<PAGE> 1
SCHWABFUNDS(R)
PROSPECTUS
NOVEMBER 15, 2000
EQUITY INDEX FUNDS
SCHWAB S&P 500 FUND
SCHWAB 1000 FUND(R)
SCHWAB SMALL-CAP INDEX FUND(R)
SCHWAB TOTAL STOCK MARKET INDEX FUND(TM)
SCHWAB INTERNATIONAL INDEX FUND(R)
QUANTITATIVE/SECTOR FUNDS
SCHWAB ANALYTICS FUND(R)
SCHWAB FOCUS FUNDS
Communications Focus Fund
Financial Services Focus Fund
Health Care Focus Fund
Technology Focus Fund
ASSET ALLOCATION FUNDS
SCHWAB MARKETTRACK PORTFOLIOS(TM)
All Equity Portfolio
Growth Portfolio
Balanced Portfolio
Conservative Portfolio
SCHWAB MARKETMANAGER PORTFOLIOS(TM)
Growth Portfolio
Balanced Portfolio
Small Cap Portfolio
International Portfolio
BOND FUNDS
SCHWAB BOND INDEX FUNDS
Schwab Short-Term Bond Market Index Fund
Schwab Total Bond Market Index Fund
SCHWAB YIELDPLUS FUND(TM)
SCHWAB TAX-FREE BOND FUNDS
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
As with all mutual funds, the Securities and Exchange Commission (SEC) has not
approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
This prospectus does not offer for sale and is not a solicitation of offers to
purchase, shares of certain funds described herein in those states and other
jurisdictions where the funds are not registered and/or qualified for sale. In
particular the California state-specific funds are offered for sale and are
available only to residents of California, Arizona, District of Columbia,
Florida, South Carolina, New Jersey and the U.S. Virgin Islands.
[CHARLES SCHWAB LOGO]
<PAGE> 2
SCHWABFUNDS(R) PROSPECTUS
03 SCHWAB EQUITY INDEX FUNDS 1
04 Schwab S&P 500 Fund
06 Schwab 1000 Fund(R)
08 Schwab Small-Cap Index Fund(R)
10 Schwab Total Stock Market Index Fund(TM)
12 Schwab International Index Fund(R)
21 SCHWAB ANALYTICS FUND(R) 1
22 Schwab Analytics Fund
25 SCHWAB FOCUS FUNDS 2
26 Communications Focus Fund
28 Financial Services Focus Fund
30 Health Care Focus Fund
32 Technology Focus Fund
35 SCHWAB MARKETTRACK PORTFOLIOS(TM) 3
36 All Equity Portfolio
38 Growth Portfolio
40 Balanced Portfolio
42 Conservative Portfolio
49 SCHWAB MARKETMANAGER PORTFOLIOS(TM) 3
50 Growth Portfolio
52 Balanced Portfolio
54 Small Cap Portfolio
56 International Portfolio
63 SCHWAB BOND INDEX FUNDS 4
64 Schwab Short-Term Bond Market Index Fund
66 Schwab Total Bond Market Index Fund
71 SCHWAB YIELDPLUS FUND(TM) 4
72 Schwab YieldPlus Fund
75 SCHWAB TAX-FREE BOND FUNDS 4
76 Schwab Short/Intermediate Tax-Free Bond Fund
78 Schwab Long-Term Tax-Free Bond Fund
80 Schwab California Short/Intermediate Bond Fund
82 Schwab California Long-Term Tax-Free Bond Fund
88 INVESTMENT MANAGEMENT
90 INVESTING IN THE FUNDS/PORTFOLIOS
Each fund or group of funds in this prospectus has a separate prospectus that
contains substantially identical information to that contained in this
prospectus. For a current copy of any of these prospectuses, call 800-435-4000.
Current prospectus dated: 1 2/29/2000, 2 5/15/2000, 3 2/29/2000 as amended
7/1/2000, 4 11/15/2000.
<PAGE> 3
S C H W A B
EQUITY INDEX FUNDS
ABOUT THE FUNDS
The Schwab Equity Index Funds share the same basic INVESTMENT STRATEGY: They are
designed to track the performance of a stock market index. Each fund tracks a
different index.
This strategy distinguishes an index fund from an "actively managed" mutual
fund. Instead of choosing investments based on judgment, a portfolio manager
LOOKS TO AN INDEX to determine which securities the fund should own.
Because the composition of an index tends to be comparatively stable, index
funds historically have shown LOW PORTFOLIO TURNOVER compared to actively
managed funds.
The funds are designed for LONG-TERM INVESTORS. Their performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
3
EQUITY INDEX FUNDS
<PAGE> 4
S C H W A B TICKER SYMBOLS
S&P 500 FUND
INVESTOR SHARES SWPIX
SELECT SHARES(R) SWPPX
e.SHARES(R) SWPEX
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE S&P 500(R) INDEX.
INDEX
THE S&P 500 INDEX INCLUDES THE COMMON STOCKS OF 500 LEADING U.S. COMPANIES FROM
A BROAD RANGE OF INDUSTRIES. Standard & Poor's, the company that maintains the
index, uses a variety of measures to determine which stocks are listed in the
index. Each stock is represented in proportion to its total market value.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does.
Like many index funds, the fund may invest in futures contracts and lend
securities to minimize the gap in performance that naturally exists between any
index fund and its index. This gap occurs mainly because, unlike the index, the
fund incurs expenses and must keep a small portion of its assets in cash for
business operations. By using futures, the fund potentially can offset the
portion of the gap attributable to its cash holdings. Any income realized
through securities lending may help reduce the portion of the gap attributable
to expenses. Because some of the effect of expenses remains, however, the fund's
performance normally is below that of the index.
LARGE-CAP STOCKS
--------------------------------------------------------------------------------
Although the 500 companies in the index constitute only about 7% of all the
publicly traded companies in the United States, they represent approximately 80%
of the total value of the U.S. stock market. (All figures are as of 10/31/99.)
Companies of this size are generally considered large-cap stocks. Their
performance is widely followed, and the index itself is popularly seen as a
measure of overall U.S. stock market performance.
Because the index weights a stock according to its market capitalization (total
market value of all shares outstanding), larger stocks have more influence on
the performance of the index than do the index's smaller stocks.
The performance information below shows you how the fund's
performance compares to that of its index, which varies over
time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investments.
The fund has three share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 93.
ANNUAL TOTAL RETURNS (%) as of 12/31
--------------------------------------------------------------------------------
Investor Shares
[BAR GRAPH]
<TABLE>
<S> <C>
97 32.47
98 28.0
99 20.60
</TABLE>
BEST QUARTER: 21.08% Q4 1998 WORST QUARTER: -9.98% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
-------------------------------------------------------------
<S> <C> <C>
Investor Shares 20.60 26.13 1
Select Shares 20.78 25.69 2
e.Shares 20.68 26.26 3
S&P 500 Index 21.04 26.74 4
</TABLE>
1 Inception: 5/1/96.
2 Inception: 5/19/97.
3 Inception: 5/1/96.
4 From 5/1/96.
4
EQUITY INDEX FUNDS
<PAGE> 5
SCHWAB S&P 500 FUND
Long-term investors who want to focus on large-cap U.S. stocks
or who are looking for performance that is linked to a popular
index may want to consider this fund.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE LARGE-CAP PORTION OF THE U.S. STOCK MARKET, as
measured by the index. It follows these stocks during upturns as well as
downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Although the S&P 500(R) Index encompasses stocks from many different sectors of
the economy, its performance primarily reflects that of large-cap stocks. As a
result, whenever these stocks perform less well than mid- or small-cap stocks,
the fund may underperform funds that have exposure to those segments of the U.S.
stock market. Likewise, whenever large-cap U.S. stocks fall behind other types
of investments -- bonds, for instance -- the fund's performance also will lag
those investments.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund tracks the performance of the index.
For example, futures contracts, which the fund uses to gain exposure to the
index for its cash balances, could cause the fund to track the index less
closely if they don't perform as expected.
The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
INDEX OWNERSHIP
--------------------------------------------------------------------------------
Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500(R) and 500(R)
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by the fund. The fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's, and Standard & Poor's makes no representation regarding the advisability
of investing in the fund. More complete information may be found in the
Statement of Additional Information (see back cover).
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE(%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES(R) e.SHARES
------------------------------------------------------------------------------------
SHAREHOLDER FEES
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Redemption fee* 0.75 0.75 0.75
Charged only on shares you sell within 180 days
of buying them, and paid directly to the fund
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
------------------------------------------------------------------------------------
Management fees** 0.17 0.17 0.17
Distribution (12b-1) fees None None None
Other expenses 0.30 0.15 0.16
===============================
Total annual operating expenses 0.47 0.32 0.33
EXPENSE REDUCTION (0.12) (0.13) (0.05)
-------------------------------
NET OPERATING EXPENSES*** 0.35 0.19 0.28
===============================
</TABLE>
* This fee applies only to shares purchased on or after 09/15/2000.
** Reflects current fees.
*** Guaranteed by Schwab and the investment adviser through 2/28/01.
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $36 $139 $251 $580
Select Shares $19 $ 90 $167 $393
e.Shares $29 $101 $180 $413
</TABLE>
5
EQUITY INDEX FUNDS
<PAGE> 6
S C H W A B TICKER SYMBOLS
1000 FUND(R)
INVESTOR SHARES SNXFX
SELECT SHARES(R) SNXSX
THE FUND'S GOAL IS TO MATCH THE TOTAL RETURN OF THE SCHWAB 1000 INDEX.(R)
INDEX
THE SCHWAB 1000 INDEX INCLUDES THE COMMON STOCKS OF THE LARGEST 1,000 PUBLICLY
TRADED COMPANIES IN THE UNITED STATES, with size being determined by market
capitalization (total market value of all shares outstanding). The index is
designed to be a measure of the performance of large- and mid-cap U.S. stocks.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does.
The fund may make use of certain management techniques in seeking to enhance
after-tax performance. For example, it may adjust its weightings of certain
stocks, continue to hold a stock that is no longer included in the index or
choose to realize certain capital losses and use them to offset capital gains.
These strategies may help the fund reduce taxable capital gains distributions.
Like many index funds, the fund also may invest in futures contracts and lend
securities to minimize the gap in performance that naturally exists between any
index fund and its index. This gap occurs mainly because, unlike the index, the
fund incurs expenses and must keep a small portion of its assets in cash for
business operations. By using futures, the fund potentially can offset the
portion of the gap attributable to its cash holdings. Any income realized
through securities lending may help reduce the portion of the gap attributable
to expenses. Because some of the effect of expenses remains, however, the fund's
performance normally is below that of the index.
LARGE- AND MID-CAP STOCKS
--------------------------------------------------------------------------------
Although there are currently more than 7,100 total stocks in the United States,
the companies represented by the Schwab 1000 Index make up some 87% of the total
value of all U.S. stocks. (Figures are as of 10/31/99.)
These large- and mid-cap stocks cover many industries and represent many sizes:
At $472 billion, the market capitalization of the largest one is approximately
1,435 times that of the smallest one. (Figures are as of 10/31/99.)
Because large- and mid-cap stocks can perform differently from each other at
times, a fund that invests in both categories of stocks may have somewhat
different performance than a fund that invests only in large-cap stocks.
The performance information below shows you how performance has
varied from year-to-year and how it averages out over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 93.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
INVESTOR SHARES
[BAR GRAPH]
<TABLE>
<S> <C>
92 8.52
93 9.63
94 -0.11
95 36.60
96 21.57
97 31.92
98 27.16
99 21.00
</TABLE>
BEST QUARTER: 21.93% Q4 1998 WORST QUARTER: -10.70% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 21.00 27.51 18.98 1
Select Shares 21.15 -- 25.94 2
S&P 500(R) Index 21.04 28.56 19.46 3
Schwab 1000 Index 21.22 28.04 19.45 3
</TABLE>
1 Inception: 4/2/91.
2 Inception: 5/19/97.
3 From 4/2/91.
6
EQUITY INDEX FUNDS
<PAGE> 7
SCHWAB 1000 FUND*
Because it includes so many U.S. stocks and industries, this
fund could make sense for long-term investors seeking broad
diversification in a single investment. It's also a logical
choice for stock investors who want exposure beyond the
large-cap segment of the U.S. stock market.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE LARGE- AND MID-CAP PORTIONS OF THE U.S. STOCK
MARKET, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Because the Schwab 1000 Index(R) encompasses stocks from across the economy, the
fund is broadly diversified, which reduces the impact of the performance of any
given industry or stock. But whenever large- and mid-cap U.S. stocks fall behind
other types of investments -- bonds, for instance -- the fund's performance also
will lag these investments.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund tracks the performance of the index.
For example, futures contracts, which the fund uses to gain exposure to the
index for its cash balances, could cause the fund to track the index less
closely if they don't perform as expected.
The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE(%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES(R)
----------------------------------------------------------------------------
SHAREHOLDER FEES
----------------------------------------------------------------------------
<S> <C> <C>
Redemption fee* 0.75 0.75
Charged only on shares you sell within 180 days of
buying them, and paid directly to the fund
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
----------------------------------------------------------------------------
Management fees 0.23 0.23
Distribution (12b-1) fees None None
Other expenses 0.28 0.14
=====================
Total annual operating expenses 0.51 0.37
EXPENSE REDUCTION (0.05) (0.02)
---------------------
NET OPERATING EXPENSES** 0.46 0.35
=====================
</TABLE>
* For shares purchased prior to 5/1/00 the redemption fee is 0.50%.
** Guaranteed by Schwab and the investment adviser through 2/28/01.
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $47 $159 $280 $636
Select Shares $36 $117 $206 $466
</TABLE>
7
EQUITY INDEX FUNDS
<PAGE> 8
S C H W A B TICKER SYMBOLS
SMALL-CAP INDEX FUND(R)
INVESTOR SHARES SWSMX
SELECT SHARES(R) SWSSX
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB SMALL-CAP INDEX.(R)
INDEX
THE SCHWAB SMALL-CAP INDEX INCLUDES THE COMMON STOCKS OF THE SECOND-LARGEST
1,000 PUBLICLY TRADED COMPANIES IN THE UNITED STATES, with size being determined
by market capitalization (total market value of all shares outstanding). The
index is designed to be a measure of the performance of small-cap U.S. stocks.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does.
Like many index funds, the fund also may invest in short-term investments and
lend securities to minimize the gap in performance that naturally exists between
any index fund and its index. This gap occurs mainly because, unlike the index,
the fund incurs expenses and must keep a small portion of its assets in cash for
business operations. Because any income from securities lending and short-term
investments typically is not enough to eliminate the effect of expenses, the
fund's performance normally is below that of the index.
SMALL-CAP STOCKS
--------------------------------------------------------------------------------
In measuring the performance of the second-largest 1,000 companies in the U.S.
stock market, the index may be said to focus on the "biggest of the small" among
America's publicly traded stocks. These stocks range in size from $8 billion to
$15 million in terms of their total market value. (All figures are as of
10/31/99.)
Historically, the performance of small-cap stocks has not always paralleled that
of large-cap stocks. For this reason, some investors use them to diversify a
portfolio that invests in larger stocks.
With its small-cap focus, this fund may make sense for long-term investors who
are willing to accept greater risk in the pursuit of potentially higher
long-term returns.
The performance information below shows you how performance
has varied from year-to-year and how it averages out over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 93.
ANNUAL TOTAL RETURNS(%) AS OF 12/31
Investor Shares
[BAR GRAPH]
<TABLE>
<S> <C>
94 -3.08
95 27.65
96 15.49
97 25.69
98 -3.57
99 24.20
</TABLE>
BEST QUARTER: 18.09% Q2 1997 WORST QUARTER: -20.94% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS(%) AS OF 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
---------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 24.20 17.28 13.71 1
Select Shares 24.44 -- 16.38 2
Russell 2000 Index(R) 21.26 16.70 13.54 3
Schwab Small-Cap Index 27.67 19.04 15.41 3
</TABLE>
1 Inception: 12/3/93.
2 Inception: 5/19/97.
3 From 12/3/93.
8
EQUITY INDEX FUNDS
<PAGE> 9
A SCHWAB SMALL-CAP INDEX FUND(R)
With its small-cap focus, this fund may make sense for
long-term investors who are willing to accept greater risk in
the pursuit of potentially higher long-term returns.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE SMALL-CAP PORTION OF THE U.S. STOCK MARKET, as
measured by the index. It follows the market during upturns as well as
downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
HISTORICALLY, SMALL-CAP STOCKS HAVE BEEN RISKIER THAN LARGE- AND MID-CAP STOCKS.
Stock prices of smaller companies may be based in substantial part on future
expectations rather than current achievements, and may move sharply, especially
during market upturns and downturns. In addition, during any period when
small-cap stocks perform less well than large- or mid-cap stocks, the fund may
underperform funds that have exposure to those segments of the U.S. stock
market. Likewise, whenever U.S. small-cap stocks fall behind other types of
investments -- bonds, for instance -- the fund's performance also will lag these
investments.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund tracks the performance of the index.
For example, the fund may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE(%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES(R)
----------------------------------------------------------------------------
SHAREHOLDER FEES
----------------------------------------------------------------------------
<S> <C> <C>
Redemption fee* 0.75 0.75
Charged only on shares you sell within 180 days of
buying them and paid directly to the fund
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
Management fees** 0.31 0.31
Distribution (12b-1) fees None None
Other expenses 0.32 0.18
=====================
Total annual operating expenses 0.63 0.49
EXPENSE REDUCTION (0.14) (0.11)
---------------------
NET OPERATING EXPENSES*** 0.49 0.38
=====================
</TABLE>
* For shares purchased prior to 5/1/00 the redemption fee is 0.50%.
** Reflects current fees.
*** Guaranteed by Schwab and the investment adviser through 2/28/01.
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $50 $188 $337 $773
Select Shares $39 $146 $263 $605
</TABLE>
9
EQUITY INDEX FUNDS
<PAGE> 10
S C H W A B TICKER SYMBOLS
TOTAL STOCK MARKET INDEX FUND(TM)
INVESTOR SHARES SWTIX
SELECT SHARES(R) SWTSX
THE FUND SEEKS TO TRACK THE TOTAL RETURN OF THE ENTIRE U.S. STOCK MARKET, AS
MEASURED BY THE WILSHIRE 5000 EQUITY INDEX.
INDEX
THE FUND'S BENCHMARK INDEX INCLUDES ALL PUBLICLY TRADED COMMON STOCKS OF
COMPANIES HEADQUARTERED IN THE UNITED STATES FOR WHICH PRICING INFORMATION IS
READILY AVAILABLE -- currently more than 7,100 stocks. The index weights each
stock according to its market capitalization (total market value of all shares
outstanding).
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher.
Because it would be impractical to invest in every company in the U.S. stock
market, the fund uses statistical sampling techniques to assemble a portfolio
whose performance is expected to resemble that of the index. The fund generally
expects that its portfolio will include the largest 2,500 to 3,000 U.S. stocks
(measured by market capitalization), and that its industry weightings, dividend
yield and price/earnings ratio will be similar to those of the index.
The fund may use certain techniques in seeking to enhance after-tax performance,
such as adjusting its weightings of certain stocks or choosing to realize
certain capital losses and use them to offset capital gains. These strategies
may help the fund reduce taxable capital gain distributions.
Like many index funds, the fund also may invest in futures contracts and lend
securities in seeking to enhance total return and minimize the gap between its
performance and that of the index. However, the fund's performance normally is
below that of the index.
THE U.S. STOCK MARKET
--------------------------------------------------------------------------------
The U.S. stock market is commonly divided into three segments, based on market
capitalization.
Mid- and small-cap stocks are the most numerous, but make up only about
one-third of the total value of the market. In contrast, large-cap stocks are
relatively few in number but make up approximately two-thirds of the market's
total value. In fact, the largest 3,000 of the market's listed stocks represent
about 98% of its total value. (All figures on this page are as of 10/31/99).
In terms of performance, these segments can behave somewhat differently from
each other, over the short term as well as the long term. For that reason, the
performance of the overall stock market can be seen as a blend of the
performance of all three segments.
