 $13,938
3/31/98 $13,964 $13,736 $13,959 $13,985
4/30/98 $14,035 $13,798 $14,032 $14,058
5/31/98 $14,166 $13,940 $14,165 $14,192
6/30/98 $14,263 $14,099 $14,286 $14,312
7/31/98 $14,306 $14,121 $14,316 $14,342
8/31/98 $14,575 $14,488 $14,549 $14,576
3/1/98: Completed transition of approved change in investment objective
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab Total Bond Market Index Fund, made at its inception, with a similar
investment in three indices: the Lehman Brothers General U.S. Government Bond
Index, which was the Fund's index up until 2/28/98; the Lehman Brothers
Aggregate Bond Index, the Fund's index beginning on 3/1/98; and a Benchmark
Index that combines the performance of these two indices for their respective
periods. The change in the index is a result of a strategy change of the Schwab
Total Bond Market Index Fund, as discussed in previous shareholder reports,
which was completed as of 3/1/98.
(1)Prior to 11/1/97, the Schwab Total Bond Market Index Fund was known as the
Schwab Long-Term Government Bond Fund. As reported in the Fund's annual
report dated 8/31/97, at the shareholders meeting held on 9/22/97,
shareholders approved the proposed change to the Fund's investment objective
from an actively managed government bond strategy to an index strategy.
(2)A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 8/31/98, the Fund's one-year, five-year and
since-inception average annual total returns would have been 10.14%, 4.90%
and 5.01%, respectively. The 30-day SEC yield as of 8/31/98 would have been
5.29%.
(3)This index represents the Lehman Brothers General U.S. Government Bond Index
for the period from the Fund's inception (3/5/93) through 2/28/98 and the
Lehman Brothers Aggregate Bond Index from 3/1/98 through the end of the
reporting period. This benchmark is designed to show investors how a
hypothetical $10,000 investment in the Fund has performed since its inception
to the end of the reporting period by comparing it with the Fund's prior
and new indices.
(4)A portion of the Fund's expenses was reduced during the reporting period.
Without such reductions, as of 6/30/98, the Fund's one-year, five-year and
since-inception average annual total returns would have been 9.63%, 6.23% and
4.76%, respectively. The 30-day SEC yield as of 6/30/98 would have been
5.59%.
THE INFORMATION PRESENTED IN THE GRAPH TO THE LEFT IS HISTORICAL AND DOES NOT
REPRESENT FUTURE RESULTS. TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND
CAPITAL GAIN DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL
FLUCTUATE, SO AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. Indices are unmanaged and do not reflect advisory fees
and other expenses associated with an investment in the Fund. Investors cannot
invest in an index directly.
10
<PAGE>
PORTFOLIO COMPOSITION
The Schwab Total Bond Market Index Fund invests primarily in U.S. Treasury
obligations, corporate bonds, asset-backed obligations and U.S. government
agency securities. The chart below illustrates the composition of the Fund's
portfolio as of 8/31/98 and is not indicative of its holdings after that date. A
complete list of the securities in the Fund's portfolio as of 8/31/98 is
provided in the Schedule of Investments later in this report.
SCHWAB TOTAL BOND MARKET INDEX FUND
PORTFOLIO COMPOSITION AS A PERCENTAGE OF FUND INVESTMENTS(1)
as of 8/31/98
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. Government Securities 55.7%
Corporate Bonds(2,3) 20.6%
Asset-Backed
Obligations(2,3) 23.1%
Short-term Investments 0.6%
</TABLE>
(1)These percentages do not take into account other assets and liabilities.
(2)The credit quality of the securities, based on published ratings from
Standard & Poor's or Moody's Investors Service, is as follows: AAA--31.1%;
AA--27.0%; A-- 29.4%; BAA--12.5%.
(3)A combination of various corporate bonds and asset-backed obligations
(approximately 29.8% of the Fund's portfolio) is used to gain exposure to
agency mortgage-backed securities.
11
<PAGE>
DIVIDENDS PAID
During the reporting period, the Funds continued to provide a high level of
current income consistent with the preservation of capital. The chart below
illustrates the income dividends on a per-share basis paid by each Fund during
each fiscal year or reporting period since inception.
DIVIDENDS PAID BY THE SCHWAB BOND INDEX FUNDS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INCOME DIVIDENDS PER SHARE
FISCAL YEAR
SCHWAB TOTAL BOND MARKET
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
NDEX FUND (INCEPTION 11/5/91) (INCEPTION 3/5/93)
<S> <C> <C>
1991* $0.10
1992 $0.60
1993** $0.37 $0.31
1994+ $0.54 $0.60
1995+ $0.59 $0.69
1996+ $0.59 $0.65
1997+ $0.59 $0.65
1998+ $0.57 $0.60
</TABLE>
* Period from inception (11/5/91) through 12/31/91.
** Period from inception (3/5/93) through 8/31/93 for Schwab Total Bond Market
Index Fund and for the eight-month period ended 8/31/93 for Schwab
Short-Term Bond Market Index Fund.
+ For the one-year period ended 8/31 for both Funds.
12
<PAGE>
FUND DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE FUNDS PERFORM DURING THE 12-MONTH REPORTING PERIOD?
A. Both Funds achieved favorable total returns for the period, aided in part by
the overall decline in bond yields, which increased prices of the Funds'
portfolio securities, thereby increasing the Funds' net asset values (NAVs).
The SCHWAB SHORT-TERM BOND MARKET INDEX FUND achieved a total return of 7.64%
for the 12-month reporting period ended August 31, 1998. This return came from a
combination of both dividend income of 6.00% and an increase in the Fund's NAV
of 1.64%. The NAV increase was a result of the Fund's declining yield, which
fell from 5.79% at the beginning of the period to 5.23% at the end of the
period. The Fund's weighted average maturity, 2.88 years as of August 31, 1998,
remained fairly constant throughout the reporting period.
The SCHWAB TOTAL BOND MARKET INDEX FUND achieved a total return of 10.83% for
the 12-month reporting period ended August 31, 1998. This return came from a
combination of both dividend income of 6.42% and an increase in the Fund's NAV
of 4.41%. The NAV increase was a result of the Fund's declining yield, which
fell from 6.61% at the beginning of the period to 5.73% at the end of the
period. The Fund's weighted average maturity was shortened significantly from
11.05 years as of August 31, 1997, to 7.84 years on August 31, 1998. This change
was implemented to bring the maturity of the Fund more in line with that of its
new benchmark, the Lehman Brothers Aggregate Bond Index.
Q. HOW DID THE FUNDS' PERFORMANCE COMPARE WITH THOSE OF THEIR NEW BENCHMARKS?
A. As we reported in the August 31, 1997, annual report, Fund shareholders
overwhelmingly approved the proposal to change each Fund's investment objective
from an actively managed government bond strategy to a passively managed bond
index strategy. The Schwab Short-Term Bond Market Index Fund now tracks the
Lehman Brothers Mutual Fund Short (1-5 Year) Government/Corporate Index, and the
Schwab Total Bond Market Index Fund now tracks the Lehman Brothers Aggregate
Bond Index. During the reporting period, the portfolio management team completed
implementation of the indexing strategy. Effective March 1, 1998, the portfolios
were positioned to track their respective benchmark indices. The Funds'
performance compared with those of their benchmark indices for the six-month
period is shown below.
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
<TABLE>
<CAPTION>
TOTAL RETURN
FOR THE SIX
MONTHS ENDED
8/31/98
<S> <C>
- --------------------------------------------------------------------------------
Schwab Short-Term Bond
Market Index Fund 3.77%
- --------------------------------------------------------------------------------
Lehman Brothers Short (1-5 Year)
Government/Corporate Index 3.90%
- --------------------------------------------------------------------------------
Tracking Differential -0.13%
- --------------------------------------------------------------------------------
</TABLE>
(NOTE: PLEASE SEE PAGE 8 FOR AVERAGE ANNUAL TOTAL RETURNS.)
13
<PAGE>
FUND DISCUSSION (continued)
Typically, there will be a small gap between the performance of each Fund's
index and that of the Fund itself. This gap occurs mainly because, unlike the
index, the Fund incurs operating expenses and trading costs and must keep a
small portion of its assets in cash for paying expenses and processing
shareholder orders. During the six-month period since the Schwab Short-Term Bond
Market Index Fund completed implementation of its indexing strategy, this gap
was -0.13%--well within our expectations for this Fund.
SCHWAB TOTAL BOND MARKET INDEX FUND
<TABLE>
<CAPTION>
TOTAL RETURN
FOR THE SIX
MONTHS ENDED
8/31/98
<S> <C>
- --------------------------------------------------------------------------------
Schwab Total Bond Market
Index Fund 4.58%
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate
Bond Index 4.58%
- --------------------------------------------------------------------------------
Tracking Differential --
- --------------------------------------------------------------------------------
</TABLE>
(NOTE: PLEASE SEE PAGE 10 FOR AVERAGE ANNUAL TOTAL RETURNS.)
As with the Schwab Short-Term Bond Market Index Fund, we typically anticipate a
small gap between the performance of the Schwab Total Bond Market Index Fund and
its benchmark index. Due to security selection over the period, however, the
tracking differential was smaller than we would normally anticipate. In fact,
during the six-month period since the Schwab Total Bond Market Index Fund
completed implementation of its indexing strategy, the performance of the Fund
and the index were equal. Although we are very pleased to report these results
for this short period, this level of Fund performance relative to its index
should be considered the exception, not the norm.
The change in the Funds' investment objectives and benchmark indices has been
reflected in the presentation of each Fund's long-term performance on pages 8
and 10.
Q. RECENTLY, THE STOCK MARKET SEEMS TO BE VERY VOLATILE. WHAT ROLE CAN BOND
INVESTMENTS PLAY IN REDUCING PORTFOLIO RISK?