PERFORMANCE
Because this is a new fund, no performance figures are given. Information will
appear in a future version of the fund's prospectus.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 93.
10
EQUITY INDEX FUNDS
<PAGE> 11
SCHWAB TOTAL STOCK MARKET INDEX FUND(R)
With its very broad exposure to the U.S. stock market, this
fund is designed for long-term investors who want exposure to
all three tiers of the market: large-, mid- and small-cap.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE U.S. STOCK MARKET, as measured by the index. It
follows these stocks during upturns as well as downturns. Because of its
indexing strategy, he fund will not take steps to reduce market exposure or to
lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
Because the fund encompasses stocks from across the economy, it is broadly
diversified, which reduces the impact of the performance of any given industry,
individual stock or market segment. But whenever any particular market segment
outperforms the U.S. stock market as a whole, the fund may underperform funds
that have greater exposure to that segment. Likewise, whenever U.S. stocks fall
behind other types of investments -- bonds, for instance -- the fund's
performance also will lag these investments. Because the fund gives greater
weight to larger stocks, most of its performance will reflect the performance of
the large-cap segment.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also involve risks.
For example, the fund's use of sampling may increase the gap between the
performance of the fund and that of the index. Futures contracts, which the fund
uses to gain exposure to stocks for its cash balances, also could cause the fund
to track the index less closely if they don't perform as expected.
The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
INDEX OWNERSHIP
--------------------------------------------------------------------------------
Wilshire and Wilshire 5000 are registered service marks of Wilshire Associates,
Inc. The fund is not sponsored, endorsed, sold or promoted by Wilshire
Associates, and Wilshire Associates is not in any way affiliated with the fund.
Wilshire Associates makes no representation regarding the advisability of
investing in the fund or in any stock included in the Wilshire 5000.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE(%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES(R)
-----------------------------------------------------------------------------
<S> <C> <C>
SHAREHOLDER FEES
Redemption fee* 0.75 0.75
Charged only on shares you sell within 180 days of
buying them and paid directly to the fund
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
-----------------------------------------------------------------------------
Management fees 0.30 0.30
Distribution (12b-1) fees None None
Other expenses** 0.61 0.44
--------------------
Total annual operating expenses 0.91 0.74
EXPENSE REDUCTION (0.51) (0.47)
--------------------
NET OPERATING EXPENSES*** 0.40 0.27
====================
</TABLE>
* For shares purchased prior to 5/1/00, the redemption fee is 0.50%.
** Based on estimated expenses for the current fiscal year.
*** Guaranteed by Schwab and the investment adviser through 2/28/01.
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
--------------------------------------------
<S> <C> <C>
Investor Shares $41 $239
Select Shares $28 $189
</TABLE>
11
EQUITY INDEX FUNDS
<PAGE> 12
S C H W A B TICKER SYMBOLS
INTERNATIONAL INDEX FUND(R)
INVESTOR SHARES SWINX
SELECT SHARES(R) SWISX
THE FUND'S GOAL IS TO TRACK THE TOTAL RETURN OF THE SCHWAB INTERNATIONAL
INDEX.(R)
INDEX
THE SCHWAB INTERNATIONAL INDEX INCLUDES COMMON STOCKS OF THE 350 LARGEST
PUBLICLY TRADED COMPANIES FROM SELECTED COUNTRIES OUTSIDE THE UNITED STATES. The
selected countries all have developed securities markets and include most
Western European countries, as well as Australia, Canada, Hong Kong and Japan --
currently 15 countries in all. Within these countries, Schwab identifies the 350
largest companies according to their market capitalizations (total market value
of all shares outstanding), in U.S. dollars. The index does not maintain any
particular country weightings, although any given country cannot represent more
than 35% of the index.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN STOCKS THAT ARE INCLUDED IN THE INDEX.
It is the fund's policy that under normal circumstances it will invest at least
80% of total assets in these stocks; typically, the actual percentage is
considerably higher. The fund generally gives the same weight to a given stock
as the index does, and does not hedge its exposure to foreign currencies beyond
using forward contracts to lock in transaction prices until settlement. In
seeking to enhance after-tax performance, the fund may choose to realize certain
capital losses and use them to offset capital gains. This strategy may help the
fund reduce taxable capital gain distributions.
Like many index funds, the fund also may invest in short-term investments and
lend securities to minimize the gap in performance that naturally exists between
any index fund and its index. This gap occurs mainly because, unlike the index,
the fund incurs expenses and must keep a small portion of its assets in cash for
business operations. Because any income from securities lending and short-term
investments typically is not enough to eliminate the effect of expenses, the
fund's performance normally is below that of the index.
INTERNATIONAL STOCKS
--------------------------------------------------------------------------------
Over the past several decades, foreign stock markets have grown rapidly. The
market value of foreign stocks today represents approximately 43% of the world's
total market capitalization. (All figures are as of 10/31/99.)
For some investors, an international index fund represents an opportunity for
low-cost access to a variety of world markets in one fund. Others turn to
international stocks to diversify a portfolio of U.S. investments, because
international stock markets historically have performed somewhat differently
from the U.S. market.
The performance information below shows you how performance
has varied from year-to-year and how it averages out over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
unmanaged market indices. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the indices do not include any costs of investments.
The fund has two share classes, which have different minimum investments and
different costs. For information on choosing a class, see page 93.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
Investor Shares
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
94 3.84
95 14.22
96 9.12
97 7.31
98 15.85
99 33.62
</TABLE>
BEST QUARTER: 19.88% Q4 1999 WORST QUARTER:-14.93% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
-------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares 33.62 15.67 13.06 1
Select Shares 33.79 -- 17.88 2
MSCI-EAFE(R) Index 26.96 12.83 10.99 3
Schwab International
Index 33.81 16.21 13.62 3
</TABLE>
1 Inception: 9/9/93.
2 Inception: 5/19/97.
3 From 9/9/93.
12
EQUITY INDEX FUNDS
<PAGE> 13
SCHWAB INTERNATIONAL INDEX FUND(R)
For long-term investors who are interested in the potential
rewards of international investing and who are prepared for the
additional risks, this fund could be worth considering.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE PERFORMANCE OF A MIX OF INTERNATIONAL LARGE-CAP
STOCKS, as measured by the index. It follows these stocks during upturns as well
as downturns. Because of its indexing strategy, the fund cannot take steps to
reduce market exposure or to lessen the effects of market declines.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
INTERNATIONAL STOCKS CARRY ADDITIONAL RISKS. Changes in currency exchange rates
can erode market gains or widen market losses. International markets -- even
those that are well established -- are often more volatile than those of the
United States, for reasons ranging from a lack of reliable company information
to the risk of political upheaval. In addition, during any period when large-cap
international stocks perform less well than other types of stocks or other types
of investments -- bonds, for instance -- the fund's performance also will lag
these investments.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund tracks the performance of the index.
For example, the fund may lend a portion of its securities to certain financial
institutions in order to earn income. These loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE(%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES(R)
-----------------------------------------------------------------------------
SHAREHOLDER FEES
-----------------------------------------------------------------------------
<S> <C> <C>
Redemption fee* 1.50 1.50
Charged only on shares you sell within 180 days of
buying them and paid directly to the fund
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
-----------------------------------------------------------------------------
Management fees** 0.42 0.42
Distribution (12b-1) fees None None
Other expenses 0.35 0.22
====================
Total annual operating expenses 0.77 0.64
EXPENSE REDUCTION (0.19) (0.17)
--------------------
NET OPERATING EXPENSES*** 0.58 0.47
====================
</TABLE>
* For shares purchased prior to 5/1/00, the redemption fee is 0.50%.
** Reflects current fees.
*** Guaranteed by Schwab and the investment adviser through 2/28/01.
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Investor Shares $59 $227 $409 $936
Select Shares $48 $188 $340 $782
</TABLE>
13
EQUITY INDEX FUNDS
<PAGE> 14
FINANCIAL HIGHLIGHTS
SCHWAB S&P 500 FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96
---------------------------------------------------------------------------------------------
PER-SHARE DATA($)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 17.05 14.17 10.88 10.00
--------------------------------------------
Income from investment operations:
Net investment income 0.17 0.16 0.14 0.08
Net realized and unrealized gain
on investments 4.10 2.85 3.24 0.80
--------------------------------------------
Total income from investment operations 4.27 3.01 3.38 0.88
Less distributions:
Dividends from net investment income (0.15) (0.13) (0.09) --
--------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.17 17.05 14.17 10.88
============================================
Total return (%) 25.20 21.39 31.29 8.80 1
RATIOS/SUPPLEMENTAL DATA (%)
---------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.35 0.35 0.38 0.49 2
Expense reductions reflected in above ratio 0.27 0.28 0.32 0.40 2
Ratio of net investment income to
average net assets 1.01 1.25 1.49 1.89 2
Portfolio turnover rate 3 1 3 1
Net assets, end of period ($ x 1,000,000) 3,183 1,935 923 244
</TABLE>
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
---------------------------------------------------------------------------------
PER-SHARE DATA($)
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 17.09 14.19 12.85
--------------------------------
Income from investment operations:
Net investment income 0.20 0.26 0.05
Net realized and unrealized gain
on investments 4.12 2.78 1.29
--------------------------------
Total income from investment operations 4.32 3.04 1.34
Less distributions:
Dividends from net investment income (0.18) (0.14) --
--------------------------------
NET ASSET VALUE AT END OF PERIOD 21.23 17.09 14.19
================================
Total return (%) 25.42 21.63 10.43 1
RATIOS/SUPPLEMENTAL DATA(%)
---------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.19 0.19 0.19 2
Expense reductions reflected in above ratio 0.28 0.28 0.34 2
Ratio of net investment income to
average net assets 1.17 1.40 1.46 2
Portfolio turnover rate 3 1 3
Net assets, end of period ($ x 1,000,000) 3,750 1,548 486
</TABLE>
1 Not annualized.
2 Annualized.
14
EQUITY INDEX FUNDS
<PAGE> 15
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB S&P 500 FUND Continued
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 5/1/96 -
e.Shares(R) 10/31/99 10/31/98 10/31/97 10/31/96
----------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 17.08 14.19 10.89 10.00
---------------------------------------------
Income from investment operations:
Net investment income 0.20 0.15 0.21 0.04
Net realized and unrealized gain
on investments 4.09 2.88 3.19 0.85
---------------------------------------------
Total income from investment operations 4.29 3.03 3.40 0.89
Less distributions:
Dividends from net investment income (0.16) (0.14) (0.10) --
---------------------------------------------
NET ASSET VALUE AT END OF PERIOD 21.21 17.08 14.19 10.89
=============================================
Total return (%) 25.28 21.50 31.48 8.90 1
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.28 0.28 0.28 0.28 2
Expense reductions reflected in above ratio 0.20 0.24 0.33 0.91 2
Ratio of net investment income to
average net assets 1.08 1.32 1.61 1.82 2
Portfolio turnover rate 3 1 3 1
Net assets, end of period ($ x 1,000,000) 435 281 132 36
</TABLE>
1 Not annualized.
2 Annualized.
15
EQUITY INDEX FUNDS
<PAGE> 16
FINANCIAL HIGHLIGHTS
SCHWAB 1000 FUND(R)
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 9/1/97 - 9/1/96 - 9/1/95 - 9/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 8/31/97 8/31/96 8/31/95
---------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period 29.90 25.25 24.78 18.14 15.68 13.08
--------------------------------------------------------------------
Income from investment operations:
Net investment income 0.26 0.27 0.04 0.28 0.24 0.26
Net realized and unrealized gain
on investments 7.21 4.64 0.43 6.62 2.45 2.48
--------------------------------------------------------------------
Total income from investment operations 7.47 4.91 0.47 6.90 2.69 2.74
Less distributions:
Dividends from net investment income (0.25) (0.26) -- (0.26) (0.23) (0.14)
--------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 37.12 29.90 25.25 24.78 18.14 15.68
====================================================================
Total return (%) 25.12 19.63 1.90 1 38.32 17.27 21.23
RATIOS/SUPPLEMENTAL DATA (%)
---------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.46 0.46 0.46 2 0.47 0.49 0.54
Expense reductions reflected in above ratio 0.05 0.05 0.04 2 0.06 0.08 0.09
Ratio of net investment income to
average net assets 0.78 1.02 1.00 2 1.33 1.66 2.03
Portfolio turnover rate 3 2 -- 2 2 2
Net assets, end of period ($ x 1,000,000) 4,925 3,657 2,61 1 2,499 1,560 827
</TABLE>
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 9/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97 8/31/97
-----------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 29.93 25.26 24.79 22.64
----------------------------------------------
Income from investment operations:
Net investment income 0.30 0.32 0.04 0.05
Net realized and unrealized gain
on investments 7.22 4.63 0.43 2.10
----------------------------------------------
Total income from investment operations 7.52 4.95 0.47 2.15
Less distributions:
Dividends from net investment income (0.29) (0.28) -- --
----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 37.16 29.93 25.26 24.79
==============================================
Total return (%) 25.29 19.79 1.90 1 9.50 1
RATIOS/SUPPLEMENTAL DATA (%)
-----------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.35 0.35 0.35 2 0.35 2
Expense reductions reflected in above ratio 0.02 0.04 0.06 2 0.33 2
Ratio of net investment income to
average net assets 0.89 1.11 1.11 2 1.26 2
Portfolio turnover rate 3 2 -- 2
Net assets, end of period ($ x 1,000,000) 2,214 1,041 426 347
</TABLE>
1 Not annualized.
2 Annualized.
16
EQUITY INDEX FUNDS
<PAGE> 17
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB SMALL-CAP INDEX FUND(R)
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 11/1/95 - 11/1/94 -
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
-----------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 15.39 17.73 13.59 11.70 10.05
----------------------------------------------------------
Income from investment operations:
Net investment income 0.06 0.05 0.06 0.07 0.10
Net realized and unrealized gain (loss)
on investments 2.89 (2.33) 4.14 1.88 1.61
----------------------------------------------------------
Total income from investment operations 2.95 (2.28) 4.20 1.95 1.71
Less distributions:
Dividends from net investment income (0.06) (0.06) (0.06) (0.06) (0.06)
Distributions from capital gains (0.87) -- -- -- --
----------------------------------------------------------
Total distributions (0.93) (0.06) (0.06) (0.06) (0.06)
----------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.41 15.39 17.73 13.59 11.70
==========================================================
Total return (%) 19.96 (12.88) 31.03 16.73 17.11
RATIOS/SUPPLEMENTAL DATA (%)
-----------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.49 0.49 0.52 0.59 0.68
Expense reductions reflected in above ratio 0.30 0.32 0.37 0.35 0.34
Ratio of net investment income to
average net assets 0.33 0.35 0.53 0.56 0.68
Portfolio turnover rate 41 40 23 23 24
Net assets, end of period ($ x 1,000,000) 452 480 410 209 122
</TABLE>
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 5/19/97 -
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
----------------------------------------------------------------------------------
PER-SHARE DATA ($)
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 15.41 17.75 14.50
---------------------------------
Income from investment operations:
Net investment income 0.07 0.08 0.02
Net realized and unrealized gain (loss)
on investments 2.90 (2.35) 3.23
---------------------------------
Total income from investment operations 2.97 (2.27) 3.25
Less distributions:
Dividends from net investment income (0.07) (0.07) --
Distributions from capital gains (0.87) -- --
---------------------------------
Total distributions (0.94) (0.07) --
---------------------------------
NET ASSET VALUE AT END OF PERIOD 17.44 15.41 17.75
=================================
Total return (%) 20.14 (12.81) 22.41 1
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.38 0.38 0.38 2
Expense reductions reflected in above ratio 0.27 0.33 0.52 2
Ratio of net investment income to
average net assets 0.44 0.46 0.56 2
Portfolio turnover rate 41 40 23
Net assets, end of period ($ x 1,000,000) 447 150 81
</TABLE>
1 Not annualized.
2 Annualized.
17
EQUITY INDEX FUNDS
<PAGE> 18
FINANCIAL HIGHLIGHTS
SCHWAB TOTAL STOCK MARKET INDEX FUND(TM)
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
6/1/99 -
INVESTOR SHARES 10/31/99
----------------------------------------------------------
PER-SHARE DATA ($)
----------------------------------------------------------
<S> <C>
Net asset value at beginning of period 20.00
---------
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain
on investments 0.80
---------
Total income from investment operations 0.87
---------
NET ASSET VALUE AT END OF PERIOD 20.87
=========
Total return (%) 4.35 1
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.40 2
Expense reductions reflected in above ratio 0.51 2
Ratio of net investment income to
average net assets 0.92 2
Portfolio turnover rate 1
Net assets, end of period ($ x 1,000,000) 136
</TABLE>
<TABLE>
<CAPTION>
6/1/99 -
SELECT SHARES(R) 10/31/99
----------------------------------------------------------
PER-SHARE DATA ($)
----------------------------------------------------------
<S> <C>
Net asset value at beginning of period 20.00
---------
Income from investment operations:
Net investment income 0.07
Net realized and unrealized gain
on investments 0.82
---------
Total income from investment operations 0.89
---------
NET ASSET VALUE AT END OF PERIOD 20.89
=========
Total return (%) 4.45 1
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.27 2
Expense reductions reflected in above ratio 0.47 2
Ratio of net investment income to
average net assets 1.05 2
Portfolio turnover rate 1
Net assets, end of period ($ x 1,000,000) 149
</TABLE>
1 Not annualized.
2 Annualized.
18
EQUITY INDEX FUNDS
<PAGE> 19
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB INTERNATIONAL INDEX FUND(R)
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 11/1/96- 11/1/95- 11/1/94-
INVESTOR SHARES 10/31/99 10/31/98 10/31/97 10/31/96 10/31/95
----------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 14.21 13.31 12.23 11.13 10.89
--------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.17 0.17 0.16 0.14
Net realized and unrealized gain
on investments 3.66 0.88 1.08 1.07 0.22
--------------------------------------------------------
Total income from investment operations 3.85 1.05 1.25 1.23 0.36
Less distributions:
Dividends from net investment income (0.13) (0.15) (0.17) (0.13) (0.12)
--------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 17.93 14.21 13.31 12.23 11.13
========================================================
Total return (%) 27.31 8.02 10.33 11.07 3.35
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses
to average net assets 0.58 0.58 0.61 0.69 0.85
Expense reductions reflected in above ratio 0.41 0.46 0.52 0.48 0.37
Ratio of net investment income to
average net assets 1.24 1.35 1.36 1.50 1.45
Portfolio turnover rate 5 6 13 6 --
Net assets, end of period ($ x 1,000,000) 447 428 318 247 180
</TABLE>
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 5/19/97-
SELECT SHARES(R) 10/31/99 10/31/98 10/31/97
---------------------------------------------------------------------------------
PER-SHARE DATA ($)
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 14.23 13.32 13.59
--------------------------------
Income from investment operations:
Net investment income 0.18 0.22 0.04
Net realized and unrealized gain (loss)
on investments 3.70 0.85 (0.31)
--------------------------------
Total income from investment operations 3.88 1.07 (0.27)
Less distributions:
Dividends from net investment income (0.15) (0.16) --
--------------------------------
NET ASSET VALUE AT END OF PERIOD 17.96 14.23 13.32
================================
Total return (%) 27.49 8.16 (1.99) 1
RATIOS/SUPPLEMENTAL DATA (%)
---------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.47 0.47 0.47 2
Expense reductions reflected in above ratio 0.39 0.48 0.80 2
Ratio of net investment income to
average net assets 1.57 1.49 0.17 2
Portfolio turnover rate 5 6 13
Net assets, end of period ($ x 1,000,000) 449 94 50
</TABLE>
1 Not annualized.
2 Annualized.
19
EQUITY INDEX FUNDS
<PAGE> 20
S C H W A B
ANALYTICS FUND(R)
ABOUT THE FUND
The Schwab Analytics Fund uses a strategy that is primarily QUANTITATIVE rather
than one based on individual company research. This strategy employs a range of
proprietary techniques to select stocks, construct a portfolio and manage
overall risk.
The fund uses software models to SCREEN STOCKS, based on factors that
historically have been associated with above-average performance. The fund also
looks at indicators of how those who are closest to a given company -- ANALYSTS
AND COMPANY INSIDERS -- currently view the company's near-term prospects. Before
making its actual investment decisions, the fund consults another technical
model, this one designed to MANAGE RISK.
Taken together, these techniques are designed to complement each other in
creating a portfolio with risk similar to that of the S&P 500(R) Index but with
returns that are intended to be greater.
The fund is designed for LONG-TERM INVESTORS. Its performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
21
QUANTITATIVE/SECTOR FUNDS
<PAGE> 21
S C H W A B TICKER SYMBOL
ANALYTICS FUND(R) SWANX
THE FUND SEEKS LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS PRIMARILY IN U.S. STOCKS. Under normal
circumstances, the fund expects to hold the common stocks of approximately 100
large- and mid-cap U.S. companies. The fund seeks to assemble a portfolio with
long-term performance that will exceed that of the S&P 500(R) Index.
The portfolio managers monitor more than 1,300 companies that have market values
of $500 million or more. Using a variety of quantitative techniques, the
managers screen and rank these companies based on numerous factors. These
include fundamental characteristics, such as a company's size and valuation and
its history of earnings and dividends, as well as technical characteristics,
such as its stock price movements. The rankings also take into account various
analysts' earnings estimates and revisions, and also purchases and sales of the
stock by corporate insiders.
Once the rankings are complete, the managers select the highest-ranked stocks
(approximately 100) for inclusion in the fund's portfolio. The managers use a
risk management model to construct a diversified portfolio with the goal of
keeping the fund's volatility similar to that of the S&P 500. While the fund may
include stocks that are outside the S&P 500 or weight its stock holdings
differently from the index, it normally seeks to have the same industry
weightings as the index.
RISK MANAGEMENT
--------------------------------------------------------------------------------
The fund approaches risk management from the perspective of its benchmark, the
S&P 500 Index. The S&P 500 includes the common stocks of 500 leading U.S.
companies from a broad range of industries.
The fund's risk management model is designed to estimate how much return a given
investment might produce compared to the benchmark and how much risk it might
involve compared to the benchmark. The model is designed to help the fund invest
for returns that exceed the S&P 500, while maintaining a risk profile that is
very similar to that of the index.
The performance information below shows you how performance
has varied from year to year and how it averages out over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<S> <C>
97 31.62
98 28.03
99 27.75
</TABLE>
BEST QUARTER: 23.09% Q4 1998 WORST QUARTER: -10.79% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
------------------------------------------------------
<S> <C> <C>
Fund 27.75 29.10 1
S&P 500 Index 21.04 27.11 1
</TABLE>
1 Inception: 7/1/96.
22
QUANTITATIVE/SECTOR FUNDS
<PAGE> 22
SCHWAB ANALYTICS FUND(R)
This fund could be appropriate for long-term investors seeking
a quantitative approach designed to outperform the S&P 500(R)
Index.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
MANY OF THE RISKS OF THIS FUND ARE ASSOCIATED WITH THE LARGE- AND MID-CAP
SEGMENTS OF THE U.S. STOCK MARKET. While the fund is not an index fund, its
management techniques are likely to result in performance that correlates with
the S&P 500, during upturns as well as downturns. The fund can take only limited
steps to reduce market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence market-wide trends; the outcome may be positive or negative, short
term or long term. Other factors may be ignored by the market as a whole but may
cause movements in the price of one company's stock or the stocks of one or more
industries (for example, rising oil prices may lead to a decline in airline
stocks).
The fund includes stocks from many different sectors of the economy, which
reduces the impact of the performance of any given industry or stock. But
whenever large-and mid-cap U.S. stocks fall behind other types of investments --
bonds or small-cap stocks, for instance -- the fund's performance also will lag
these investments. In addition, because the values of mid-cap stocks may
fluctuate more widely than those of large-cap stocks, the fund could be more
volatile if it were to increase its holdings of mid-cap stocks.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
The fund's management model is based largely on past market behavior. To the
extent that market dynamics shift over time, the model may fail to anticipate
these shifts, which could affect the fund's ability to outperform its benchmark.
Although the fund's main risks are those associated with its stock investments,
the fund uses other strategies that also may involve risks.
For example, futures contracts, which the fund uses to gain exposure to the
stock market for its cash balances, could hurt the fund's performance if they
don't perform as expected.
Additionally, the fund may actively buy and sell portfolio securities, which
will increase its portfolio turnover rate and expenses, and increase the
likelihood of capital gain distributions.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE(%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
----------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
----------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.39
=====
Total annual operating expenses 0.93
EXPENSE REDUCTION (0.18)
-----
NET OPERATING EXPENSES* 0.75
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/28/01.
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
$77 $278 $497 $1,127
</TABLE>
23
QUANTITATIVE/SECTOR FUNDS
<PAGE> 23
FINANCIAL HIGHLIGHTS
SCHWAB ANALYTICS FUND(R)
This section provides further details about the fund's recent financial history.
"Total return" shows the percentage that an investor in the fund would have
earned or lost during a given period, assuming all distributions were
reinvested. The fund's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the fund's annual report
(see back cover).
<TABLE>
<CAPTION>
11/1/98 - 11/1/97 - 11/1/96 - 7/1/96 -
10/31/99 10/31/98 10/31/97 10/31/96
-----------------------------------------------------------------------------------------------
PER-SHARE DATA($)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 14.57 13.72 11.01 10.00
----------------------------------------------
Income from investment operations:
Net investment income 0.06 0.10 0.13 0.05
Net realized and unrealized gain
on investments 4.94 2.20 2.79 0.96
----------------------------------------------
Total income from investment operations 5.00 2.30 2.92 1.01
Less distributions:
Dividends from net investment income (0.09) (0.12) (0.08) --
Distributions from capital gains (0.57) (1.33) (0.13) --
----------------------------------------------
Total distributions (0.66) (1.45) (0.21) --
----------------------------------------------
NET ASSET VALUE AT END OF PERIOD 18.91 14.57 13.72 11.01
==============================================
Total return (%) 35.20 18.37 26.83 10.10 1
RATIOS/SUPPLEMENTAL DATA(%)
-----------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.75 0.75 0.74 0.75 2
Expense reductions reflected in above ratio 0.18 0.37 0.41 0.76 2
Ratio of net investment income to
average net assets 0.34 0.70 1.04 1.41 2
Portfolio turnover rate 99 115 120 33
Net assets, end of period ($ x 1,000,000) 289 192 150 98
</TABLE>
1 Not annualized.
2 Annualized.
24
QUANTITATIVE/SECTOR FUNDS
<PAGE> 24
S C H W A B
FOCUS FUNDS
ABOUT THE FUNDS
The Schwab Focus Funds share the same basic INVESTMENT APPROACH. Each fund seeks
long-term capital growth by investing in companies in a particular economic
sector.
Each fund selects from a base universe of stocks issued by the 2,000 LARGEST
COMPANIES (as measured by market capitalization) incorporated in the United
States, plus any smaller or foreign stocks that are not among these 2,000 but
are included in the S&P 500(R) Index. The Communications Focus Fund also may
include in its base universe foreign stocks not included in the S&P 500.
The investment adviser for the funds has identified a series of SECTOR-SPECIFIC
factors that historically have signaled superior long-term PERFORMANCE, such as
earnings, cash flow, sales and market value. A sophisticated QUANTITATIVE MODEL
sorts the base universe by sector, screens each stock for fundamental and
technical factors and assigns weightings to help the adviser construct the
portfolios. However, in seeking to lock in gains, limit losses or otherwise
maximize a fund's RISK-ADJUSTED RETURN, the adviser may adjust the model's
output. The adviser periodically reviews the factors used by the model, and may
enhance or change them to incorporate the results of NEW RESEARCH. If a stock no
longer meets the model's investment criteria, the fund may sell it.
Each of the funds is designed for LONG-TERM INVESTORS. The funds' performance
will fluctuate over time and, as with all investments, future performance may
differ from past performance.
QUANTITATIVE/SECTOR FUNDS 25
<PAGE> 25
TICKER SYMBOL
SWCFX
COMMUNICATIONS
FOCUS FUND
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE COMMUNICATIONS
SECTOR. It is the fund's policy that under normal circumstances it will invest
at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher. The fund also may invest in common
stocks and other equity securities of foreign companies.
The fund expects to invest in all of the types of companies in the
communications sector (see sidebar). The investment adviser chooses the fund's
stocks as described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE COMMUNICATIONS SECTOR
--------------------------------------------------------------------------------
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The communications sector includes these types of companies:
- companies involved in telecommunications research, distribution, sales or
service
- media companies, including radio and television
- telecommunications equipment makers
- telephone service providers, including providers of local, long-distance,
cellular and paging services
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
Investors who believe that communications firms may be a good
long-term investment and are able to accept the risks may want to
consider this fund.
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights are
given. Information will appear in a future version of the fund's prospectus.
26 QUANTITATIVE/SECTOR FUNDS
<PAGE> 26
COMMUNICATIONS FOCUS FUND
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of communications
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as legislative or regulatory changes, intense
competition for market share and competitive challenges posed by joint ventures
and mergers between U.S. and foreign firms. Because the fund uses an active
model, it could underperform its sector as measured by a sector-specific index.
The fund may take only limited steps to reduce sector exposure or to lessen the
effects of a declining market. Also, foreign stocks carry additional risks such
as: changes in currency exchange rates (which can erode market gains or widen
losses); lack of reliable company information or political upheaval.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUND because the
fund is non-diversified, which means it may invest more than 5% of assets in a
single issuer. In addition, to the extent that the fund invests in companies of
a given size, it takes on the risks of that market segment. For example, small-
and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
The fund may buy and sell portfolio securities actively. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks or a single
stock) may trade at a discount. If the fund invests in any depositary receipts,
this could mean that the fund would not be able to realize the full market value
of its underlying securities.
Depositary receipts can represent ownership of foreign stocks, such as ADRs.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES (% OF TRANSACTION AMOUNT)
--------------------------------------------------------------------------------
Redemption fee 0.75
Charged only on shares you sell within 180 days of
buying them, and paid directly to the fund.
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.83
------
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
------
NET OPERATING EXPENSES* 0.89
======
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$91 $387
</TABLE>
QUANTITATIVE/SECTOR FUNDS 27
<PAGE> 27
TICKER SYMBOL
SWFFX
FINANCIAL SERVICES
FOCUS FUND
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE FINANCIAL
SERVICES SECTOR. It is the fund's policy that under normal circumstances it will
invest at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher.
The fund expects to invest in all of the types of companies in the financial
services sector (see sidebar). The investment adviser chooses the fund's stocks
as described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE FINANCIAL SERVICES SECTOR
--------------------------------------------------------------------------------
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The financial services sector includes these types of
companies:
- asset management firms
- brokerage companies
- commercial banks
- financial services firms
- insurance companies
- real estate investment trusts (REITs)
- savings and loan associations
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights are
given. Information will appear in a future version of the fund's prospectus.
28 QUANTITATIVE/SECTOR FUNDS
<PAGE> 28
FINANCIAL SERVICES FOCUS FUND
This fund may appeal to long-term investors who are
interested in a fund that seeks to capture the performance
potential of the U.S. financial services sector.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of financial services
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as legislative or regulatory changes, rising
interest rates, credit losses when borrowers default and pricing pressures from
increasing competition. Because the fund uses an active model, it could
underperform its sector as measured by a sector-specific index. The fund may
take only limited steps to reduce sector exposure or to lessen the effects of a
declining market.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUND because the
fund is non-diversified, which means it may invest more than 5% of assets in a
single issuer. In addition, to the extent that the fund invests in companies of
a given size, it takes on the risks of that market segment. For example, small-
and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
THE FUND MAY BUY AND SELL PORTFOLIO SECURITIES ACTIVELY. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks) may trade
at a discount. If the fund invests in any depositary receipts, this could mean
that the fund would not be able to realize the full market value of its
underlying securities.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE(%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES (% OF TRANSACTION AMOUNT)
--------------------------------------------------------------------------------
Redemption fee 0.75
Charged only on shares you sell within 180 days of
buying them, and paid directly to the fund.
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.83
------
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
------
NET OPERATING EXPENSES* 0.89
======
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
$91 $387
</TABLE>
QUANTITATIVE/SECTOR FUNDS 29
<PAGE> 29
TICKER SYMBOL
SWHFX
HEALTH CARE
FOCUS FUND
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE HEALTH CARE
SECTOR. It is the fund's policy that under normal circumstances it will invest
at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher.
The fund expects to invest in all of the types of companies in the health care
sector (see sidebar). The investment adviser chooses the fund's stocks as
described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE HEALTH CARE SECTOR
--------------------------------------------------------------------------------
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The health care sector includes these types of companies:
- drug and biotechnology companies
- health care facilities operators
- medical product manufacturers and suppliers
- medical providers
- medical services firms
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
Investors who believe that U.S. health care companies may show
potential long-term growth may want to consider this fund.
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights are
given. Information will appear in a future version of the fund's prospectus.
30 QUANTITATIVE/SECTOR FUNDS
<PAGE> 30
HEALTH CARE FOCUS FUND
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of health care
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as legislative or regulatory changes, failure
to win government approval for new products, rapid product obsolescence and the
high costs of liability should a product or service prove harmful. Because the
fund uses an active model, it could underperform its sector as measured by a
sector-specific index. The fund may take only limited steps to reduce sector
exposure or to lessen the effects of a declining market.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUND because the
fund is non-diversified, which means it may invest more than 5% of assets in a
single issuer. In addition, to the extent that the fund invests in companies of
a given size, it takes on the risks of that market segment. For example, small-
and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
THE FUND MAY BUY AND SELL PORTFOLIO SECURITIES ACTIVELY. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks) may trade
at a discount. If the fund invests in any depositary receipts, this could mean
that the fund would not be able to realize the full market value of its
underlying securities.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES (% OF TRANSACTION AMOUNT)
--------------------------------------------------------------------------------
Redemption fee 0.75
Charged only on shares you sell within 180 days of
buying them, and paid directly to the fund.
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.83
------
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
------
NET OPERATING EXPENSES* 0.89
======
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C> <C>
$91 $387
</TABLE>
QUANTITATIVE/SECTOR FUNDS 31
<PAGE> 31
TECHNOLOGY TICKER SYMBOL
FOCUS FUND SWTFX
THE FUND'S GOAL IS TO SEEK LONG-TERM CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE FUND CONCENTRATES ITS INVESTMENTS IN COMMON STOCKS AND
OTHER EQUITY SECURITIES PRIMARILY ISSUED BY U.S. COMPANIES IN THE TECHNOLOGY
SECTOR. It is the fund's policy that under normal circumstances it will invest
at least 65% of total assets in these securities; typically, the actual
percentage will be considerably higher.
The fund expects to invest in all of the types of companies in the technology
sector (see sidebar). The investment adviser chooses the fund's stocks as
described in "About the Funds."
The fund may invest in futures contracts to gain greater market exposure while
still keeping a small portion of assets in cash for business operations. By
using futures, the fund potentially can offset the impact on its performance of
keeping some assets in cash. The fund also may lend portfolio securities to earn
additional income. Any income realized through securities lending may help fund
performance.
Until the fund has reached sufficient asset levels, the fund may use futures,
exchange-traded funds and depositary receipts more extensively than it otherwise
might, if the investment adviser determines that doing so would be advantageous.
THE TECHNOLOGY SECTOR
--------------------------------------------------------------------------------
The U.S. economy can be divided into sectors, each consisting of a number of
related industries. The technology sector includes these types of companies:
- companies involved in technology research, distribution, sales or service
- computer hardware and software makers
- defense and aerospace contractors
- electronic equipment makers
- internet equipment and service providers
- office equipment makers
- semiconductor makers
In determining whether a company falls within the sector, the fund considers the
amount of the company's assets devoted to, and sales and operating income
derived from, the sector.
This fund is designed for long-term investors seeking a way to
gain exposure to the technology segment of the U.S. economy
PERFORMANCE
Because this is a new fund, no performance figures or financial highlights are
given. Information will appear in a future version of the fund's prospectus.
32 QUANTITATIVE/SECTOR FUNDS
<PAGE> 32
TECHNOLOGY FOCUS FUND
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence marketwide trends, over both the short and the long term. Other
factors may affect a single company or an industry, but not the broader market.
BECAUSE THE FUND CONCENTRATES ITS INVESTMENTS IN A SINGLE SECTOR OF THE ECONOMY,
YOUR INVESTMENT IS EXPOSED TO THAT SECTOR'S RISKS. Stocks of technology
companies may underperform the stock market as a whole, and are likely to have
above-average volatility. The companies in which the fund invests are affected
by many of the same factors, such as intense price competition, difficulties
bringing products to market, product obsolescence caused by competitor
innovations, stock prices that are unsupported by revenues, high employee
turnover and high labor costs. Because the fund uses an active model, it could
underperform its sector as measured by a sector-specific index. The fund may
take only limited steps to reduce sector exposure or to lessen the effects of a
declining market.
RISKS OF INDIVIDUAL COMPANIES MAY PLAY A GREATER ROLE WITH THIS FUNDS because
the fund is non-diversified, which means it may invest more than 5% of assets in
a single issuer. In addition, to the extent that the fund invests in companies
of a given size, it takes on the risks of that market segment. For example,
small- and mid-cap company stocks may be more volatile than large-cap stocks.
THE FUND'S MANAGEMENT MODEL IS BASED ON MARKET HISTORY. If the model fails to
capture shifts in market dynamics, or if adjustments to the model do not produce
the results expected, fund performance could suffer.
THE FUND MAY BUY AND SELL PORTFOLIO SECURITIES ACTIVELY. If it does, its
portfolio turnover rate and transaction costs will rise, which would lower fund
performance and increase the likelihood of capital gain distributions.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Although the fund's main risks are those associated with its stock investments,
its other investment strategies also may involve risks. These risks could affect
how well the fund pursues its strategy.
For example, futures contracts, which the fund uses to gain additional market
exposure, could adversely affect the fund's performance if they don't perform as
expected.
Any loans of portfolio securities by the fund are fully collateralized. However,
if the borrowing institution defaults, the fund's performance could be reduced.
If the fund invests in any exchange-traded funds, there is the risk that those
funds' managers could make decisions that would hurt the fund's performance.
Depositary receipts (which represent ownership in a group of stocks) may trade
at a discount. If the fund invests in any depositary receipts, this could mean
that the fund would not be able to realize the full market value of its
underlying securities.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in total return.
FEE TABLE (%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES (% OF TRANSACTION AMOUNT)
Redemption fee 0.75
Charged only on shares you sell within 180 days of
buying them, and paid directly to the fund.
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees 0.54
Distribution (12b-1) fees None
-----
Other expenses 0.83
-----
Total annual operating expenses 1.37
EXPENSE REDUCTION (0.48)
-----
NET OPERATING EXPENSES* 0.89
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 5/15/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
--------------------------------------------------------------------------------
<S> <C>
$91 $387
</TABLE>
QUANTITATIVE/SECTOR FUNDS 33
<PAGE> 33
S C H W A B
MARKETTRACK PORTFOLIOS(TM)
ABOUT THE PORTFOLIOS
The Schwab MarketTrack Portfolios in this prospectus share the same investment
approach. Each portfolio seeks to maintain a DEFINED MIX of asset classes over
time, and each invests mainly in a COMBINATION of other SchwabFunds,(R) which
are managed using INDEXING STRATEGIES. Each portfolio pursues a different
investment goal.
This approach is intended to offer the investor key features of two types of
investment strategies: asset allocation and indexing. Each portfolio's
performance is a blend of the performance of different asset classes or
different segments within an asset class.
Indexing, a strategy of TRACKING THE PERFORMANCE of a given market over time,
involves looking to an index to determine what securities to own. By investing
in a combination of index mutual funds, the portfolios can offer
DIVERSIFICATION in a single investment.
The portfolios are designed for LONG-TERM INVESTORS. Their performance will
fluctuate over time and, as with all investments, future performance may differ
from past performance.