A. Diversifying your portfolio with bonds or bond funds as part of your asset
allocation plan may help offset the effects of stock market volatility and
generally can help add stability to your portfolio, as shown in the following
example. Of course, share prices of bond funds, like any investment, fluctuate
with market conditions. The chart on the following page displays the high, low
and average annual returns from 1970 to 1997 for five hypothetical portfolios
representing the returns of stocks and bonds as measured by the indices.(1) As
shown in the chart, adding bonds to an all-stock portfolio has reduced risk
while still producing competitive returns.
A portfolio comprising 40% bonds and 60% stocks, for example, achieved an
average annual return of 11.65%-- only slightly over 1% less than the 12.97%
return of the all-stock portfolio--and did so with significantly less
volatility. The lowest annual return--
(1)The returns do not reflect actual investment in any security. The
hypothetical returns are all weighted averages and assume reinvestment of
dividends. The indices represented are the S&P 500-Registered Trademark-
Index and the Ibbotson Intermediate Government Bond Index. Indices are
unmanaged, do not incur expenses and cannot be invested in directly. Past
results are not indicative of future performance.
14
<PAGE>
for the portfolio invested 40% in bonds and 60% in stocks--was actually a loss
of 13.61%, about half of the 26.47% loss in the all-stock portfolio. Of course,
past performance does not guarantee future results.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HYPOTHETICAL PORTFOLIOS SHOWING THE
EFFECTS
OF ADDING BONDS TO AN ALL-STOCK
PORTFOLIO
1970-1997
AVERAGE ANNUAL HIGHEST ANNUAL LOWEST ANNUAL
RETURN RETURN RETURN
<S> <C> <C> <C>
100% Stocks 12.97% 37.43% -26.47%
90% Stocks/10% Bonds 12.68% 35.37% -23.25%
80% Stocks/20% Bonds 12.36% 33.30% -20.04%
70% Stocks/30% Bonds 12.02% 31.24% -16.82%
60% Stocks/40% Bonds 11.65% 29.18% -13.61%
</TABLE>
15
<PAGE>
PORTFOLIO HIGHLIGHTS
SCHWAB SHORT-TERM BOND MARKET
INDEX FUND
ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
Total net assets as of 8/31/97
(000s) $ 127,460
- -----------------------------------------------
Total net assets as of 8/31/98
(000s) $ 157,421
- -----------------------------------------------
Percentage growth over reporting
period 23.5%
- -----------------------------------------------
</TABLE>
MATURITY SCHEDULE: AVERAGE WEIGHTED
MATURITY AT 8/31/98
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF
VALUE OF PORTFOLIO
MATURITY RANGE (000S) PORTFOLIO (CUMULATIVE)
<S> <C> <C> <C>
- --------------------------------------------------------
0-6 months $ 1,013 0.6% 0.6%
- --------------------------------------------------------
7-36 months 73,528 47.2% 47.8%
- --------------------------------------------------------
37-60 months 76,413 49.1% 96.9%
- --------------------------------------------------------
More than
60 months 4,893 3.1% 100.0%
- --------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY: 2.88 years
SCHWAB TOTAL BOND MARKET
INDEX FUND
ASSETS
<TABLE>
<S> <C>
- -----------------------------------------------
Total net assets as of 8/31/97
(000s) $ 24,778
- -----------------------------------------------
Total net assets as of 8/31/98
(000s) $ 294,020
- -----------------------------------------------
Percentage growth over reporting
period 1,186.6%
- -----------------------------------------------
</TABLE>
MATURITY SCHEDULE: AVERAGE WEIGHTED
MATURITY AT 8/31/98
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF
VALUE OF PORTFOLIO
MATURITY RANGE (000S) PORTFOLIO (CUMULATIVE)
<S> <C> <C> <C>
- --------------------------------------------------------
0-1 year $ 71,034 24.2% 24.2%
- --------------------------------------------------------
2-10 years 177,869 60.6% 84.8%
- --------------------------------------------------------
11-20 years 7,534 2.6% 87.4%
- --------------------------------------------------------
21-30 years 31,227 10.7% 98.1%
- --------------------------------------------------------
More than
30 years 5,465 1.9% 100.0%
- --------------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY: 7.84 years
16
<PAGE>
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1998
Par Value
-------- --------
U.S. GOVERNMENT SECURITIES -- 77.2% (a)
U.S. TREASURY OBLIGATIONS -- 69.5%
U.S. Treasury Notes
6.25%, 05/31/99 $ 4,000 $ 4,031
6.88%, 07/31/99 5,800 5,887
6.88%, 08/31/99 5,000 5,084
7.13%, 09/30/99 5,000 5,105
5.38%, 01/31/00 17,000 17,071
5.50%, 02/29/00 11,500 11,572
6.75%, 04/30/00 2,800 2,876
5.38%, 06/30/00 500 504
6.38%, 09/30/01 5,000 5,185
5.88%, 11/30/01 18,000 18,449
6.63%, 03/31/02 4,000 4,205
6.63%, 04/30/02 2,000 2,105
5.75%, 11/30/02 1,400 1,436
5.50%, 02/28/03 2,800 2,851
5.50%, 03/31/03 4,000 4,081
5.75%, 04/30/03 5,000 5,150
5.50%, 05/31/03 3,000 3,061
5.38%, 06/30/03 2,250 2,290
5.25%, 08/15/03 8,400 8,531
--------
109,474
--------
AGENCY OBLIGATIONS -- 7.7%
Federal Home Loan Bank
6.26%, 08/09/99 5,000 5,036
Federal National Mortgage Association
6.45%, 03/26/01 5,000 5,031
5.25%, 01/15/03 2,000 1,989
--------
12,056
--------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $119,835) 121,530
--------
CORPORATE BONDS -- 21.2% (a)
American General Finance
6.25%, 12/18/02 2,000 2,050
American Home Products Corp.
7.70%, 02/15/00 2,000 2,062
Bank of New York Co., Inc.
6.63%, 06/15/03 2,000 2,067
Bank One Corp.
7.25%, 08/01/02 2,000 2,092
Par Value
------- --------
Columbia Gas Systems
6.39%, 11/28/00 $ 2,000 $ 2,033
Comdisco, Inc.
6.38%, 11/30/01 1,500 1,536
Ford Motor Credit
7.00%, 09/25/01 2,000 2,085
Hertz Corp.
7.00%, 05/01/02 2,000 2,083
KN Energy, Inc.
6.30%, 03/01/01 2,000 2,025
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,523
PDVSA Finance Ltd.
6.45%, 02/15/04 3,000 2,888
Philip Morris Companies, Inc.
6.15%, 03/15/00 3,000 3,019
Quebec Province
7.50%, 07/15/02 2,000 2,120
US West Capital Funding Inc.
6.13%, 07/15/02 1,500 1,524
Walmart Stores
5.65%, 02/01/10 2,000 2,005
WestPac Banking Corp.
9.13%, 08/15/01 2,000 2,192
--------
TOTAL CORPORATE BONDS
(Cost $33,013) 33,304
--------
SHORT-TERM INVESTMENTS -- 0.6% (b)
Provident Institutional Funds -
Fed Funds Portfolio
5.06% 1,013 1,013
--------
TOTAL SHORT-TERM INVESTMENTS
(Cost $1,013) 1,013
--------
TOTAL INVESTMENTS -- 99.0%
(Cost $153,861) 155,847
--------
OTHER ASSETS AND LIABILITIES -- 1.0%
Other Assets 35,691
Liabilities (34,117)
--------
1,574
--------
NET ASSETS -- 100.0% $157,421
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
17
<PAGE>
SCHWAB TOTAL BOND MARKET INDEX FUND
SCHEDULE OF INVESTMENTS (in thousands)
August 31, 1998
Par Value
-------- --------
U.S. GOVERNMENT SECURITIES -- 55.6% (a)
U.S. TREASURY OBLIGATIONS -- 51.4%
U.S. Treasury Bonds
6.13%, 11/15/27 $ 6,400 $ 7,098
U.S. Treasury Notes
5.63%, 11/30/99 5,000 5,031
5.50%, 02/29/00 4,500 4,528
5.38%, 07/31/00 5,000 5,038
5.75%, 11/30/02 12,250 12,568
5.50%, 02/28/03 15,500 15,784
5.50%, 03/31/03 29,500 30,096
5.75%, 04/30/03 8,000 8,239
5.50%, 05/31/03 9,500 9,694
5.38%, 06/30/03 24,400 24,839
5.25%, 08/15/03 850 863
6.13%, 08/15/07 3,300 3,531
5.50%, 02/15/08 8,450 8,707
5.63%, 05/15/08 14,350 14,987
--------
151,003
--------
AGENCY OBLIGATIONS -- 4.2%
Federal National Mortgage Association
5.25%, 01/15/03 2,000 1,989
5.75%, 04/15/03 5,000 5,073
6.00%, 05/15/08 5,000 5,140
--------
12,202
--------
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $159,721) 163,205
--------
CORPORATE BONDS -- 20.5% (a)
Argentaria Capital Funding
6.06%, 11/09/98 (c) 10,000 10,012
BRE Properties, Inc.
7.13%, 02/15/13 3,000 3,101
Cable & Wireless Communications Co.
6.63%, 03/06/05 2,000 2,002
CNA Financial Corp.
6.50%, 04/15/05 3,000 3,064
Dell Computer
7.10%, 04/15/28 3,000 3,075
General Motors Corp.
6.38%, 05/01/08 2,750 2,777
GTE Corp.
6.94%, 04/15/28 5,000 5,125
Hydro Quebec
8.05%, 07/07/06 2,000 2,307
Par Value
------- -------
KN Energy, Inc.
7.45%, 03/01/48 $ 2,000 $ 1,890
Lehman Brothers Holdings, Inc.
6.20%, 01/15/02 1,500 1,523
Merrill Lynch & Co., Inc.
5.84%, 09/24/98 (c) 5,000 5,000
Nabisco, Inc.
6.00%, 02/15/11 2,000 1,993
NationsBank Corp.
6.50%, 03/15/06 2,000 2,025
PDVSA Finance Ltd.
7.50%, 11/15/28 4,000 3,575
Suntrust Capital III
6.34%, 09/15/98 (c) 5,000 4,970
Swiss Bank Corp.