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 35
<PAGE> 34
TICKER SYMBOL
SWEGX
S C H W A B
MARKETTRACK
ALL EQUITY PORTFOLIO
THE PORTFOLIO SEEKS HIGH CAPITAL GROWTH THROUGH AN ALL-STOCK PORTFOLIO.
STRATEGY
To pursue its goal, the portfolio maintains a defined asset allocation. The
portfolio's target allocation is 100% in stock investments, with certain
percentages for different segments of the stock market.
The portfolio invests in other SchwabFunds,(R) particularly three of the Equity
Index Funds. These underlying funds seek to track the total returns of various
stock market indices. They typically invest in the stocks included in the index
they are tracking, and generally give each stock the same weight as the index
does. Each underlying fund focuses on a different segment of the stock market.
Below are the underlying funds for this portfolio and the indices they seek to
track, listed according to their corresponding category in the fund's asset
allocation:
<TABLE>
<CAPTION>
ALLOCATION FUND AND INDEX
--------------------------------------------------------------------------------
<S> <C>
LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a
STOCK widely recognized index maintained by Standard & Poor's that
includes 500 U.S. large-cap stocks.
--------------------------------------------------------------------------------
SMALL-CAP Schwab Small-Cap Index Fund.(R) Seeks to track the Schwab
STOCK Small-Cap Index,(R) which includes the second-largest 1,000
U.S. stocks as measured by market capitalization.
--------------------------------------------------------------------------------
INTERNATIONAL Schwab International Index Fund.(R) Seeks to track the Schwab
STOCK International Index,(R) which includes the largest 350 stocks
(as measured by market capitalization) that are publicly
traded in developed securities markets outside the United
States.
--------------------------------------------------------------------------------
</TABLE>
The portfolio managers monitor the portfolio's holdings and cash flow and manage
them as needed in order to maintain the portfolio's target allocation. In
seeking to enhance after-tax performance, the managers may permit modest
deviations from the target allocation for certain periods of time.
ASSET ALLOCATION AMONG FUNDS
--------------------------------------------------------------------------------
Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.
The portfolio's allocation focuses on stock investments for long-term growth.
The portfolio typically does not change its stock segment allocations for
purposes of investment strategy and seeks to remain close to the target
allocations of 45% in large-cap, 30% in international and 25% in small-cap.
Because the portfolio must keep a small portion of its assets in cash for
business operations, the portfolio's actual investments will be slightly less
than 100% in stock funds.
The performance information below shows you how the fund's
performance compares to that of an index, which varies over
time.
PERFORMANCE
Below are a chart and a table showing the portfolio's performance, as well as
data on an unmanaged market index. These figures assume that all distributions
were reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
--------------------------------------------------------------------------------
[BAR GRAPH]
<TABLE>
<S> <C>
99 25.06
</TABLE>
BEST QUARTER: 17.07% Q4 1999 WORST QUARTER: -1.71% Q3 1999
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
--------------------------------------------------------------------------------
<S> <C> <C>
Portfolio 25.06 16.94 1
S&P 500 Index 21.04 19.90 2
</TABLE>
1 Inception: 5/19/98.
2 From 5/19/98.
36 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 35
SCHWAB MARKETTRACK ALL EQUITY PORTFOLIO
This portfolio's exposure to a broad spectrum of U.S. and
international stocks makes it a good choice for long-term
investors seeking a composite of U.S. and international stock
market performance in a single fund.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the portfolio will
fluctuate, which means that you could lose money.
THE PORTFOLIO'S STOCK ALLOCATIONS CAN HAVE AN EFFECT ON RETURNS. The risks and
returns of different segments of the stock market can vary over the long term
and the short term. Because of this, the portfolio's performance could suffer
during times when segments emphasized by its target allocation are out of favor,
or when stocks in general are out of favor.
MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH STOCK INDEX FUNDS. The
portfolio's underlying stock index funds seek to track the performance of
various segments of the stock market, as measured by their respective indices.
Neither the portfolio, because of its asset allocation strategy, nor the
underlying funds, because of their indexing strategy, can take steps to reduce
market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence market-wide trends; the outcome may be positive or negative, short
term or long term. Any type of stock can temporarily fall out of favor with the
market.
THE VALUES OF CERTAIN TYPES OF STOCKS, SUCH AS SMALL-CAP STOCKS AND
INTERNATIONAL STOCKS, MAY FLUCTUATE MORE WIDELY THAN OTHERS. With small-cap
stocks, one reason is that their prices may be based in part on future
expectations rather than current achievements. International stock investments
can be affected by changes in currency exchange rates, which can erode market
gains or widen market losses. Other reasons for the volatility of international
markets range from a lack of reliable company information to the risk of
political upheaval.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.
This gap occurs mainly because, unlike an index, the underlying funds incur
expenses and must keep a small portion of their assets in cash. To the extent
that an underlying fund lends securities or makes short-term or other
investments to reduce its performance gap, it may increase the risk that its
performance will be reduced.
The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance. These fees are approximately 0.40% of the portfolio's average net
assets based on current investments, and may fluctuate.
FEE TABLE (%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES
--------------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees* 0.44
Distribution (12b-1) fees None
Other expenses 0.49
------
Total annual operating expenses 0.93
EXPENSE REDUCTION (0.43)
------
NET OPERATING EXPENSES** 0.50
======
</TABLE>
* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$51 $253 $473 $1,104
</TABLE>
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 37
<PAGE> 36
TICKER SYMBOL
SWHGX
S C H W A B
MARKETTRACK
GROWTH PORTFOLIO
THE PORTFOLIO SEEKS HIGH CAPITAL GROWTH WITH LESS VOLATILITY THAN AN ALL-STOCK
PORTFOLIO.
STRATEGY
TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The
portfolio's target allocation includes stock, bond and cash investments.
The portfolio invests mainly in other SchwabFunds,(R) particularly index funds,
which seek to track the total returns of various market indices. These
underlying funds typically invest in the securities included in the index they
are tracking, and give each security the same weight as the index does. Each
underlying fund focuses on a different market segment. Below are the underlying
funds for this portfolio and the indices they seek to track, listed according to
their corresponding category in the fund's asset allocation:
<TABLE>
<CAPTION>
ALLOCATION FUND AND INDEX
--------------------------------------------------------------------------------
<S> <C>
LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a
STOCK widely recognized index maintained by Standard & Poor's that
includes 500 U.S. large-cap stocks.
--------------------------------------------------------------------------------
SMALL-CAP Schwab Small-Cap Index Fund.(R) Seeks to track the Schwab
STOCK Small-Cap Index,(R) which includes the second-largest 1,000
U.S. stocks as measured by market capitalization.
--------------------------------------------------------------------------------
INTERNATIONAL Schwab International Index Fund.(R) Seeks to track the Schwab
STOCK International Index,(R) which includes the largest 350 stocks
(as measured by market capitalization) that are publicly
traded in developed securities markets outside the United
States.
--------------------------------------------------------------------------------
BOND Schwab Total Bond Market Index Fund(TM). Seeks to track the
Lehman Brothers U.S. Aggregate Bond Index, which includes a
broad-based mix of U.S. investment-grade bonds with
maturities greater than one year.
</TABLE>
The portfolio also may use individual securities in its allocations and may
continue to hold any individual securities it currently owns. The portfolio
managers monitor the portfolio's holdings and cash flow and manage them as
needed in order to maintain the portfolio's target allocation. In seeking to
enhance after-tax performance, the managers may permit modest deviations from
the target allocation for certain periods of time.
ASSET ALLOCATION
--------------------------------------------------------------------------------
Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.
The Growth Portfolio's allocation focuses on stock investments, while including
some bonds and cash investments to reduce volatility. The portfolio typically
does not change its asset allocations for purposes of investment strategy and
seeks to remain close to the target allocations of 80% stocks, 15% bonds and 5%
cash.
The stock allocation is further divided into three segments: 40% of assets for
large-cap, 20% for small-cap and 20% for international.
The performance information below shows you how performance
has varied from year to year and how it averages out over
time.
PERFORMANCE
Below are a chart and a table showing the portfolio's performance, as well as
data on two unmanaged market indices. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance, and that indices do not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
--------------------------------------------------------------------------------
[BAR GRAPH]
<TABLE>
<S> <C>
96 14.49
97 21.00
98 15.17
99 19.36
</TABLE>
BEST QUARTER: 15.70% Q4 1998 WORST QUARTER: -10.55% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
--------------------------------------------------------------------------------
<S> <C> <C>
Portfolio 19.36 17.77 1
S&P 500 Index 21.04 26.47 2
Lehman Brothers U.S.
Aggregate Bond Index -0.82 5.60 2
</TABLE>
1 Inception: 11/20/95.
2 From 11/20/95.
38 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 37
SCHWAB MARKETTRACK GROWTH PORTFOLIO
By emphasizing stocks while including other investments to
temper market risk, this portfolio could be appropriate for
investors seeking attractive long-term growth with potentially
lower volatility.
MAIN RISKS
STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose
performance is tied to these markets, the value of your investment in the
portfolio will fluctuate, which means that you could lose money.
THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE AN EFFECT ON RETURNS. The
risks and returns of different classes of assets and different segments of the
stock market can vary over the long term and the short term. Because of this,
the portfolio's performance could suffer during times when the types of stocks
favored by its target allocation are out of favor, or when stocks in general are
out of favor.
MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH STOCK INDEX FUNDS. The
portfolio's underlying stock index funds seek to track the performance of
various segments of the stock market, as measured by their respective indices.
Neither the portfolio, because of its asset allocation strategy, nor the
underlying funds, because of their indexing strategy, can take steps to reduce
market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence market-wide trends; the outcome may be positive or negative, short
term or long term. Any type of stock can temporarily fall out of favor with the
market.
THE VALUES OF CERTAIN TYPES OF STOCKS, SUCH AS SMALL-CAP STOCKS AND
INTERNATIONAL STOCKS, MAY FLUCTUATE MORE WIDELY THAN OTHERS. With small-cap
stocks, one reason is that their prices may be based in part on future
expectations rather than current achievements. International stock investments
can be affected by changes in currency exchange rates, which can erode market
gains or widen market losses. Other reasons for the volatility of international
markets range from a lack of reliable company information to the risk of
political upheaval.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
For the portion of the portfolio's assets that are invested in the bond market,
a major risk is that bond prices generally fall when interest rates rise.
Portfolio performance also could be affected if bonds held by the underlying
funds go into default. Another risk is that certain bonds may be paid off, or
"called," substantially earlier or later than expected.
While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.
This gap occurs mainly because, unlike an index, the underlying funds incur
expenses and must keep a small portion of their assets in cash. To the extent
that an underlying fund lends securities or makes short-term or other
investments to reduce its performance gap, it may increase the risk that its
performance will be reduced.
The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance. These fees are approximately 0.26% of the portfolio's average net
assets based on current investments, and may fluctuate.
FEE TABLE (%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES
--------------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees* 0.44
Distribution (12b-1) fees None
Other expenses 0.39
------
Total annual operating expenses 0.83
EXPENSE REDUCTION (0.33)
------
NET OPERATING EXPENSES** 0.50
======
</TABLE>
* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$51 $232 $428 $995
</TABLE>
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 39
<PAGE> 38
S C H W A B
MARKETTRACK TICKER SYMBOL
BALANCED PORTFOLIO SWBGX
THE PORTFOLIO SEEKS BOTH CAPITAL GROWTH AND INCOME.
STRATEGY
To pursue its goal, the portfolio maintains a defined asset allocation. The
portfolio's target allocation includes bond, stock and cash investments.
The portfolio invests mainly in other SchwabFunds,(R) particularly index funds,
which seek to track the total returns of various market indices. These
underlying funds typically invest in the securities included in the index they
are tracking, and give each security the same weight as the index does. Each
underlying fund focuses on a different market segment. Below are the underlying
funds for this portfolio and the indices they seek to track, listed according to
their corresponding category in the fund's asset allocation:
<TABLE>
<CAPTION>
ALLOCATION FUND AND INDEX
--------------------------------------------------------------------------------
<S> <C>
LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a
STOCK widely recognized index maintained by Standard & Poor's that
includes 500 U.S. large-cap stocks.
--------------------------------------------------------------------------------
SMALL-CAP Schwab Small-Cap Index Fund.(R) Seeks to track the Schwab
STOCK Small-Cap Index,(R) which includes the second-largest 1,000
U.S. stocks as measured by market capitalization.
--------------------------------------------------------------------------------
INTERNATIONAL Schwab International Index Fund.(R) Seeks to track the Schwab
STOCK International Index,(R) which includes the largest 350 stocks
(as measured by market capitalization) that are publicly
traded in developed securities markets outside the United
States.
--------------------------------------------------------------------------------
BOND Schwab Total Bond Market Index Fund(TM). Seeks to track the
Lehman Brothers U.S. Aggregate Bond Index, which includes a
broad-based mix of U.S. investment-grade bonds with
maturities greater than one year.
</TABLE>
The portfolio also may use individual securities in its allocations and may
continue to hold any individual securities it currently owns. The portfolio
managers monitor the portfolio's holdings and cash flow and manage them as
needed in order to maintain the portfolio's target allocation. In seeking to
enhance after-tax performance, the managers may permit modest deviations from
the target allocation for certain periods of time.
ASSET ALLOCATION
--------------------------------------------------------------------------------
Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.
The Balanced Portfolio's allocation is weighted toward stock investments, while
including substantial bond investments to add income and reduce volatility. The
portfolio typically does not change its asset allocations for purposes of
investment strategy and seeks to remain close to the target allocations of 60%
stocks, 35% bonds and 5% cash.
The stock allocation is further divided into three segments: 30% of assets for
large-cap, 15% for small-cap and 15% for international.
The performance information below shows you how performance
has varied from year to year and how it averages out over
time.
PERFORMANCE
Below are a chart and a table showing the portfolio's performance, as well as
data on two unmanaged market indices. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance, and that indices do not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
--------------------------------------------------------------------------------
[BAR GRAPH]
<TABLE>
<S> <C>
96 11.15
97 17.76
98 13.67
99 14.00
</TABLE>
BEST QUARTER: 11.81% Q4 1998 WORST QUARTER: -6.85% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
--------------------------------------------------------------------------------
<S> <C> <C>
Portfolio 14.00 14.44 1
S&P 500 Index 21.04 26.47 2
Lehman Brothers U.S.
Aggregate Bond Index -0.82 5.60 2
</TABLE>
1 Inception: 11/20/95.
2 From 11/20/95.
40 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 39
SCHWAB MARKETTRACK BALANCED PORTFOLIO
With a blend of asset types that modestly favors stocks, this
portfolio may be suitable for intermediate-term investors or
for long-term investors with moderate sensitivity to risk.
MAIN RISKS
STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose
performance is tied to these markets, the value of your investment in the
portfolio will fluctuate, which means that you could lose money.
THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE A SUBSTANTIAL EFFECT ON
PERFORMANCE. The risks and returns of different classes of assets and different
segments of he stock market can vary over the long term and the short term.
Because it intends to maintain substantial exposure to stocks as well as bonds,
the portfolio will be hurt by poor performance in either market. Also, because
it does not intend to make strategic changes in its allocation, it could
underperform any asset allocation funds that underweight asset classes or types
of stocks that perform poorly during a given period.
MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH INDEX FUNDS. The
portfolio's underlying index funds seek to track the performance of various
segments of the stock or bond market, as measured by their respective indices.
Neither the portfolio, because of its asset allocation strategy, nor the
underlying funds, because of their indexing strategy, can take steps to reduce
market exposure or to lessen the effects of a declining market.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence market-wide trends; the outcome may be positive or negative, short
term or long term. Any type of stock can temporarily fall out of favor with the
market. The values of certain types of stocks, such as small-cap stocks and
international stocks, may fluctuate more widely than others.
BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE, WHICH CAN AFFECT THE BOND
PORTION OF THE PORTFOLIO. This risk is generally greater for bond investments
with longer maturities. Portfolio performance also could be affected if bonds
held by the underlying funds go into default. Another risk is that certain bonds
may be paid off, or "called," substantially earlier or later than expected.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.
This gap occurs mainly because, unlike an index, the underlying funds incur
expenses and must keep a small portion of their assets in cash. To the extent
that an underlying fund lends securities or makes short-term or other
investments to reduce its performance gap, it may increase the risk that its
performance will be reduced.
The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance. These fees are approximately 0.29% of the portfolio's average net
assets based on current investments, and may fluctuate.
FEE TABLE (%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES
--------------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees* 0.44
Distribution (12b-1) fees None
Other expenses 0.39
------
TOTAL ANNUAL OPERATING EXPENSES 0.83
EXPENSE REDUCTION (0.33)
------
NET OPERATING EXPENSES** 0.50
======
</TABLE>
* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$51 $232 $428 $995
</TABLE>
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 41
<PAGE> 40
S C H W A B
MARKETTRACK TICKER SYMBOL
CONSERVATIVE PORTFOLIO SWCGX
THE PORTFOLIO SEEKS INCOME AND MORE GROWTH POTENTIAL THAN AN ALL-BOND PORTFOLIO.
STRATEGY
TO PURSUE ITS GOAL, THE PORTFOLIO MAINTAINS A DEFINED ASSET ALLOCATION. The
portfolio's target allocation includes bond, stock and cash investments.
The portfolio invests mainly in other SchwabFunds,(R) particularly index funds,
which seek to track the total returns of various market indices. These
underlying funds typically invest in the securities included in the index they
are tracking, and give each security the same weight as the index does. Each
underlying fund focuses on a different market segment. Below are the underlying
funds for this portfolio and the indices they seek to track, listed according to
their corresponding category in the fund's asset allocation:
<TABLE>
<CAPTION>
ALLOCATION FUND AND INDEX
--------------------------------------------------------------------------------
<S> <C>
LARGE-CAP Schwab S&P 500 Fund. Seeks to track the S&P 500(R) Index, a
STOCK widely recognized index maintained by Standard & Poor's that
includes 500 U.S. large-cap stocks.
--------------------------------------------------------------------------------
SMALL-CAP Schwab Small-Cap Index Fund.(R) Seeks to track the Schwab
STOCK Small-Cap Index,(R) which includes the second-largest 1,000
U.S. stocks as measured by market capitalization.
--------------------------------------------------------------------------------
INTERNATIONAL Schwab International Index Fund.(R) Seeks to track the Schwab
STOCK International Index, (R) which includes the largest 350 stocks
(as measured by market capitalization) that are publicly
traded in developed securities markets outside the United
States.
--------------------------------------------------------------------------------
BOND Schwab Total Bond Market Index Fund (TM). Seeks to track the
Lehman Brothers U.S. Aggregate Bond Index, which includes a
broad-based mix of U.S. investment-grade bonds with maturities
greater than one year.
</TABLE>
The portfolio also may use individual securities in its allocations and may
continue to hold any individual securities it currently owns. The portfolio
managers monitor the portfolio's holdings and cash flow and manage them as
needed in order to maintain the portfolio's target allocation. In seeking to
enhance after-tax performance, the managers may permit modest deviations from
the target allocation for certain periods of time.
ASSET ALLOCATION
--------------------------------------------------------------------------------
Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.
The Conservative Portfolio's allocation is weighted toward bond investments,
while including substantial stock investments for long-term growth. The
portfolio typically does not change its asset allocations for purposes of
investment strategy and seeks to remain close to the target allocations of 55%
bonds, 40% stocks and 5% cash.
The stock allocation is further divided into three segments: 20% of assets for
large-cap, 10% for small-cap and 10% for international.
The performance information below shows you how performance
has varied from year to year and how it averages out over
time.
PERFORMANCE
Below are a chart and a table showing the portfolio's performance, as well as
data on two unmanaged market indices. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance, and that indices do not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
--------------------------------------------------------------------------------
[BAR GRAPH]
<TABLE>
<S> <C>
96 8.14
97 14.71
98 11.56
99 8.70
</TABLE>
BEST QUARTER: 8.49% Q2 1997 WORST QUARTER: -3.35% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
--------------------------------------------------------------------------------
<S> <C> <C>
Portfolio 8.70 11.06 1
Lehman Brothers U.S.