7.75%, 09/01/26 2,000 2,358
TCI Communications, Inc.
6.38%, 05/01/03 3,000 3,064
USX Corp.
9.38%, 02/15/12 2,000 2,440
-------
TOTAL CORPORATE BONDS
(Cost $60,163) 60,301
-------
ASSET BACKED OBLIGATIONS -- 23.0% (a) (c)
Advanta Mortgage Loan Trust,
Series 1998-1 A-7 (MBIA Insurance
LOC)
5.86%, 09/25/98 9,068 9,074
Airplanes Pass Through Trust
Series 1R, Class A8
6.02%, 09/15/98 27,000 27,084
Discover Card Master Trust I,
Series 94-2, Class A
5.99%, 09/15/98 10,000 10,066
First USA Credit Card Master Trust
5.93%, 09/15/98 7,000 7,031
Provident Bank Home Equity Loan
Trust Series 1997-2 Class A5
5.89%, 09/25/98 9,999 10,014
Southern Pacific Secured Asset Corp.
Series 1998 A-1
5.84%, 09/25/98 4,493 4,497
-------
TOTAL ASSET BACKED OBLIGATIONS
(Cost $67,692) 67,766
-------
18
<PAGE>
Par Value
------- ---------
SHORT-TERM INVESTMENTS -- 0.6% (b)
Provident Institutional Funds -
Fed Funds Portfolio
5.06% $ 1,857 $ 1,857
---------
TOTAL SHORT-TERM INVESTMENTS
(Cost $1,857) 1,857
---------
TOTAL INVESTMENTS -- 99.7%
(Cost $289,433) 293,129
---------
OTHER ASSETS AND LIABILITIES -- 0.3%
Other Assets 70,750
Liabilities (69,859)
---------
891
---------
NET ASSETS -- 100.0% $ 294,020
=========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
19
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
(a) Interest rates represent coupon rate of security.
(b) Interest rates represent the yield on report date.
(c) Variable rate obligations -- Interest rates vary periodically based on
current market rates. Rates shown are the effective rates as of the report
date. Dates shown represent the later of the demand date or next interest
rate change date. For variable rate obligations without demand features, the
next interest reset date is shown. All dates shown are considered the
maturity date for financial reporting purposes.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
August 31, 1998
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
ASSETS
Investments, at value (Cost:
$153,861, $289,433, respectively) $155,847 $293,129
Receivables:
Interest 1,936 3,248
Investments sold 32,739 65,845
Due from counterparties
(see Note 2) -- 317
Fund shares sold 1,015 1,338
Prepaid expenses 1 2
-------- --------
Total assets 191,538 363,879
-------- --------
LIABILITIES
Payables:
DIVIDENDS 135 267
Investments purchased 33,539 69,386
Fund shares redeemed 370 102
Investment advisory and
administration fees 16 --
Transfer agency and
shareholder service fees 54 2
Other liabilities 3 102
-------- --------
Total liabilities 34,117 69,859
-------- --------
Net assets applicable to
outstanding shares $157,421 $294,020
======== ========
NET ASSETS CONSIST OF:
Paid-in-capital $165,175 $288,879
Distributions in excess
of net investment income (67) (74)
Accumulated net realized gain
(loss) on investments sold (9,673) 1,409
Net unrealized appreciation on
investments and swap agreements 1,986 3,806
-------- --------
$157,421 $294,020
======== ========
PRICING OF SHARES
Outstanding shares, $0.00001 par
value (unlimited shares authorized) 15,899 28,894
Net asset value, offering and
redemption price per share $9.90 $10.18
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended August 31, 1998
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
Interest income $ 8,644 $ 8,746
------- -------
Expenses:
Investment advisory and
administration fees 586 580
Transfer agency and
shareholder service fees 358 354
Custodian and portfolio
accounting fees 81 76
Registration fees 35 96
Professional fees 6 13
Shareholder reports 41 4
Trustees' fees 12 8
Proxy fees 88 13
Other expenses 10 14
------- -------
1,217 1,158
Less:expenses reduced (see Note 4) (561) (720)
------- -------
Total expenses incurred by Fund 656 438
------- -------
Net investment income 7,988 8,308
------- -------
Net realized gain on investments
sold 1,170 1,762
Net unrealized appreciation on
investments 1,341 3,281
Net unrealized appreciation on
swap agreements -- 110
------- -------
Net gain on investments 2,511 5,153
------- -------
Increase in net assets resulting from
operations $10,499 $13,461
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
Schwab Schwab
Short-Term Total
Bond Market Bond Market
Index Fund Index Fund
----------- -----------
Year ended August 31,
1998 1997 1998 1997
------ ------ ------ ------
Operations:
Net investment income $ 7,988 $ 7,863 $ 8,308 $ 1,476
Net realized gain (loss)
on investments sold 1,170 (105) 1,762 (51)
Net unrealized appreciation
on investments 1,341 1,132 3,281 869
Net unrealized appreciation
on swap agreements -- -- 110 --
-------- -------- -------- --------
Increase in net assets
resulting from operations 10,499 8,890 13,461 2,294
-------- -------- -------- --------
Dividends to shareholders
from net investment income (8,180) (7,869) (8,398) (1,475)
-------- -------- -------- --------
Capital share transactions:
Proceeds from shares sold 70,549 28,648 283,044 16,059
Net asset value of shares
issued in reinvestment
of dividends 6,283 6,022 7,336 970
Less payments for shares
redeemed (49,190) (42,250) (26,201) (15,831)
-------- -------- -------- --------
Increase (decrease) in net
assets from capital share
transactions 27,642 (7,580) 264,179 1,198
-------- -------- -------- --------
Total increase (decrease)
in net assets 29,961 (6,559) 269,242 2,017
Net assets:
Beginning of period 127,460 134,019 24,778 22,761
-------- -------- -------- --------
End of period (including
distributions in excess
of net investment income
and undistributed net
investment income of
($67), $48, ($74) and $7,
respectively) $157,421 $127,460 $294,020 $ 24,778
======== ======== ======== ========
Number of Fund shares:
Sold 7,182 2,944 28,231 1,658
Reinvested 640 620 731 100
Redeemed (5,009) (4,343) (2,610) (1,642)
-------- -------- -------- --------
Net increase (decrease)
in shares outstanding 2,813 (779) 26,352 116
Shares outstanding:
Beginning of period 13,086 13,865 2,542 2,426
-------- -------- -------- --------
End of period 15,899 13,086 28,894 2,542
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
Income from
Investment Operations
--------------------------------
Net
Fiscal Net Asset Realized & Total
Period Value At Net Unrealized from
Ended Beginning Investment Gain (Loss) on Investment
August 31, of Period Income Investments Operations
- ---------- --------- ---------- -------------- ----------
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
1998 $ 9.74 $0.56 $ 0.17 $ 0.73
1997 $ 9.67 $0.59 $ 0.07 $ 0.66
1996 $ 9.84 $0.59 $(0.17) $ 0.42
1995 $ 9.81 $0.59 $ 0.03 $ 0.62
1994 $10.64 $0.54 $(0.71) $(0.17)
SCHWAB TOTAL BOND MARKET INDEX FUND
1998 $ 9.75 $0.60 $ 0.43 $ 1.03
1997 $ 9.38 $0.65 $ 0.37 $ 1.02
1996 $ 9.80 $0.65 $(0.42) $ 0.23
1995 $ 9.33 $0.69 $ 0.47 $ 1.16
1994 $10.53 $0.60 $(1.20) $(0.60)
Less Distributions
- --------------------------------------------
Dividends Distributions Net Asset
from Net from Realized Value at
Investment Gain on Total End of
Income Investments Distributions Period
- ---------- ------------- ------------- ---------
$(0.57)1 $ -- $(0.57) $ 9.90
$(0.59) $ -- $(0.59) $ 9.74
$(0.59) $ -- $(0.59) $ 9.67
$(0.59) $ -- $(0.59) $ 9.84
$(0.54) $(0.12) $(0.66) $ 9.81
$(0.60)1 $ -- $(0.60) $10.18
$(0.65) $ -- $(0.65) $ 9.75
$(0.65) $ -- $(0.65) $ 9.38
$(0.69) $ -- $(0.69) $ 9.80
$(0.60) $ -- $(0.60) $ 9.33
(Dagger) The information contained in the above table is based on actual
expenses for the periods, after giving effect to the portion of expenses
reduced by the Investment Manager and Schwab. Had these expenses not been
reduced, the Funds' expense and net investment income ratios would have
been:
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
- ------------------------------------------------------------------
FISCAL RATIO OF NET
Period Ratio of Expenses Investment Income
Ended to Average Net Assets to Average Net Assets
August 31, (%) (%)
- ---------- --------------------- ---------------------
1998 0.85 5.19
1997 0.82 5.69
1996 0.80 5.72
1995 0.81 5.88
1994 0.81 5.07
SCHWAB TOTAL BOND MARKET INDEX FUND
- ------------------------------------------------------------------
FISCAL RATIO OF NET
Period Ratio of Expenses Investment Income
Ended to Average Net Assets to Average Net Assets
August 31, (%) (%)
- ---------- --------------------- ---------------------
1998 0.82 5.35
1997 1.18 5.76
1996 1.17 5.50
1995 1.18 6.20
1994 2.19 4.18
1 The amounts shown include certain reclassifications related to book to tax
differences (see Note 2 of Notes to Financial Statements).
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Ratios/Supplemental Data
- ----------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Total Expenses Income Portfolio
Return Net Assets to Average to Average Turnover
(not annualized) End of Period Net Assets Net Assets Rate
(%) (000's) (%) (%) (%)
- ---------------- ------------- ---------- ------------ ---------
7.64 $157,421 0.46 5.58 128
6.96 $127,460 0.49 6.02 71
4.39 $134,019 0.49 6.03 80
6.61 $157,191 0.58 6.11 203
(1.67) $190,479 0.60 5.28 91
10.83 $294,020 0.31 5.86 285
11.18 $ 24,778 0.20 6.74 51
2.29 $ 22,761 0.00 6.67 66
13.03 $ 12,949 0.00 7.38 240
(5.80) $ 7,108 0.10 6.27 123
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the year ended August 31, 1998
1. DESCRIPTION OF THE FUNDS
The Schwab Short-Term Bond Market Index Fund (formerly Schwab Short/Intermediate
Government Bond Fund) and Schwab Total Bond Market Index Fund (formerly Schwab
Long-Term Government Bond Fund) (the "Funds") are series of Schwab Investments
(the "Trust"), a no-load, open-end, investment management company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940 (the "Act"), as amended.