Aggregate Bond Index -0.82 5.60 2
S&P 500 Index 21.04 26.47 2
</TABLE>
1 Inception: 11/20/95.
2 From 11/20/95.
42 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 41
SCHWAB MARKETTRACK CONSERVATIVE PORTFOLIO
Conservative investors and investors with shorter time
horizons are among those for whom this portfolio was created.
MAIN RISKS
STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose
performance is tied to these markets, the value of your investment in the
portfolio will fluctuate, which means that you could lose money.
THE PORTFOLIO'S ASSET AND STOCK ALLOCATIONS CAN HAVE A SUBSTANTIAL EFFECT ON
PERFORMANCE. The risks and returns of different classes of assets and different
segments of the stock market can vary over the long term and the short term.
Because it intends to maintain substantial exposure to stocks as well as bonds,
the portfolio will be hurt by poor performance in either market. Also, because
it does not intend to make strategic changes in its allocation, it could
underperform any asset allocation funds that underweight asset classes or types
of stocks that perform poorly during a given period.
MANY OF THE RISKS OF THIS PORTFOLIO ARE ASSOCIATED WITH INDEX FUNDS. The
portfolio's underlying index funds seek to track the performance of various
segments of the stock or bond market, as measured by their respective indices.
Neither the portfolio, because of its asset allocation strategy, nor the
underlying funds, because of their indexing strategy, can take steps to reduce
market exposure or to lessen the effects of a declining market.
BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE, WHICH CAN AFFECT THE BOND
PORTION OF THE PORTFOLIO. This risk is generally greater for bond investments
with longer maturities. Portfolio performance also could be affected if bonds
held by the underlying funds go into default. Another risk is that certain bonds
may be paid off, or "called," substantially earlier or later than expected.
MANY FACTORS CAN AFFECT STOCK MARKET PERFORMANCE. Political and economic news
can influence market-wide trends; the outcome may be positive or negative, short
term or long term. Any type of stock can temporarily fall out of favor with the
market. Also, the values of certain types of stocks, such as small-cap stocks
and international stocks, may fluctuate more widely than others.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
While the portfolio's underlying funds seek to track the returns of various
indices, in each case their performance normally is below that of the index.
This gap occurs mainly because, unlike an index, the underlying funds incur
expenses and must keep a small portion of their assets in cash. To the extent
that an underlying fund lends securities or makes short-term or other
investments to reduce its performance gap, it may increase the risk that its
performance will be reduced.
The portfolio itself keeps a small portion of its assets in cash, which may
contribute modestly to lower performance.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance. These fees are approximately 0.30% of the portfolio's average net
assets based on current investments, and may fluctuate.
FEE TABLE (%)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
SHAREHOLDER FEES
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
Management fees* 0.44
Distribution (12b-1) fees None
Other expenses 0.41
=====
Total annual operating expenses 0.85
EXPENSE REDUCTION (0.35)
-----
NET OPERATING EXPENSES** 0.50
=====
</TABLE>
* Reflects current fees.
** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$51 $236 $437 $1,017
</TABLE>
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 43
<PAGE> 42
FINANCIAL HIGHLIGHTS
SCHWAB MARKETTRACK ALL EQUITY PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 5/19/98-
10/31/99 10/31/98
--------------------------------------------------------------------------------
PER-SHARE DATA ($)
--------------------------------------------------------------------------------
<S> <C> <C>
Net asset value at beginning of period 9.28 10.00
-------------------------
Income from investment operations:
Net investment income (loss) 0.03 (0.01)
Net realized and unrealized gain (loss)
on investments 2.22 (0.71)
-------------------------
Total income (loss) from investment operations 2.25 (0.72)
Less distributions:
Dividends from net investment income (0.01) --
Dividends in excess of net investment income (0.04) --
-------------------------
Total distributions (0.05) --
-------------------------
NET ASSET VALUE AT END OF PERIOD 11.48 9.28
=========================
Total return (%) 24.34 (7.20) 1
RATIOS/SUPPLEMENTAL DATA (%)
--------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.54 0.39 2
Expense reductions reflected in above ratio 0.43 0.74 2
Ratio of net investment income to
average net assets 0.13 (0.36) 2
Portfolio turnover rate 6 2
Net assets, end of period ($ x 1,000,000) 203 117
</TABLE>
1 Not annualized.
2 Annualized.
44 ASSET ALLOCATION / MULTI-FUND PORTFOLIOS
<PAGE> 43
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB MARKETTRACK GROWTH PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 11/1/96- 11/20/95-
10/31/99 10/31/98 10/31/97 10/31/96
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 13.96 13.59 11.30 10.00
---------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.18 0.16 0.17 0.19
Net realized and unrealized gain
on investments 2.48 0.99 2.32 1.13
---------------------------------------------------------------------------
Total income from investment operations 2.66 1.15 2.49 1.32
Less distributions:
Dividends from net investment income (0.22) (0.16) (0.20) (0.02)
Distributions from capital gains (0.03) (0.62) -- --
---------------------------------------------------------------------------
Total distributions (0.25) (0.78) (0.20) (0.02)
---------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 16.37 13.96 13.59 11.30
===========================================================================
Total return (%) 19.24 8.85 22.33 13.24 1
RATIOS/SUPPLEMENTAL (%) DATA
------------------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.58 0.60 0.75 0.89 2
Expense reductions reflected in above ratio 0.33 0.50 0.49 0.61 2
Ratio of net investment income to
average net assets 1.21 1.34 1.58 2.03 2
Portfolio turnover rate 7 14 113 46
Net assets, end of period ($ x 1,000,000) 428 276 168 106
</TABLE>
1 Not annualized.
2 Annualized.
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 45
<PAGE> 44
FINANCIAL HIGHLIGHTS
SCHWAB MARKETTRACK BALANCED PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 11/1/96- 11/20/95-
10/31/99 10/31/98 10/31/97 10/31/96
------------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 13.39 12.82 11.05 10.00
------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.29 0.25 0.22 0.25
Net realized and unrealized gain
on investments 1.57 0.86 1.78 0.83
------------------------------------------------------------------------------------
Total income from investment operations 1.86 1.11 2.00 1.08
Less distributions:
Dividends from net investment income (0.33) (0.23) (0.23) (0.03)
Distributions from capital gains (0.07) (0.31) -- --
------------------------------------------------------------------------------------
Total distributions (0.40) (0.54) (0.23) (0.03)
------------------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 14.85 13.39 12.82 11.05
====================================================================================
Total return (%) 14.18 9.02 18.43 10.82 1
RATIOS/SUPPLEMENTAL DATA(%)
------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.58 0.59 0.78 0.89 2
Expense reductions reflected in above ratio 0.33 0.51 0.52 0.67 2
Ratio of net investment income to
average net assets 2.25 2.33 2.48 2.79 2
Portfolio turnover rate 7 32 104 44
Net assets, end of period ($ x 1,000,000) 403 264 151 81
</TABLE>
1 Not annualized.
2 Annualized.
46 ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 45
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB MARKETTRACK CONSERVATIVE PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 11/1/96- 11/20/95-
10/31/99 10/31/98 10/31/97 10/31/96
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 12.11 11.71 10.51 10.00
--------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.41 0.35 0.35 0.33
Net realized and unrealized gain
on investments 0.68 0.64 1.21 0.48
--------------------------------------------------------------------------------------
Total income from investment operations 1.09 0.99 1.56 0.81
Less distributions:
Dividends from net investment income (0.40) (0.35) (0.36) (0.30)
Distributions from capital gains (0.07) (0.24) -- --
--------------------------------------------------------------------------------------
Total distributions (0.47) (0.59) (0.36) (0.30)
--------------------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 12.73 12.11 11.71 10.51
======================================================================================
Total return (%) 9.13 8.64 15.12 8.18 1
RATIOS/SUPPLEMENTAL DATA(%)
------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.57 0.58 0.81 0.89 2
Expense reductions reflected in above ratio 0.35 0.64 0.84 1.16 2
Ratio of net investment income to
average net assets 3.28 3.26 3.40 3.49 2
Portfolio turnover rate 8 58 104 64
Net assets, end of period ($ x 1,000,000) 167 115 41 22
</TABLE>
1 Not annualized.
2 Annualized.
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 47
<PAGE> 46
S C H W A B
MARKETMANAGER PORTFOLIOS(TM)
ABOUT THE PORTFOLIOS
The Schwab MarketManager Portfolios share a "MULTI-FUND" investment strategy.
Each portfolio invests primarily in a COMBINATION of other actively managed
funds. Each portfolio's mix of underlying funds is strategically chosen with a
SPECIFIC GOAL in mind.
By using a multi-fund strategy, the portfolios can provide exposure to a VARIETY
OF MUTUAL FUNDS in a single investment. This strategy may help to produce a high
level of DIVERSIFICATION among securities and industries. As a result, the
portfolios may reduce the risks associated with INVESTING in a single fund, fund
company or investment style.
The portfolio managers ANALYZE ECONOMIC CONDITIONS to identify promising areas
for investment. They review funds according to their investment objectives and
policies, and use quantitative techniques to measure their past performance,
volatility and expenses. The managers then choose each underlying fund by
ANALYZING its investment style and gaining FIRSTHAND KNOWLEDGE of its manager.
The portfolios are designed for LONG-TERM INVESTORS. Their performance will
fluctuate over time and, as with all investments, future performance may differ
from past performance.
49
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 47
S C H W A B TICKER SYMBOL
MARKETMANAGER GROWTH PORTFOLIO SWOGX
THE PORTFOLIO SEEKS CAPITAL GROWTH.
STRATEGY
TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN
OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund
OneSource(R) service. Typically, the actual percentage is considerably higher.
The portfolio invests in stock, bond and money market funds, which the managers
choose within the framework of an asset allocation strategy. Based on analysis
of economic outlooks and market conditions, the managers determine whether and
how much to adjust the portfolio's allocation.
Within the stock fund allocation, the portfolio managers may allocate their
investment among large-cap, small-cap and international stock funds. Within the
bond fund allocation, the managers allocate investments among bond funds
primarily based on the maturities and credit quality of their holdings.
In choosing the underlying funds, the portfolio managers seek clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/99, the portfolio included 40 underlying funds.
The performance information below shows you how performance has varied
from year to year and how it averages out over time.
ASSET ALLOCATION AMONG FUNDS
--------------------------------------------------------------------------------
Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.
The Growth Portfolio's allocation is designed to provide the growth
opportunities of stock investing while tempering volatility with bond and money
market funds. Over the long term, the portfolio will generally reflect its
target allocation, as shown below.
The table also shows the highest and lowest allocations the portfolio could
assign for each type of fund. The portfolio has the flexibility to adjust its
allocations of large-cap, small-cap and international stock funds as well.
<TABLE>
<CAPTION>
TARGET ALLOCATION
ALLOCATION FLEXIBILITY
------------------------------------------------
<S> <C> <C>
STOCK FUNDS 80% 65 - 95%
large-cap 35%
small-cap 20%
international 25%
BOND FUNDS 15% 0 - 30%
MONEY MARKET FUNDS 5% 0 - 35%
</TABLE>
PERFORMANCE
Below are a chart and a table showing the portfolio's performance, as well as
data on two unmanaged market indices. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance, and that indices do not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
97 98 99
<S> <C> <C>
18.36 15.15 35.65
</TABLE>
BEST QUARTER: 25.72% Q4 1999 WORST QUARTER: -11.73% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
----------------------------------------------------------------
<S> <C> <C>
Portfolio 35.65 22.07 1
S&P 500(R)Index 21.04 26.65 2
Lehman Brothers U.S.
Aggregate Bond Index -0.82 5.43 2
</TABLE>
1 Inception: 11/18/96.
2 From 11/18/96.
50
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 48
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
When you are investing for the long term, a portfolio that emphasizes stock
investments in its asset allocation may make sense for you.
MAIN RISKS
THE STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose
performance is tied to these markets, the value of your investment in the
portfolio will fluctuate, which means that you could lose money.
THE PORTFOLIO'S PARTICULAR ASSET ALLOCATION CAN HAVE AN EFFECT ON PERFORMANCE.
The portfolio's neutral allocation is designed with long-term performance in
mind, and does not ensure any particular type of performance over the short
term. Because the risks and returns of different asset classes can vary widely
over both the long term and the short term, the portfolio's performance could
suffer if a particular asset class does not perform as expected.
MANY OF THE RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH STOCK FUNDS. The
same factors that affect stock market performance generally affect stock funds.
Political and economic news can influence marketwide trends; the outcome may be
positive or negative, short term or long term. Any type of stock can temporarily
fall out of favor with the market. The values of certain types of stocks, such
as small-cap stocks and international stocks, may fluctuate more widely than
others.
TO THE EXTENT THAT THE PORTFOLIO INVESTS IN BOND FUNDS, A MAJOR RISK IS THAT
BOND PRICES GENERALLY FALL WHEN INTEREST RATES RISE. Underlying funds that focus
on bonds with longer maturities tend to be more sensitive to this risk.
Portfolio performance also could be affected if bonds held by the underlying
funds go into default. To minimize this risk, the portfolio intends to invest in
bond funds that invest primarily in investment-grade quality debt securities.
Another risk is that certain bonds may be paid off, or "called," substantially
earlier or later than expected.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Because the portfolio managers have no control over the management of the
underlying funds, decisions made by the underlying funds' managers could change
the portfolio's effective asset allocation or hurt its performance.
For example, if managers of underlying funds tended to favor cash, the
portfolio's exposure to the stock market would be lowered. Similarly, if
underlying funds make investments that don't perform as expected, the
portfolio's performance could be affected.
Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
--------------------------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
<S> <C>
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.39
-----
Total annual operating expenses 0.93
EXPENSE REDUCTION (0.43)
-----
NET OPERATING EXPENSES* 0.50
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes, and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$51 $253 $473 $1,104
</TABLE>
51
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 49
S C H W A B
MARKETMANAGER BALANCED PORTFOLIO TICKER SYMBOL
SWOBX
THE PORTFOLIO SEEKS CAPITAL GROWTH AND INCOME.
STRATEGY
TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN
OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund
OneSource(R) service. Typically, the actual percentage is considerably higher.
The portfolio invests in stock, bond and money market funds, which the managers
choose within the framework of an asset allocation strategy. Based on analysis
of economic outlooks and market conditions, the managers determine whether and
how much to adjust the portfolio's allocation.
Within the stock fund allocation, the portfolio managers may allocate their
investment among large-cap, small-cap and international stock funds. Within the
bond fund allocation, the managers allocate investments among bond funds
primarily based on the maturities and credit quality of their holdings.
In choosing the underlying funds, the portfolio managers seek clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/99, the portfolio included 37 underlying funds.
The performance information below shows you how performance has varied
from year to year and how it averages out over time.
ASSET ALLOCATION AMONG FUNDS
--------------------------------------------------------------------------------
Asset allocation is a strategy of investing specific percentages of a portfolio
in various asset classes.
The Balanced Portfolio's allocation is designed to provide a mix of the growth
opportunities of stock investing with the income opportunities of bond and money
market funds. Over the long term, the portfolio will generally reflect its
target allocation, as shown below.
The table also shows the highest and lowest allocations the portfolio could
assign for each type of fund. The portfolio has the flexibility to adjust its
allocations of large-cap, small-cap and international stock funds as well.
<TABLE>
<CAPTION>
TARGET ALLOCATION
ALLOCATION FLEXIBILITY
--------------------------------------------------------------------
<S> <C> <C>
STOCK FUNDS 60% 50 - 70%
large-cap 30%
small-cap 15%
international 15%
BOND FUNDS 35% 25 - 45%
MONEY MARKET FUNDS 5% 0 - 25%
</TABLE>
PERFORMANCE
Below are a chart and a table showing the portfolio's performance, as well as
data on two unmanaged market indices. These figures assume that all
distributions were reinvested. Keep in mind that future performance may differ
from past performance, and that indices do not include any costs of investment.
ANNUAL TOTAL RETURNS (%) as of 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
97 98 99
<S> <C> <C>
16.51 13.59 25.77
</TABLE>
BEST QUARTER: 18.58% Q4 1999 WORST QUARTER: -8.16% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
---------------------------------------------------------------------
<S> <C> <C>
Portfolio 25.77 17.96 1
S&P 500(R) Index 21.04 26.65 2
Lehman Brothers U.S.
Aggregate Bond Index -0.82 5.43 2
</TABLE>
1 Inception: 11/18/96.
2 From 11/18/96.
52
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 50
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
Long-term investors seeking a blend of growth and income investments may
want to consider this portfolio.
MAIN RISKS
THE STOCK AND BOND MARKETS RISE AND FALL DAILY. As with any investment whose
performance is tied to these markets, the value of your investment in the
portfolio will fluctuate, which means that you could lose money.
THE PORTFOLIO'S PARTICULAR ASSET ALLOCATION CAN HAVE A SIGNIFICANT EFFECT ON
PERFORMANCE. The portfolio's neutral allocation is designed with long-term
performance in mind, and does not ensure any particular type of performance over
the short term. Because the risks and returns of different asset classes can
vary widely over both the long term and the short term, the portfolio's
performance could suffer if a particular asset class does not perform as
expected.
TO THE EXTENT THAT THE PORTFOLIO HAS EXPOSURE TO A GIVEN TYPE OF MUTUAL FUND, IT
TAKES ON THE ASSOCIATED RISKS. The same factors that affect stock market
performance generally affect stock funds. Political and economic news can
influence marketwide trends; the outcome may be positive or negative, short term
or long term. The values of certain types of stocks, such as small-cap stocks or
international stocks, may fluctuate more widely in price than others.
WITH BOND FUNDS, ONE MAJOR RISK IS THAT BOND PRICES GENERALLY FALL WHEN INTEREST
RATES RISE. Underlying funds that focus on bonds with longer maturities tend to
be more sensitive to this risk. Portfolio performance also could be affected if
bonds held by its underlying funds go into default. Economic conditions can
cause bond markets to fall in anticipation of greater risk of default, in which
case funds that emphasize lower-quality bonds could suffer disproportionate
losses. To minimize this risk, the portfolio intends to invest primarily in bond
funds that invest primarily in investment-grade quality debt securities. Another
risk is that certain bonds may be paid off, or "called," substantially earlier
or later than expected.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Because the portfolio managers have no control over the management of the
underlying funds, decisions made by the underlying funds' managers could change
the portfolio's investment profile or hurt its performance.
For example, if managers of underlying funds tended to favor cash, the
portfolio's exposure to the stock market would be lowered. Similarly, if
underlying funds make investments that don't perform as expected, the
portfolio's performance could be affected.
Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
<S> <C>
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.41
-----
Total annual operating expenses 0.95
EXPENSE REDUCTION (0.45)
-----
NET OPERATING EXPENSES* 0.50
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes, and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$51 $258 $482 $1,125
</TABLE>
53
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 51
S C H W A B TICKER SYMBOL
MARKETMANAGER SMALL CAP PORTFOLIO SWOSX
THE PORTFOLIO SEEKS LONG-TERM CAPITAL APPRECIATION.
STRATEGY
TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN
OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund
OneSource(R) service. The fund also has a policy of investing at least 65% of
total assets in small-cap stock funds. Typically, the actual percentages for
both policies are considerably higher.
The portfolio managers regularly review the small-cap segment of the market to
identify sectors or industries that offer the greatest potential for growth. The
managers then screen the universe of small-cap funds based on a combination of
quantitative measures-past performance, volatility, expenses-and qualitative
evaluations of their investment objectives, management teams and current
holdings.
The portfolio managers meet frequently with the management teams of those
small-cap funds that satisfy the screening criteria in order to gain a more
complete understanding of their investment styles and strategies. In choosing
the underlying funds, the portfolio managers seek clearly defined investment
strategies, strong performance histories and stable management, among other
criteria. As of 10/31/99, the portfolio included 24 underlying funds.
Because the small-cap market can be volatile, the portfolio managers monitor and
adjust the portfolio as necessary. In so doing, they seek to anticipate upcoming
markets as well as respond to current conditions.
SMALL-CAP STOCKS AND CAPITAL GROWTH
--------------------------------------------------------------------------------
Small-cap companies are those whose market capitalization places them at the
smaller end of the spectrum of publicly traded companies.
There are thousands of small-cap companies, which historically have made up
approximately 20% of the total U.S. market capitalization. These companies are
found in every industry, although they tend to be concentrated in high-growth
sectors such as technology.
Over the past 70 years, stocks of these companies have offered high long-term
growth rates. At the same time, they have often been more volatile than
large-cap stocks, sometimes suffering deep slumps and at other times enjoying
high market enthusiasm.
The performance information below shows you how the fund's performance
compares to that of an index, which varies over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
98 99
<S> <C>
0.61 37.88
</TABLE>
BEST QUARTER: 24.78% Q4 1999 WORST QUARTER: -18.97% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
----------------------------------------------------------------------
<S> <C> <C>
Portfolio 37.88 14.77 1
Russell 2000(R) Index 21.26 6.88 2
</TABLE>
1 Inception: 9/16/97.
2 From 9/16/97.
54
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 52
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
For the long-term investor, a small-cap stock investment can be important
because of the exposure it provides to a different segment of the stock
market.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the portfolio will
fluctuate, which means that you could lose money.
THE MAIN RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH SMALL-CAP STOCK
FUNDS. The same factors that affect stock market performance generally affect
all stock funds. Political and economic news can influence marketwide trends;
the outcome may be positive or negative, short term or long term. Other factors
may be ignored by the market as a whole but may affect stock prices in one or
more industries (for example, rising oil prices may lead to a decline in airline
stocks).
HISTORICALLY, SMALL-CAP STOCK FUNDS HAVE BEEN RISKIER THAN FUNDS THAT FOCUS ON
LARGE-AND MID-CAP STOCKS. Stock prices of smaller companies may be based in
substantial part on future expectations rather than current achievements and may
move sharply, especially during market upturns and downturns. In addition,
during any period when small-cap stock funds perform less well than funds that
focus on other types of stock or other types of investments--bonds, for
instance--the portfolio's performance also will lag these investments.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Because the portfolio managers have no control over the management of the
underlying funds, decisions made by the underlying funds' managers could change
the portfolio's investment profile or hurt its performance.
For example, if managers of underlying funds tended to favor cash, the
portfolio's exposure to the stock market would be lowered. Similarly, if
underlying funds make investments that don't perform as expected, the
portfolio's performance could be affected.
Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
<S> <C>
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.47
-----
Total annual operating expenses 1.01
EXPENSE REDUCTION (0.51)
-----
NET OPERATING EXPENSES* 0.50
=====
</TABLE>
* Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes, and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$51 $271 $508 $1,190
</TABLE>
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS 55
<PAGE> 53
S C H W A B TICKER SYMBOL
MARKETMANAGER INTERNATIONAL PORTFOLIO SWOIX
THE PORTFOLIO SEEKS LONG-TERM CAPITAL APPRECIATION.
STRATEGY
TO PURSUE ITS GOAL, THE PORTFOLIO INVESTS AT LEAST 65% OF ITS TOTAL ASSETS IN
OTHER MUTUAL FUNDS, including those available through Schwab's Mutual Fund
OneSource(R) service. The fund also has a policy of investing at least 65% of
total assets in international stock funds. Typically, the actual percentages for
both policies are considerably higher.
The portfolio managers analyze global economic trends to target regions and
countries that offer the greatest potential for growth. Based on their findings,
they develop a country-by-country allocation that focuses typically on developed
markets but also may include emerging markets. The managers then screen the
universe of international stock funds based on a combination of quantitative
measures-past performance, volatility, expenses-and qualitative evaluations of
their investment objectives, country weightings, sector diversification,
management teams and current holdings.
The portfolio managers meet frequently with the management teams of those
international stock funds that satisfy the screening criteria in order to gain a
more complete understanding of their investment styles and strategies. In
choosing the underlying funds, the portfolio managers seek clearly defined
investment strategies, strong performance histories and stable management, among
other criteria. As of 10/31/99, the portfolio included 23 underlying funds.
Because international markets can be volatile, the portfolio managers monitor
and adjust the portfolio as necessary. In so doing, they seek to anticipate
upcoming markets as well as respond to current conditions.
INTERNATIONAL STOCK FUNDS
--------------------------------------------------------------------------------
Approximately two-thirds of the world's market opportunities lie outside the
United States. These include developed countries whose securities markets are
established and whose economies are industrialized, as well as emerging markets,
where industrialization and securities markets are in the process of developing.
With so many opportunities available, it is difficult for any one mutual fund to
maintain expertise in all industries and regions. The multi-fund approach offers
a potential solution by allowing portfolio managers to assemble a combination of
underlying funds whose strengths lie in different areas.
The performance information below shows you how performance has varied
from year to year and how it averages out over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
97 98 99
<S> <C> <C>
6.81 13.29 74.82
</TABLE>
BEST QUARTER: 41.67% Q4 1999 WORST QUARTER: -16.35% Q3 1998
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/99
<TABLE>
<CAPTION>
SINCE
1 YEAR INCEPTION
-----------------------------------------------------------------------
<S> <C> <C>
Portfolio 74.82 27.50 1
MSCI EAFE(R) Index 26.96 14.86 2
</TABLE>
1 Inception: 10/16/96.
2 From 10/16/96.
56
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 54
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
International stock funds offer access to many foreign markets that can be
difficult for individual investors to reach.
MAIN RISKS
STOCK MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the portfolio will
fluctuate, which means that you could lose money.
THE MAIN RISKS OF THIS PORTFOLIO ARE THOSE ASSOCIATED WITH SMALL-CAP STOCK
FUNDS. The same factors that affect stock market performance generally affect
all stock funds. Political and economic news can influence marketwide trends;
the outcome may be positive or negative, short term or long term. Other factors
may be ignored by the market as a whole but may affect stock prices in one or
more industries (for example, rising oil prices may lead to a decline in airline
stocks).
INTERNATIONAL STOCK FUNDS CARRY ADDITIONAL RISKS. Changes in currency exchange
rates can erode market gains or widen market losses for the underlying funds.
International markets-even those that are well established-are often more
volatile than those of the United States, for reasons ranging from a lack of
reliable company information to the risk of political upheaval. These risks are
more significant in emerging markets, where governments may be less stable,
markets less liquid and economies less highly industrialized. In addition,
during any period when international stock funds perform less well than funds
that focus on other types of stocks or other types of investments--bonds, for
instance--the portfolio's performance also will lag these investments.
OTHER MAIN RISK FACTORS
--------------------------------------------------------------------------------
Because the portfolio managers have no control over the management of the
underlying funds, decisions made by the underlying funds' managers could change
the portfolio's investment profile or hurt its performance.
For example, if managers of underlying funds tended to favor cash, the
portfolio's exposure to the stock market would be lowered. Similarly, if
underlying funds make investments that don't perform as expected, such as
certain foreign currency transactions, the portfolio's performance could be
affected.
Additionally, the portfolio may actively buy and sell underlying fund shares,
which will increase its portfolio turnover rate, and increase the likelihood of
capital gain distributions.
PORTFOLIO FEES AND EXPENSES
The following table describes what you could expect to pay as a portfolio
investor. "Shareholder fees" are one-time expenses charged to you directly by
the portfolio. "Annual operating expenses" are paid out of portfolio assets, so
their effect is included in total return. Fees of the underlying funds are
reflected in those funds' performance, and thus indirectly in portfolio
performance.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
--------------------------------------------------------------------------------
<S> <C>
Redemption fee* 1.50
</TABLE>
Charged only on shares you sell within 180 days of buying them, and paid
directly to the fund.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------------------------
<S> <C>
Management fees 0.54
Distribution (12b-1) fees None
Other expenses 0.43
-----
Total annual operating expenses 0.97
EXPENSE REDUCTION (0.47)
-----
NET OPERATING EXPENSES** 0.50
=====
</TABLE>
* This fee does not apply to shares purchased before 5/1/00.
** Guaranteed by Schwab and the investment adviser through 2/28/01 (excluding
interest, taxes and certain non-routine expenses).
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$51 $262 $490 $1,147
</TABLE>
57
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 55
FINANCIAL HIGHLIGHTS
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 11/18/96-
PER-SHARE DATA ($) 10/31/99 10/31/98 10/31/97
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 11.43 11.60 10.00
------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.16 0.32 0.08
Net realized and unrealized gain
on investments 2.91 0.11 1.66
------------------------------------------------------------------------
Total income from investment operations 3.07 0.43 1.74
Less distributions:
Dividends from net investment income (0.16) (0.29) (0.14)
Dividends in excess of net investment income (0.05) -- --
Distributions from capital gains (0.23) (0.31) --
------------------------------------------------------------------------
Total distributions (0.44) (0.60) (0.14)
------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 14.06 11.43 11.60
========================================================================
Total return (%) 27.38 3.87 17.60 1
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratio of actual operating expenses to
average net assets 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.43 0.67 0.77 2
Ratio of net investment income to
average net assets 1.23 2.66 2.07 2
Portfolio turnover rate 284 384 192
Net assets, end of period ($ x 1,000,000) 181 152 124
</TABLE>
1 Not annualized.
2 Annualized.
58
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 56
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 11/18/96-
10/31/99 10/31/98 10/31/97
PER-SHARE DATA ($)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 11.36 11.38 10.00
----------------------------------------------------------------------
Income from investment operations:
Net investment income 0.27 0.36 0.17
Net realized and unrealized gain
on investments 2.11 0.18 1.34
----------------------------------------------------------------------
Total income from investment operations 2.38 0.54 1.51
Less distributions:
Dividends from net investment income (0.28) (0.34) (0.13)
Dividends in excess of net investment income (0.02) -- --
Distributions from capital gains -- (0.22) --
----------------------------------------------------------------------
Total distributions (0.30) (0.56) (0.13)
----------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 13.44 11.36 11.38
======================================================================
Total return (%) 21.28 4.89 15.27 1
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratio of actual operating expenses to
average net assets 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.45 0.69 0.95 2
Ratio of net investment income to
average net assets 2.20 3.21 3.03 2
Portfolio turnover rate 244 353 171
Net assets, end of period ($ x 1,000,000) 122 93 61
</TABLE>
1 Not annualized.
2 Annualized.
59
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 57
FINANCIAL HIGHLIGHTS
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 9/16/97-
10/31/99 10/31/98 10/31/97
PER-SHARE DATA ($)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 8.51 9.93 10.00
----------------------------------------------------------------
Income from investment operations:
Net investment income 0.24 0.21 0.02
Net realized and unrealized gain (loss)
on investments 2.34 (1.36) (0.09)
----------------------------------------------------------------
Total income (loss) from investment operations 2.58 (1.15) (0.07)
Less distributions:
Dividends from net investment income (0.05) (0.21) --
Dividends in excess of net investment income -- (0.03) --
Distributions from capital gains -- (0.03) --
----------------------------------------------------------------
Total distributions (0.05) (0.27) --
----------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 11.04 8.51 9.93
================================================================
Total return (%) 30.38 (11.84) (0.70) 1
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ratio of actual operating expenses to
average net assets 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.51 0.69 0.75 2
Ratio of net investment income to
average net assets 2.23 2.65 1.29 2
Portfolio turnover rate 145 166 10
Net assets, end of period ($ x 1,000,000) 123 129 207
</TABLE>
1 Not annualized.
2 Annualized.
60
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 58
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
This section provides further details about the portfolio's financial history.
"Total return" shows the percentage that an investor in the portfolio would have
earned or lost during a given period, assuming all distributions were
reinvested. The portfolio's independent accountants, PricewaterhouseCoopers LLP,
audited these figures. Their full report is included in the portfolio's annual
report (see back cover).
<TABLE>
<CAPTION>
11/1/98- 11/1/97- 11/1/96- 10/16/96-
10/31/99 10/31/98 10/31/97 10/31/96
PER-SHARE DATA ($)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 10.58 10.86 9.91 10.00
-------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.11 0.34 0.17 --
Net realized and unrealized gain (loss)
on investments 4.28 0.02 0.95 (0.09)
-------------------------------------------------------------------------
Total income (loss) from investment operations 4.39 0.36 1.12 (0.09)
Less distributions:
Dividends from net investment income (0.11) (0.33) (0.17) --
Dividends in excess of net investment income (0.02) (0.01) -- --
Distributions from capital gains -- (0.30) -- --
-------------------------------------------------------------------------
Total distributions (0.13) (0.64) (0.17) --
-------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 14.84 10.58 10.86 9.91
=========================================================================
Total return (%) 41.92 3.55 11.47 (0.90) 1
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA (%)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of actual operating expenses to
average net assets 0.50 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.47 0.70 0.80 2.91 2
Ratio of net investment income to
average net assets 0.94 2.96 1.40 0.52 2
Portfolio turnover rate 249 236 179 --
Net assets, end of period ($ x 1,000,000) 104 74 81 59
</TABLE>
1 Not annualized.
2 Annualized.
61
ASSET ALLOCATION/MULTI-FUND PORTFOLIOS
<PAGE> 59
SCHWAB
BOND INDEX FUNDS
ABOUT THE FUNDS
The funds in this prospectus share the same basic INVESTMENT STRATEGY: They are
designed to track the price and yield performance of a bond index. Each fund
tracks a different index.
This strategy distinguishes an index fund from an "actively managed" fund.
Instead of choosing investments based on judgments about future market or
interest rate movements, a portfolio manager LOOKS TO AN INDEX to determine
which securities the fund should own.
By investing in bonds, the funds seek to provide CURRENT INCOME to shareholders.
Each fund also seeks to lower risk by DIVERSIFYING BROADLY across the various
sectors of the bond market represented in its index.
The funds are designed FOR LONG-TERM INVESTING. Their performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
BOND FUNDS 63
<PAGE> 60
TICKER SYMBOL
SWBDX
SCHWAB
SHORT-TERM BOND MARKET
INDEX FUND
THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS
MUTUAL FUND SHORT (1 - 5 YEAR) U.S. GOVERNMENT/CREDIT INDEX.
INDEX
THE LEHMAN BROTHERS MUTUAL FUND SHORT (1 - 5 YEAR) U.S. GOVERNMENT/CREDIT INDEX
INCLUDES INVESTMENT-GRADE GOVERNMENT AND CORPORATE BONDS that are denominated in
U.S. dollars and have maturities of one to five years. Investment-grade
securities are rated in the four highest credit rating categories (AAA to BBB-).
Bonds are represented in the index in proportion to their market value.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN BONDS THAT ARE INCLUDED IN THE INDEX.
The fund normally invests at least 65% of total assets in these securities, and
typically far more. If a portfolio security falls below investment-grade, the
fund may continue to hold it if the investment adviser believes it would benefit
the fund.
Because it would be impractical to invest in every bond in the index, the fund
uses quantitative techniques to assemble a portfolio whose performance is
expected to track that of the index. The fund seeks to remain close to the index
in its dollar-weighted average maturity by investing primarily in bonds that are
included in the index.
Like many index funds, the fund may enter into swap agreements, in which the
payment or investment performance of one security or asset is exchanged for
another. The fund may also invest in convertible, preferred, variable and
floating rate securities, collateralized mortgage obligations and futures
contracts, and may lend securities. The fund would use these securities and
techniques in seeking to enhance total return and minimize the gap between its
performance and that of the index. However, because of fund expenses, the fund's
performance normally is somewhat below that of the index.
SHORT-TERM BONDS
As a bond approaches maturity, its market value typically approaches its par
value (the amount a bondholder receives when the bond matures). Because of this,
short-term bond prices typically do not react as strongly to interest rate
changes.
In exchange for this lower volatility, short-term bonds typically (though not
always) offer lower yields than longer term bonds.
The index focuses on three bond market sectors, in this proportion:
<TABLE>
<CAPTION>
BOND TYPE
<S> <C>
U.S. Government 67.5%
U.S. corporate 24.8%
Dollar-denominated foreign issues 7.7%
</TABLE>
The index has approximately 1,983 bonds and a dollar-weighted average maturity
of 2.80 years. (all figures as of 8/31/2000.)
THE PERFORMANCE INFORMATION BELOW SHOWS YOU HOW THE FUND'S PERFORMANCE
COMPARES TO ITS INDEX, WHICH VARIES OVER TIME.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
The fund adopted its current goal and strategies on 11/1/1997; performance
before that time may have been different had its current goal and strategy been
in place.
ANNUAL TOTAL RETURNS (%) as of 12/31
[BAR GRAPH]
<TABLE>
<S> <C>
92 6.08
93 7.84
94 (2.82)
95 10.90
96 4.00
97 6.88
98 6.96
99 1.54
</TABLE>
BEST QUARTER: 4.32% Q3 1992 WORST QUARTER: -2.09% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/2000: 5.85%
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
------ ------- ---------
<S> <C> <C> <C>
Fund 1.54 6.01 5.48 1
Lehman Brothers Mutual
Fund Short (1 - 5 year) U.S.
Government/Credit Index 2.09 6.82 6.15 2
</TABLE>
1 Inception: 11/5/1991.
2 From 11/5/1991.
64 BOND FUNDS
<PAGE> 61
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
Investors who are seeking a diversified source of current income and want
potentially lower volatility and lower returns, compared to a long-term
fund, may want to consider this fund.
MAIN RISKS
BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE SHORT-TERM BOND MARKET, AS MEASURED BY THE INDEX.
The fund is designed to follow the index during upturns as well as downturns.
Because of its indexing strategy, the fund will not take steps to reduce market
exposure or to lessen the effects of a declining market.
WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's short average maturity is designed to reduce this risk,
but will not eliminate it. A fall in interest rates could hurt the fund as well,
by lowering its yield. This is because issuers tend to pay off their bonds when
interest rates fall, often forcing the fund to reinvest in lower-yielding
securities.
DIFFERENT TYPES OF BONDS CARRY DIFFERENT TYPES OF RISKS. To the extent that the
fund is exposed to a given sector of the bond market, it takes on the risks of
that sector. Prices of foreign bonds may be more volatile than those of
comparable bonds from U.S. issuers, for reasons ranging from lack of reliable
issuer information to the risk of political upheaval. Although the risk of
default is generally considered unlikely, any default on the part of a portfolio
investment could cause the fund's share price or yield to fall.
OTHER MAIN RISK FACTORS
Although the fund's main risks are those associated with its bond investments,
its other investment strategies also involve risks.
For example, the fund's use of quantitative techniques may increase the gap
between the performance of the fund and that of the index.
Futures contracts, which the fund uses to gain exposure to bonds for its cash
balances or to enhance total return, also could cause the fund to track the
index less closely if they don't perform as expected.
The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. The fund's loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
The fund also could lose money if a swap agreement doesn't perform as expected
or if the counterparty to a swap agreement fails to honor the agreement.
Additionally, the fund may have a relatively high portfolio turnover rate, which
could increase transaction costs and the likelihood of capital gain
distributions.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the fund's total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
--------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------
Management fees* 0.30
Distribution (12b-1) fees None
Other expenses* 0.35
-----
Total annual operating expenses 0.65
EXPENSE REDUCTION (0.30)
-----
NET OPERATING EXPENSES** 0.35
====
</TABLE>
* Restated to reflect current fees and expenses.
** Guaranteed by Schwab and the investment adviser through 11/15/2001, excluding
interest, taxes and certain non-routine expenses.
Designed to help you compare expenses, this example uses the same assumptions as
other mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------
<S> <C> <C> <C> <C>
$36 $178 $332 $782
</TABLE>
BOND FUNDS 65
<PAGE> 62
TICKER SYMBOL
SWLBX
SCHWAB
TOTAL BOND MARKET
INDEX FUND
THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS
U.S. AGGREGATE BOND INDEX.
INDEX
THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX INCLUDES INVESTMENT-GRADE
GOVERNMENT, CORPORATE, MORTGAGE-, COMMERCIAL MORTGAGE- AND ASSET-BACKED BONDS
that are denominated in U.S. dollars and have maturities longer than one year.
Investment-grade securities are rated in the four highest rating categories (AAA
to BBB-). Bonds are represented in the index in proportion to their market
value.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN BONDS THAT ARE INCLUDED IN THE INDEX.
The fund normally invests at least 65% of total assets in these securities. If a
portfolio security falls below investment-grade, the fund may continue to hold
it if the investment adviser believes it would benefit the fund.