In addition to the Funds, the Trust also offers the Schwab 1000 Fund
(REGISTRATION MARK), Schwab California Short/Intermediate Tax-Free Bond Fund,
Schwab California Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate
Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund. The assets of each
series are segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
The value of each swap agreement is determined in accordance with a specified
formula reflective of the agreement's individual terms. Short-term securities
with 60 days or less to maturity are stated at amortized cost, which
approximates market value.
SECURITY TRANSACTIONS, INTEREST INCOME AND REALIZED GAINS (LOSSES) -- Security
transactions are accounted for on a trade date basis (date the order to buy or
sell is executed). Interest income is accrued on a daily basis and includes
accretion of market discount and amortization of market premium. For callable
bonds purchased at a premium, the excess of the purchase price over the call
value is amortized against interest income through the call date. If the call
provision is not exercised, any remaining premium is amortized through the final
maturity date. Realized gains and losses from security transactions are
determined on an identified cost basis.
SWAP AGREEMENTS -- Each Fund may enter into swap agreements, which are an
exchange of one security or asset for another. A swap may be entered into in
order to, among other things, change the maturity of a fund's portfolio, to
protect a fund's value from changes in interest rates, to expose a fund to a
different security or market, or to help a fund achieve a strategy relative to
an index or other benchmark. By entering into a swap agreement, a fund is
exposed to the risks of unanticipated movements in interest rates or in the
value of an underlying security or index, or that the counterparty will not
fulfill its obligation under the agreement.
26
<PAGE>
As of August 31, 1998, the Total Bond Market Index Fund had the following
outstanding swap agreements with the following terms:
Notional Termination Payments Made
Swap Counterparty Amount Date by the Fund
- ----------------- ----------- ----------- -------------
Goldman Sachs $25,000,000 9/1/99 Based on
Capital Markets 1 month LIBOR
Lehman Brothers $37,000,000 2/27/99 Based on
Special Finance 3 Month LIBOR
Goldman Sachs $27,000,000 6/1/99 Based on
Capital Markets 3 Month LIBOR
Payments Received Net
by the Fund Receivable
- ------------------------------------ ----------
Mortgage Component of the
Lehman Brothers Aggregate Bond Index $129,000
Mortgage Component of the
Lehman Brothers Aggregate Bond Index 188,000
Mortgage Component of the
Lehman Brothers Aggregate Bond Index 0
--------
Total Net Receivable $317,000
========
Total net amounts receivable under the agreements are included in Due from
counterparties in the Statement of Assets and Liabilities. Net income or loss
from the swap agreements is included in net investment income.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- Each Fund declares a dividend
daily, substantially equal to its net investment income for that day, payable
monthly. Distributions from net realized capital gains, if any, are recorded on
ex-dividend date, payable annually on a calendar year basis.
EXPENSES -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
FEDERAL INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its net investment income and realized net capital gains, if
any, to shareholders. Therefore, no federal income tax provision is required.
Each Fund is considered a separate entity for tax purposes.
Net unrealized appreciation (depreciation) for federal income tax purposes at
August 31, 1998 was as follows:
Net Unrealized Appreciated Depreciated
Appreciation Securities Securities
-------------- ----------- -----------
Schwab Short-Term Bond
Market Index Fund $2,014,000 $2,162,000 $(148,000)
Schwab Total Bond Market
Index Fund $3,853,000 $4,459,000 $(606,000)
The cost at August 31, 1998 for federal income tax purposes for the Schwab
Short-TermBond Market Index Fund and the Schwab Total Bond Market Index Fund was
$153,833,000 and $289,386,000, respectively.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
CAPITAL LOSS CARRYFORWARDS -- As of August 31, 1998, the unused capital loss
carryforwards for federal income tax purposes were as follows:
Schwab Short-Term
Bond Market Index Fund
----------------------
Expiring in:
08/31/03 $ 7,257,000
08/31/04 2,216,000
08/31/05 172,000
-----------
Total capital loss carryforwards $ 9,645,000
===========
RECLASSIFICATIONS -- Generally accepted accounting principles require that
certain components of net assets be reclassified to reflect permanent
differences between financial and tax reporting. Accordingly, permanent book/tax
differences of $77,000 and $9,000 for the Schwab Short-Term Bond Market Index
Fund and Schwab Total Bond Market Index Fund, respectively, were reclassified
from paid-in-capital to undistributed net investment income. In Schwab Total
Bond Market Index Fund $4,000 was reclassified between paid-in-capital and
accumulated net realized gain. These reclassifications have no effect on net
assets or net asset values per share.