Because it would be impractical to invest in every bond in the index, the fund
uses quantitative techniques to assemble a portfolio whose performance is
expected to track that of the index. The fund seeks to remain close to the index
in its dollar-weighted average maturity by investing primarily in bonds that are
included in the index.
Like many index funds, the fund may enter into swap agreements, in which the
payments or investment performance of one security or asset is exchanged for
another. The fund also may invest in mortgage dollar rolls, which involve the
fund selling mortgage-backed securities and simultaneously agreeing to later
repurchase nearly identical securities at a stated price. In addition, the fund
may invest in convertible, preferred, variable and floating rate securities,
collateralized mortgage obligations and futures contracts, and may lend
securities. The fund would use these securities and techniques in seeking to
enhance total return and minimize the gap between its performance and that of
the index. However, because of fund expenses, the fund's performance normally is
somewhat below that of the index.
THE BOND MARKET
The fund's index focuses on five main sectors of the bond market, in this
proportion:
<TABLE>
<CAPTION>
BOND TYPE
<S> <C>
U.S. government 38.8%
Mortgage-backed 34.4%
U.S. corporate 18.0%
Dollar-denominated foreign issues 5.7%
Asset-backed 1.6%
Commercial mortgage-backed 1.5%
</TABLE>
The index has approximately 6,013 bonds and a dollar-weighted average maturity
of 8.77 years. (All figures as of 8/31/2000.)
By investing in longer term bonds, the fund seeks to earn higher yields over
time than the Schwab Short-Term Bond Market Index Fund, although with more share
price volatility than that fund.
The performance information below shows you how the fund's performance
compares to its index, which varies over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
The fund adopted its current goal and strategies on 11/1/1997; performance
before that time may have been different had its current goal and strategy been
in place.
ANNUAL TOTAL RETURNS (%) as of 12/31
[BAR GRAPH]
<TABLE>
<S> <C>
94 (5.74)
95 22.47
96 1.06
97 9.98
98 8.41
99 (1.04)
</TABLE>
BEST QUARTER: 6.79% Q2 1995 WORST QUARTER: -4.83% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/2000: 6.65%
AVERAGE ANNUAL TOTAL RETURNS (%) as of 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
<S> <C> <C> <C>
Fund (1.04) 7.87 5.89 1
Lehman Brothers U.S.
Aggregate Bond Index (0.82) 7.73 5.93 2
</TABLE>
1 Inception: 3/5/1993.
2 From 3/5/1993.
66 BOND FUNDS
<PAGE> 63
SCHWAB TOTAL BOND MARKET INDEX FUND
This fund is designed for investors seeking to fill the fixed income
component to their asset allocation plan, and who can accept higher risk in
exchange for potentially higher long-term returns compared to a short-term
fund.
MAIN RISKS
BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
YOUR INVESTMENT FOLLOWS THE BOND MARKET, AS MEASURED BY THE INDEX. The fund is
designed to follow the index during upturns as well as downturns. Because of its
indexing strategy, the fund will not take steps to reduce market exposure or to
lessen the effects of a declining market.
WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The longer the fund's dollar-weighted average maturity, the more
sensitive to interest rate movements its share price is likely to be. When
interest rates fall, issuers tend to pay off their bonds, which may force the
fund to reinvest in lower-yielding securities.
DIFFERENT TYPES OF BONDS CARRY DIFFERENT TYPES OF RISKS. To the extent that the
fund is exposed to a given sector of the bond market, it takes on the risks of
that sector. With certain mortgage- and asset-backed bonds, a primary risk is
the possibility that the bonds may be paid off earlier or later than expected.
Either situation could hurt the fund's yield or share price. Prices of foreign
bonds may be more volatile than those of comparable bonds from U.S. issuers, for
reasons ranging from lack of reliable issuer information to the risk of
political upheaval. Although the risk of default is generally considered
unlikely, any default on the part of a portfolio investment could cause the
fund's share price or yield to fall.
OTHER MAIN RISK FACTORS
Although the fund's main risks are those associated with its bond investments,
its other investment strategies also involve risks.
For example, the fund's use of quantitative techniques may increase the gap
between the performance of the fund and that of the index.
Futures contracts, which the fund may use to gain exposure to bonds for its cash
balances or to enhance total return, also could cause the fund to track the
index less closely if they don't perform as expected.
The fund also may lend a portion of its securities to certain financial
institutions in order to earn income. The fund's loans are fully collateralized.
However, if the institution defaults, the fund's performance could be reduced.
The fund also could lose money if a swap agreement doesn't perform as expected
or if the counterparty to a swap agreement fails to honor the agreement. The
fund's mortgage dollar rolls could lose money if the price of the
mortgage-backed securities falls below the agreed repurchase price, or if the
counterparty is unable to honor the agreement.
Additionally, the fund may have a relatively high portfolio turnover rate, which
could increase transaction costs and the likelihood of capital gain
distributions.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the fund's total return.
FEE TABLE (%)
<TABLE>
SHAREHOLDER FEES
<S> <C>
None
ANNUAL OPERATING EXPENSES (% of average net assets)
Management fees* 0.29
Distribution (12b-1) fees None
Other expenses* 0.31
====
Total annual operating expenses 0.60
EXPENSE REDUCTION (0.25)
-----
NET OPERATING EXPENSES* 0.35
====
</TABLE>
Designed to help you compare expenses, this example uses the same assumptions as
other mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
$36 $167 $310 $726
</TABLE>
* Restated to reflect current fees and expenses.
** Guaranteed by schwab and the investment adviser through 11/15/2001, excluding
interest, taxes and certain non-routine expenses.
BOND FUNDS 67
<PAGE> 64
FINANCIAL HIGHLIGHTS
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
9/1/99 - 9/1/98 - 9/1/97 - 9/1/96 - 9/1/95 -
8/31/00 8/31/99 8/31/98 8/31/97 8/31/96
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 9.66 9.90 9.74 9.67 9.84
----- ----- ---- ---- -----
Income from investment operations:
Net investment income 0.57 0.50 0.56 0.59 0.59
Net realized and unrealized gains or losses (0.01) (0.24) 0.17 0.07 (0.17)
----- ----- ---- ---- -----
Total income from investment operations 0.56 0.26 0.73 0.66 0.42
Less distributions:
Dividends from net investment income (0.57) (0.50) (0.57) (0.59) (0.59)
----- ----- ---- ---- -----
Net asset value at end of period 9.65 9.66 9.90 9.74 9.67
===== ===== ===== ===== =====
Total return (%) 5.97 2.66 7.64 6.96 4.39
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of net operating expenses to
average net assets 0.35 1 0.35 0.46 0.49 0.49
Expense reductions reflected in above ratio 0.32 0.42 0.39 0.33 0.31
Ratio of net investment income to
average net assets 5.91 5.11 5.58 6.02 6.03
Portfolio turnover rate 129 195 128 71 80
Net assets, end of period ($ x 1,000,000) 219 218 157 127 134
</TABLE>
1 Would have been 0.36% if certain non-routine expenses (proxy fees) had been
included.
68 BOND FUNDS
<PAGE> 65
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB TOTAL BOND MARKET INDEX FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
9/1/99 - 9/1/98 - 9/1/97 - 9/1/96 - 9/1/95 -
8/31/00 8/31/99 8/31/98 8/31/97 8/31/96
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 9.58 10.18 9.75 9.38 9.80
----- ----- ----- ----- -----
Income from investment operations:
Net investment income 0.61 0.55 0.60 0.65 0.65
Net realized and unrealized gains or losses 0.07 (0.53) 0.43 0.37 (0.42)
----- ----- ----- ----- -----
Total income from investment operations 0.68 0.02 1.03 1.02 0.23
Less distributions:
Dividends from net investment income (0.61) (0.55) (0.60) (0.65) (0.65)
Distributions from net realized gains -- (0.07) -- -- --
----- ----- ----- ----- -----
Total distributions (0.61) (0.62) (0.60) (0.65) (0.65)
----- ----- ----- ----- -----
Net asset value at end of period 9.65 9.58 10.18 9.75 9.38
===== ===== ===== ===== =====
Total return (%) 7.36 0.14 10.83 11.18 2.29
RATIOS/SUPPLEMENTAL DATA (%)
Ratio of net operating expenses to
average net assets 0.35 1 0.35 0.31 0.20 --
Expense reductions reflected in above ratio 0.27 0.39 0.51 0.98 1.17
Ratio of net investment income to
average net assets 6.42 5.55 5.86 6.74 6.67
Portfolio turnover rate 135 174 285 51 66
Net assets, end of period ($ x 1,000,000) 647 480 294 25 23
</TABLE>
1 Would have been 0.36% if certain non-routine expenses (proxy fees) had been
included.
BOND FUNDS 69
<PAGE> 66
S C H W A B
YIELDPLUS FUND(TM)
BOND FUNDS 71
<PAGE> 67
SCHWAB TICKER SYMBOLS
INVESTOR SHARES SWYPX
YIELDPLUS FUND(TM) SELECT SHARES(R) SWYSX
THE FUND SEEKS HIGH CURRENT INCOME WITH MINIMAL CHANGES IN SHARE PRICE.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE (HIGH AND CERTAIN
MEDIUM QUALITY, AAA TO BBB-) BONDS. These may include fixed-, variable- or
floating-rate corporate, mortgage-backed, asset-backed debt securities, and
collateralized mortgage obligations from U.S. and foreign issuers.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and maturity policies. To help maintain a
very high degree of share price stability and preserve investors' capital, the
fund seeks to keep the average duration of its overall portfolio at one year or
less. Duration is a tool to measure interest rate risk. For any bonds with
interest payments occurring before principal is repaid, duration is ordinarily
less than the maturity. Historically, the fund's average maturity measurement
and average duration have closely followed each other. However, in seeking to
enhance its potential yields, the fund may invest in bonds, convertible and
preferred securities with effective or final maturities of any length and may
invest up to 25% of assets in lower quality bonds (sometimes called junk bonds)
that are rated as low as BB or Ba by at least one nationally recognized rating
service or are the unrated equivalent.
The investment adviser's credit research department analyzes and monitors the
securities that the fund owns or is considering buying. The manager may adjust
the fund's holdings or its average duration based on actual or anticipated
changes in interest rates or credit quality. In the event a portfolio security
was downgraded below B, the manager would promptly sell the security. The
manager also may use risk management techniques, including short sales, futures
contracts, swap agreements and other derivatives, in seeking to reduce share
price volatility, increase income and otherwise manage the fund's exposure to
investment risks.
The fund's investment strategy is designed to offer the potential for somewhat
higher yields than a money market fund, although unlike a money market fund, its
share price will fluctuate. In exchange for seeking minimal fluctuation in share
price, the fund may offer lower long-term performance than stock investments or
certain other bond investments.
RISK MANAGEMENT
The fund may use a variety of techniques to manage risk and increase income.
Certain types of derivatives (investments whose value is based on one or more
securities, rates or indices) can be cost-effective risk management tools.
For example, the fund may buy and sell futures contracts to manage interest rate
changes. By doing this, the fund has the potential to reduce the share price
volatility that tends to be a characteristic of bond funds.
These investments, such as swap agreements, also may produce additional income
for the fund.
PERFORMANCE
Because this is a new fund, no performance figures are given. Information will
appear in a future version of the fund's prospectus.
72 BOND FUNDS
<PAGE> 68
SCHWAB YIELDPLUS FUND(TM)
MAIN RISKS
INTEREST RATES RISE AND FALL OVER TIME. As with any investment whose yield
reflects current interest rates, the fund's yield will change over time. During
periods when interest rates are low, the fund's yield (and total return) also
may be low. Changes in interest rates also may affect the fund's share price: a
sharp rise in interest rates could cause the fund's share price to fall.
Assuming a 1 year duration for the fund, a 2% increase/decrease in interest
rates would be approximately a 2% decrease/increase in the fund's share price.
This risk is greater when the fund holds bonds with longer maturities.
THE FUND IS NOT A MONEY MARKET FUND OR A BANK DEPOSIT. Its shares are not
insured or guaranteed. Because the fund's share price may move up and down, the
value of your investment in the fund will fluctuate, which means you could lose
money.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default is generally considered unlikely, any default on the part of a
portfolio investment could cause the fund's share price or yield to fall. This
risk is greater with lower-quality bonds.
SOME INVESTMENTS CARRY ADDITIONAL RISKS. To the extent that the manager decides
to invest in foreign or lower quality bonds, the fund takes on a greater
exposure to certain risks. Prices of foreign bonds may be more volatile than
those of comparable bonds from U.S. issuers, for reasons ranging from lack of
reliable issuer information to the risk of political upheaval. Prices of
lower-quality bonds tend to be more volatile than those of investment-grade
bonds, and may fall based on bad news about an issuer, an industry or the
overall economy. With certain mortgage- and asset-backed bonds, a primary risk
is the possibility that the bonds may be paid off earlier or later than
expected. Either situation could cause the fund to hold securities paying lower
than market rates of interest, which could hurt the fund's yield or share price.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the
extent that the manager anticipates interest rate trends imprecisely, the fund
could miss yield opportunities or its share price could fall.
OTHER MAIN RISK FACTORS
While the fund intends to use techniques to manage risk, they could hurt the
fund's performance if they don't perform as expected.
For example, if the fund uses a technique involving a derivative, such as a
futures contract, for the purpose of offsetting price changes in the fund's
portfolio, but the technique does not precisely offset the price changes, the
fund's share price could fall. The fund's performance also could be hurt if the
counterparty to a derivative does not honor its contractual obligations to the
fund.
The fund could lose money if the price of securities sold short increase.
The cost of derivatives may have the effect of increasing fund expenses. While
the decision to use or not use a given risk management technique depends on
market conditions, these costs could at times outweigh the benefits the fund
realizes from these techniques.
Investors with investment horizons of one year or more who are seeking an
alternative to a money fund or other fixed-income fund may want to consider
this fund.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the total return for each share class.
FEE TABLE (%)
<TABLE>
<CAPTION>
INVESTOR SELECT
SHARES SHARES(R)
------ ---------
<S> <C> <C>
SHAREHOLDER FEES (% OF TRANSACTION AMOUNT)
Redemption fee. 0.25 0.25
Charged only on shares you sell within
90 days of buying them, and paid directly
to the fund.
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
Management fees 0.35 0.35
distribution (12b-1) fees None None
other expenses* 0.44 0.29
==== ====
Total annual operating expenses 0.79 0.64
EXPENSE REDUCTION (0.24) (0.24)
----- -----
NET OPERATING EXPENSES** 0.55 0.40
==== ====
</TABLE>
* Restated to reflect current fees and expenses.
**Guaranteed by Schwab and the investment adviser through 11/15/2001, excluding
interest, taxes and certain non-routine expenses.
Designed to help you compare expenses, this example uses the same assumptions as
all mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Investor Shares $56 $228 $415 $956
Select Shares $41 $181 $333 $776
</TABLE>
BOND FUNDS 73
<PAGE> 69
FINANCIAL HIGHLIGHTS
SCHWAB YIELDPLUS FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
10/1/99 1 -
INVESTOR SHARES 8/31/00
--------------------------------------------------------------------------------
<S> <C>
PER-SHARE DATA ($)
================================================================================
Net asset value at beginning of period 10.00
---------------------
Income from investment operations:
Net investment income 0.61
Net realized and unrealized losses (0.08)
---------------------
Total income from investment operations 0.53
Less distributions:
Dividends from net investment income (0.61)
---------------------
Net asset value at end of period 9.92
=====================
Total return (%) 5.44 2
RATIOS/SUPPLEMENTAL DATA (%)
================================================================================
Ratio of net operating expenses to
average net assets 0.55 3,4
Expense reductions reflected in above ratio 0.24 3
Ratio of net investment income to
average net assets 6.72 3
Portfolio turnover rate 81
Net assets, end of period ($ x 1,000,000) 53
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
10/1/99 1 -
SELECT SHARES(R) 8/31/00
--------------------------------------------------------------------------------
<S> <C>
PER-SHARE DATA ($)
================================================================================
Net asset value at beginning of period 10.00
---------------------
Income from investment operations:
Net investment income 0.62
Net realized and unrealized losses (0.08)
---------------------
Total income from investment operations 0.54
Less distributions:
Dividends from net investment income (0.62)
---------------------
Net asset value at end of period 9.92
=====================
Total return (%) 5.58 2
RATIOS/SUPPLEMENTAL DATA (%)
================================================================================
Ratio of net operating expenses to
average net assets 0.40 3,5
Expense reductions reflected in above ratio 0.24 3
Ratio of net investment income to
average net assets 6.88 3
Portfolio turnover rate 81
Net assets, end of period ($ x 1,000,000) 219
</TABLE>
1 Commencement of operations.
2 Not annualized.
3 Annualized.
4 Would have been 0.56% if certain non-routine expenses (proxy fees) had been
included.
5 Would have been 0.41% if certain non-routine expenses (proxy fees) had been
included.
74 YIELDPLUS FUND
<PAGE> 70
S C H W A B
TAX-FREE BOND FUNDS
ABOUT THE FUNDS
The Schwab Tax-Free Bond Funds seek to provide HIGH CURRENT INCOME free from
federal income tax and, in the case of the California funds, California personal
income tax. Each fund has a similar investment goal but uses a DIFFERENT
STRATEGY.
Because these funds invest in municipal bonds, their dividends generally are
free from federal income tax. Dividends from the California funds generally are
free from California personal income tax as well. Each fund also seeks to lower
risks by investing across different sectors of the INVESTMENT-GRADE municipal
bond market.
The funds are designed for LONG-TERM INVESTING. Their performance will fluctuate
over time and, as with all investments, future performance may differ from past
performance.
BOND FUNDS 75
<PAGE> 71
S C H W A B TICKER SYMBOL
SWITX
SHORT/INTERMEDIATE
TAX-FREE BOND FUND
THE FUND SEEKS HIGH CURRENT INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAX,
CONSISTENT WITH CAPITAL PRESERVATION.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA TO BBB-). The fund
normally invests at least 80% of total assets in these securities, and typically
far more. Interest income from these securities is free from federal income tax
and generally federal alternative minimum tax. To help preserve investors'
capital, the fund seeks to keep the average maturity of its overall portfolio
between two and five years.
The fund may invest in fixed-, variable- or floating-rate securities from state
issuers around the country and from municipal agencies, U.S. territories and
possessions. These may include general obligation issues, which typically are
backed by the issuer's ability to levy taxes, and revenue issues, which
typically are backed by a stream of revenue from a given source, such as an
electric utility or a public water system. The fund may invest more than 25% of
total assets in municipal securities financing similar projects, and may also
invest in municipal notes. Many of the fund's securities carry credit
enhancements (such as bond insurance) or liquidity enhancements (such as a
letter of credit), which are designed to provide incremental levels of
creditworthiness or liquidity.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and average maturity standards. The
investment adviser's credit research department analyzes and monitors the
securities that the fund owns or is considering buying. If a portfolio security
falls below investment-grade, the fund may continue to hold it if the investment
adviser believes it would benefit the fund. The manager may adjust the fund's
holdings or its average maturity based on actual or anticipated changes in
interest rates or credit quality.
During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.
SHORTER MATURITIES
As a bond approaches maturity, its market value typically moves closer to its
par value (the amount of the bond's principal value, which a bondholder receives
when the bond matures).
Investing in short- and intermediate-term bonds is a common strategy for
reducing price volatility and other risks. In exchange for these lower risks,
short- and intermediate-term bonds typically (though not always) offer lower
yields than longer term bonds.
The performance information below shows you how the fund's performance
compares to its index, which varies over time.
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98 99
------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(1.12) 9.28 3.54 5.17 4.78 0.51
</TABLE>
BEST QUARTER: 3.00% Q1 1995 WORST QUARTER: -2.33% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/2000: 4.22%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
----------------------------------------------------------------
<S> <C> <C> <C>
Fund 0.51 4.62 3.95 1
Lehman Brothers
Three-Year
Municipal Bond Index 1.96 5.17 4.47 2
</TABLE>
1 Inception: 4/21/1993.
2 From: 4/21/1993.
76 BOND FUNDS
<PAGE> 72
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
MAIN RISKS
BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's short-to-intermediate maturity is designed to reduce
this risk, but will not eliminate it. A fall in interest rates could hurt the
fund as well, by lowering its yield. This is because issuers tend to pay off
their bonds when interest rates fall, often forcing the fund to reinvest in
lower-yielding securities.