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable monthly, of 0.41% of each Fund's
average daily net assets. The Investment Manager has reduced a portion of its
fee for the year ended August 31, 1998 (see Note 4).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced a portion of its fees for the year ended August 31, 1998 (see
Note 4).
OFFICERS AND TRUSTEES -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
year ended August 31, 1998, the Trust made no direct payments to its officers or
trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $20,000
related to the Trust's unaffiliated trustees.
28
<PAGE>
OTHER AFFILIATED PARTIES AND TRANSACTIONS -- As of August 31, 1998, 14.8%,
32.2%, 20.8% and 0.7% of the Schwab Total Bond Market Index Fund's outstanding
shares were owned by Schwab MarketTrack Growth Portfolio, MarketTrack Balanced
Portfolio, MarketTrack Conservative Portfolio and MarketTrack Growth II
Portfolio, respectively.
INTERFUND TRANSACTIONS -- During the year ended August 31, 1998, the Schwab
Total Bond Market Index Fund engaged in purchase and sale transactions with
funds that have a common investment advisor, common trustees, and common
officers. These transactions, made at current market value pursuant to Rule
17a-7 under the Act, aggregated $56,755,000.
4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab guarantee that, effective November 1, 1997
through at least October 31, 1998, the Schwab Short-Term Bond Market Index Fund
and Schwab Total Bond Market Index Fund's total operating expenses will not
exceed 0.38% and 0.30%, respectively, of each Fund's average daily net assets,
after reductions and reimbursements. Prior to November 1, 1997 the Investment
Manager and Schwab guraranteed that the Schwab Short-Term Bond Market Index Fund
operating expenses would not exceed 0.49%. For the purpose of this guarantee,
operating expenses do not include interest expenses, extraordinary expenses and
taxes. The operating expense ratio for the year ended August 31, 1998, includes
extraordinary expenses.
During the year ended August 31, 1998, the total of such fees reduced by the
Investment Manager and Schwab was $561,000 and $0 for the Schwab Short-Term Bond
Market Index Fund and $580,000 and $140,000 for the Schwab Total Bond Market
Index Fund, respectively.
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, (excluding U.S.
Government securities and short-term obligations) during the year ended August
31, 1998, were as follows:
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
Purchases $40,238,000 $177,703,000
Proceeds of sales and maturities $ 7,152,000 $ 48,939,000
Purchases, sales and maturities of long-term U.S. government securities during
the year ended August 31, 1998, were as follows:
Schwab Short-Term Schwab Total Bond
Bond Market Index Fund Market Index Fund
---------------------- -----------------
Purchases $173,771,000 $468,987,000
Proceeds of sales and maturities $178,966,000 $334,697,000
29
<PAGE>
To the Board of Trustees and Shareholders of
Schwab Short-Term Bond Market Index Fund and
Schwab Total Bond Market Index Fund
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab Short-Term Bond Market Index
Fund (formerly Schwab Short/Intermediate Government Bond Fund) and Schwab Total
Bond Market Index Fund (formerly Schwab Long-Term Government Bond Fund) (two
portfolios of Schwab Investments, hereafter referred to as the "Funds") at
August 31, 1998, and the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1998, by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, CA
October 5, 1998
30
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND
QUESTIONS. A SCHWAB REPRESENTATIVE WILL BE
HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND
QUESTIONS. A SCHWAB REPRESENTATIVE WILL BE
HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND
QUESTIONS. A SCHWAB REPRESENTATIVE WILL BE
HAPPY TO ASSIST YOU.
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help you meet your
investment goals. You can diversify your portfolio in a single step with our
asset allocation funds. Or you can customize your portfolio with a combination
of our stock funds as well as our taxable and tax-advantaged bond and money
market funds.
Please call 1-800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio(1)
Schwab MarketTrack Growth Portfolio(1)
Schwab MarketTrack Balanced Portfolio(1)
Schwab MarketTrack Conservative Portfolio(1)
Schwab MarketManager Growth Portfolio(2)
Schwab MarketManager Balanced Portfolio(2)
SCHWAB STOCK FUNDS
Schwab 1000 Fund-Registered Trademark-
Schwab S&P 500 Fund
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio(2)
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio(2)
SCHWAB BOND FUNDS
Schwab Total Bond Market Index Fund(3)
Schwab Short-Term Bond Market Index Fund(3)
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(4) that seek high current income
with safety and liquidity. Choose from taxable or tax-advantaged alternatives.
Many can be linked to your Schwab account to "sweep" cash balances automatically
when you're between investments. Or, for your larger cash reserves, choose one
of our Value Advantage Investments.-Registered Trademark-
(1)Formerly the Schwab Asset Director-Registered Trademark- Funds.
(2)Formerly the Schwab OneSource-TM- Portfolios.
(3)Formerly the Schwab Government Bond Funds.
(4)Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
<PAGE>
SCHWABFUNDS
FAMILY
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
(COPYRIGHT) 1998 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. CRS 20375 (20+9-3791) MKT3655(10/98)