STATE AND REGIONAL FACTORS COULD AFFECT THE FUND'S PERFORMANCE. To the extent
that the fund invests in securities from a given state or geographic region, its
share price and performance could be affected by local, state and regional
factors, including erosion of the tax base and changes in the economic climate.
National governmental actions, such as the elimination of tax-free status, also
could affect performance. Because the fund is non-diversified, it may divide its
assets among fewer issuers than a diversified fund. This means that the fund
could increase its exposure to the risks of a given issuer.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely with investment-grade municipal
securities, any default on the part of a portfolio investment could cause the
fund's share price or yield to fall. The fund's emphasis on quality and
preservation of capital also could cause it to underperform certain other types
of bond investments, particularly those that take greater maturity and credit
risks. At the same time, some of the fund's investments may have greater risks
than securities in taxable bond funds.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the
extent that the manager anticipates interest rate trends imprecisely, the fund
could miss yield opportunities or its share price could fall.
IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO
BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive
investments in taxable securities could generate taxable income. Also, some
types of municipal securities produce income that is subject to the federal
alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange
for its goal of capital preservation, the fund may offer lower long-term
performance than stock investments or certain other types of bond investments.
Individuals in higher tax brackets who are seeking tax-free income along
with the potential for lower volatility may want to consider this fund.
--------------------------------------------------------------------------------
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the fund's total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
-----------------------------------------------------------------
None
-----------------------------------------------------------------
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
-----------------------------------------------------------------
Management fees* 0.30
Distribution (12b-1) fees None
Other expenses* 0.42
----
Total annual operating expenses 0.72
EXPENSE REDUCTION (0.23)
-----
NET OPERATING EXPENSES** 0.49
=====
</TABLE>
Designed to help you compare expenses, this example uses the same assumptions as
other mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------
<S> <C> <C> <C> <C>
$50 $207 $378 $873
</TABLE>
* Restated to reflect current fees and expenses.
** Guaranteed by Schwab and the investment adviser through 11/15/2001 excluding
interest, taxes and certain non-routine expenses.
BOND FUNDS 77
<PAGE> 73
S C H W A B TICKER SYMBOL
SWNTX
LONG-TERM TAX-FREE BOND FUND
THE FUND SEEKS HIGH CURRENT INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAX,
CONSISTENT WITH CAPITAL PRESERVATION.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA TO BBB-). The fund
normally invests at least 80% of total assets in these securities, and typically
far more. Interest income from these securities is free from federal income tax
and generally federal alternative minimum tax. The fund seeks to maintain an
average maturity in its overall portfolio of at least ten years.
The fund may invest in fixed-, variable- or floating-rate securities from state
issuers around the country and from municipal agencies, U.S. territories and
possessions. These may include general obligation issues, which typically are
backed by the issuer's ability to levy taxes, and revenue issues, which
typically are backed by a stream of revenue from a given source, such as an
electric utility or a public water system. The fund may invest more than 25% of
total assets in municipal securities financing similar projects, and may also
invest in municipal notes. Many of the fund's securities carry credit
enhancements (such as bond insurance) or liquidity enhancements (such as a
letter of credit), which are designed to provide incremental levels of
creditworthiness or liquidity.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and average maturity standards. The
investment adviser's credit research department analyzes and monitors the
securities that the fund owns or is considering buying. If a portfolio security
falls below investment-grade, the fund may continue to hold it if the investment
adviser believes it would benefit the fund. The manager may adjust the fund's
holdings or its average maturity based on actual or anticipated changes in
interest rates or credit quality.
During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.
MATURITY AND YIELD
--------------------------------------------------------------------------------
Bond yields typically are higher the longer the bond's maturity. By investing in
longer term bonds, the fund seeks to earn higher yields over time than the
Schwab Short/Intermediate Tax-Free Bond Fund.
Maintaining a longer average maturity does carry certain risks, and investors
should expect this fund's share price to fluctuate more than that of the Schwab
Short/Intermediate Tax-Free Bond Fund.
The performance information below shows you how the fund's performance
compares to its index, which varies over time.
--------------------------------------------------------------------------------
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
93 94 95 96 97 98 99
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
13.61 (7.04) 18.14 4.18 9.83 6.14 (7.31)
</TABLE>
BEST QUARTER: 8.03% Q1 1995 WORST QUARTER: -5.88% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/2000: 8.48%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
--------------------------------------------------------------
<S> <C> <C> <C>
Fund (7.31) 5.88 4.90 1
Lehman Brothers
General Municipal
Bond Index (2.06) 6.91 5.74 2
</TABLE>
1 Inception: 9/11/1992.
2 From: 9/11/1992.
--------------------------------------------------------------------------------
78 BOND FUNDS
<PAGE> 74
SCHWAB LONG-TERM TAX-FREE BOND FUND
MAIN RISKS
BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's comparatively long maturity will tend to make it more
sensitive to this risk than funds with shorter average maturities.
STATE AND REGIONAL FACTORS COULD AFFECT THE FUND'S PERFORMANCE. To the extent
that the fund invests in securities from a given state or geographic region, its
share price and performance could be affected by local, state and regional
factors, including erosion of the tax base and changes in the economic climate.
National governmental actions, such as the elimination of tax-free status, also
could affect performance. Because the fund is non-diversified, it may divide its
assets among fewer issuers than a diversified fund. This means that the fund
could increase its exposure to the risks of a given issuer.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely with investment-grade municipal
securities, any default on the part of a portfolio investment could cause the
fund's share price or yield to fall. The fund's emphasis on quality and
preservation of capital also could cause it to underperform certain other types
of bond investments, particularly those that take greater maturity and credit
risks. At the same time, some of the fund's investments may have greater risks
than securities in taxable bond funds.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the
extent that the manager anticipates interest rate trends imprecisely, the fund
could miss yield opportunities or its share price could fall.
IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO
BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive
investments in taxable securities could generate taxable income. Also, some
types of municipal securities produce income that is subject to the federal
alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange
for its goal of capital preservation, the fund may offer lower long-term
performance than stock investments or certain other types of bond
investments.
This fund is designed for individuals in higher tax brackets who are
interested in high current tax-free income and can accept a higher degree
of risk to their investment.
--------------------------------------------------------------------------------
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the fund's total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
---------------------------------------------------------------
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
---------------------------------------------------------------
Management fees* 0.30
Distribution (12b-1) fees None
Other expenses* 0.43
====
Total annual operating expenses 0.73
EXPENSE REDUCTION (0.24)
-----
NET OPERATING EXPENSES** 0.49
-----
</TABLE>
Designed to help you compare expenses, this example uses the same assumptions as
other mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------
<S> <C> <C> <C> <C>
$50 $209 $382 $884
</TABLE>
* Restated to reflect current fees and expenses.
** Guaranteed by Schwab and the investment adviser through 11/15/2001, excluding
interest, taxes and certain non-routine expenses.
--------------------------------------------------------------------------------
BOND FUNDS 79
<PAGE> 75
S C H W A B TICKER SYMBOL
SWCSX
CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL
INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA TO BBB-) -- FROM
CALIFORNIA ISSUERS. The fund normally invests at least 80% of total assets in
these securities, and typically far more. Interest income from these securities
is free from federal and California personal income tax and generally federal
alternative minimum tax. To help preserve investors' capital, the fund seeks to
keep the average maturity of its overall portfolio between two and five years.
The fund may invest in securities from municipal issuers in California and in
U.S. territories and possessions. These may include general obligation issues,
which typically are backed by the issuer's ability to levy taxes, and revenue
issues, which typically are backed by a stream of revenue from a given source,
such as an electric utility or a public water system. The fund may invest more
than 25% of total assets in municipal securities financing similar projects, and
may also invest in municipal notes. Many of the fund's securities carry credit
enhancements (such as bond insurance) or liquidity enhancements (such as a
letter of credit), which are designed to provide incremental levels of
creditworthiness or liquidity.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and average maturity standards. The
investment adviser's credit research department analyzes and monitors the
securities that the fund owns or is considering buying. If a portfolio security
falls below investment-grade, the fund may continue to hold it if the investment
adviser believes it would benefit the fund. The manager may adjust the fund's
holdings or its average maturity based on actual or anticipated changes in
interest rates or credit quality.
During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.
SHORTER MATURITIES
--------------------------------------------------------------------------------
As a bond approaches maturity, its market value typically moves closer to its
par value (the amount of the bond's principal, which a bondholder receives when
the bond matures).
Investing in short- and intermediate-term bonds is a common strategy for
reducing price volatility and other risks. In exchange for these lower risks,
short- and intermediate-term bonds typically (though not always) offer lower
yields than longer term bonds.
The performance information below shows you how the fund's performance
compares to its index, which varies over time.
--------------------------------------------------------------------------------
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
94 95 96 97 98 99
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(2.08) 10.46 3.90 5.19 4.83 0.66
</TABLE>
BEST QUARTER: 3.62% Q1 1995 WORST QUARTER: -2.45% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/2000: 5.01%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
---------------------------------------------------------------
<S> <C> <C> <C>
Fund 0.66 4.96 4.03 1
Lehman Brothers
Three-Year
Municipal Bond Index 1.96 5.17 4.47 2
</TABLE>
1 Inception: 4/21/1993.
2 From: 4/21/1993.
--------------------------------------------------------------------------------
80 BOND FUNDS
<PAGE> 76
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
MAIN RISKS
BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's short-to-intermediate maturity is designed to reduce
this risk, but will not eliminate it. A fall in interest rates could hurt the
fund as well, by lowering its yield. This is because issuers tend to pay off
their bonds when interest rates fall, often forcing the fund to reinvest in
lower-yielding securities.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions, such as the elimination
of tax-free status, also could affect performance. Because the fund is
non-diversified, it may divide its assets among fewer issuers than a diversified
fund. This means that the fund could increase its exposure to the risks of a
given issuer.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely with investment-grade municipal
securities, any default on the part of a portfolio investment could cause the
fund's share price or yield to fall. The fund's emphasis on quality and
preservation of capital also could cause it to underperform certain other types
of bond investments, particularly those that take greater maturity and credit
risks. At the same time, some of the fund's investments may have greater risks
than securities in taxable bond funds.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE. To the
extent that the manager anticipates interest rate trends imprecisely, the fund
could miss yield opportunities or its share price could fall.
IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO
BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive
investments in taxable securities could generate taxable income. Also, some
types of municipal securities produce income that is subject to the federal
alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange
for its goal of capital preservation, the fund may offer lower long-term
performance than stock investments or certain other types of bond
investments.
California taxpayers who are seeking double tax-free income along with the
potential for lower volatility may want to consider this fund.
--------------------------------------------------------------------------------
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the fund's total return.
FEE TABLE (%)
<TABLE>
<S> <C>
SHAREHOLDER FEES
--------------------------------------------------------------
None
--------------------------------------------------------------
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
Management fees* 0.30
Distribution (12b-1) fees None
Other expenses* 0.38
----
Total annual operating expenses 0.68
EXPENSE REDUCTION (0.19)
-----
NET OPERATING EXPENSES** 0.49
====
</TABLE>
Designed to help you compare expenses, this example uses the same assumptions as
other mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------
<S> <C> <C> <C>
$50 $198 $360 $829
</TABLE>
* Restated to reflect current fees and expenses.
** Guaranteed by Schwab and the investment adviser through 11/15/2001, excluding
interest, taxes and certain non-routine expenses.
--------------------------------------------------------------------------------
BOND FUNDS 81
<PAGE> 77
S C H W A B TICKER SYMBOL
SWCAX
CALIFORNIA LONG-TERM TAX-FREE BOND FUND
THE FUND SEEKS HIGH CURRENT INCOME EXEMPT FROM FEDERAL AND CALIFORNIA PERSONAL
INCOME TAX THAT IS CONSISTENT WITH CAPITAL PRESERVATION.
STRATEGY
TO PURSUE ITS GOAL, THE FUND INVESTS IN INVESTMENT-GRADE MUNICIPAL SECURITIES --
THOSE IN THE FOUR HIGHEST CREDIT RATING CATEGORIES (AAA TO BBB-) -- FROM
CALIFORNIA ISSUERS. The fund normally invests at least 80% of total assets in
these securities, and typically far more. Interest income from these securities
is free from federal and California personal income tax and generally federal
alternative minimum tax. The fund seeks to maintain an average maturity in its
overall portfolio of at least ten years.
The fund may invest in securities from municipal issuers in California and in
U.S. territories and possessions. These may include general obligation issues,
which typically are backed by the issuer's ability to levy taxes, and revenue
issues, which typically are backed by a stream of revenue from a given source,
such as an electric utility or a public water system. The fund may invest more
than 25% of total assets in municipal securities financing similar projects, and
may also invest in municipal notes. Many of the fund's securities carry credit
enhancements (such as bond insurance) or liquidity enhancements (such as a
letter of credit), which are designed to provide incremental levels of
creditworthiness or liquidity.
In choosing securities, the fund's manager seeks to maximize current income
within the limits of the fund's credit and average maturity standards. The
investment adviser's credit research department analyzes and monitors the
securities that the fund owns or is considering buying. If a portfolio security
falls below investment-grade, the fund may continue to hold it if the investment
adviser believes it would benefit the fund. The manager may adjust the fund's
holdings or its average maturity based on actual or anticipated changes in
interest rates or credit quality.
During unusual market conditions, the fund may invest in taxable securities as a
temporary defensive measure. In this case, the fund would not be pursuing its
goal.
MATURITY AND YIELD
--------------------------------------------------------------------------------
Bond yields typically are higher the longer the bond's maturity. By investing in
longer term bonds, the fund seeks to earn higher yields over time than the
Schwab California Short/Intermediate Tax-Free Bond Fund.
Maintaining a longer average maturity does carry certain risks, however:
investors should expect this fund's share price to be more volatile than that of
the Schwab California Short/Intermediate Tax-Free Bond Fund.
The performance information below shows you how the fund's performance
compares to its index, which varies over time.
--------------------------------------------------------------------------------
PERFORMANCE
Below are a chart and a table showing the fund's performance, as well as data on
an unmanaged market index. These figures assume that all distributions were
reinvested. Keep in mind that future performance may differ from past
performance, and that the index does not include any costs of investment.
ANNUAL TOTAL RETURNS (%) AS OF 12/31
[BAR GRAPH]
<TABLE>
<CAPTION>
93 94 95 96 97 98 99
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12.88 (8.75) 19.63 4.33 10.04 6.43 (6.14)
</TABLE>
BEST QUARTER: 8.47% Q1 1995 WORST QUARTER: -6.74% Q1 1994
YEAR-TO-DATE PERFORMANCE AS OF 9/30/2000: 10.26%
AVERAGE ANNUAL TOTAL RETURNS (%) AS OF 12/31/1999
<TABLE>
<CAPTION>
SINCE
1 YEAR 5 YEARS INCEPTION
---------------------------------------------------------------
<S> <C> <C> <C>
Fund (6.14) 6.53 5.91 1
Lehman Brothers
General Municipal
Bond Index (2.06) 6.91 6.29 2
</TABLE>
1 Inception: 2/24/1992.
2 From: 2/24/1992.
--------------------------------------------------------------------------------
82 BOND FUNDS
<PAGE> 78
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
MAIN RISKS
BOND MARKETS RISE AND FALL DAILY. As with any investment whose performance is
tied to these markets, the value of your investment in the fund will fluctuate,
which means that you could lose money.
WHEN INTEREST RATES RISE, BOND PRICES USUALLY FALL, and with them the fund's
share price. The fund's comparatively long average maturity will tend to make it
more sensitive to this risk than funds with shorter average maturities.
THIS FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE STATE OF CALIFORNIA AND
ITS MUNICIPALITIES. The fund's share price and performance could be affected by
local, state and regional factors, including erosion of the tax base and changes
in the economic climate. National governmental actions, such as the elimination
of tax-free status, also could affect performance. Because the fund is
non-diversified, it may divide its assets among fewer issuers than a diversified
fund. This means that the fund could increase its exposure to the risks of a
given issuer.
THE FUND COULD LOSE MONEY OR UNDERPERFORM AS A RESULT OF DEFAULT. Although the
risk of default generally is considered unlikely with investment-grade municipal
securities, any default on the part of a portfolio investment could cause the
fund's share price or yield to fall. The fund's emphasis on quality and
preservation of capital also could cause it to underperform certain other types
of bond investments, particularly those that take greater maturity and credit
risks. At the same time, some of the fund's investments may have greater risks
than securities in taxable bond funds.
THE MANAGER'S MATURITY DECISIONS ALSO WILL AFFECT THE FUND'S PERFORMANCE.
To the extent that the manager anticipates interest rate trends imprecisely, the
fund could miss yield opportunities or its share price could fall.
IF CERTAIN TYPES OF INVESTMENTS THE FUND BUYS AS TAX EXEMPT ARE LATER RULED TO
BE TAXABLE, A PORTION OF THE FUND'S INCOME COULD BE TAXABLE. Any defensive
investments in taxable securities could generate taxable income. Also, some
types of municipal securities produce income that is subject to the federal
alternative minimum tax (AMT).
THE FUND IS NOT DESIGNED TO OFFER SUBSTANTIAL CAPITAL APPRECIATION. In exchange
for its goal of capital preservation, the fund may offer lower long-term
performance than stock investments or certain other types of bond
investments.
This fund is designed for California taxpayers who want double tax-free
income and can accept higher risk in exchange for potentially higher
long-term returns.
FUND FEES AND EXPENSES
The following table describes what you could expect to pay as a fund investor.
"Shareholder fees" are one-time expenses charged to you directly by the fund.
"Annual operating expenses" are paid out of fund assets, so their effect is
included in the fund's total return.
FEE TABLE (%)
<TABLE>
<CAPTION>
SHAREHOLDER FEES
--------------------------------------------------------------
<S> <C>
None
ANNUAL OPERATING EXPENSES (% OF AVERAGE NET ASSETS)
--------------------------------------------------------------
Management fees* 0.30
Distribution (12b-1) fees None
Other expenses* 0.36
----
Total annual operating expenses 0.66
EXPENSE REDUCTION (0.17)
----
NET OPERATING EXPENSES** 0.49
====
</TABLE>
* Restated to reflect current fees and expenses.
** Guaranteed by Schwab and the investment adviser through 11/15/2001, excluding
interest, taxes and certain non-routine expenses.
Designed to help you compare expenses, this example uses the same assumptions as
other mutual fund prospectuses: a $10,000 investment and 5% return each year.
One-year figures are based on net operating expenses. The expenses would be the
same whether you stayed in the fund or sold your shares at the end of each
period. Your actual costs may be higher or lower.
EXPENSES ON A $10,000 INVESTMENT
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------
<S> <C> <C> <C> <C>
$50 $194 $351 $806
</TABLE>
--------------------------------------------------------------------------------
BOND FUNDS 83
<PAGE> 79
FINANCIAL HIGHLIGHTS
SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
9/1/99 - 9/1/98 - 9/1/97 - 9/1/96 - 9/1/95 -
8/31/00 8/31/99 8/31/98 8/31/97 8/31/96
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
----------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 10.05 10.26 10.16 10.04 10.12
-------------------------------------------------------------------
Income from investment operations:
Net investment income 0.41 0.40 0.42 0.41 0.41
Net realized and unrealized gains or losses 0.03 (0.21) 0.10 0.12 (0.08)
-------------------------------------------------------------------
Total income from investment operations 0.44 0.19 0.52 0.53 0.33
Less distributions:
Dividends from net investment income (0.41) (0.40) (0.42) (0.41) (0.41)
-------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.08 10.05 10.26 10.16 10.04
===================================================================
Total return (%) 4.50 1.86 5.17 5.40 3.32
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.49 1 0.49 0.49 0.49 0.49
Expense reductions reflected in above ratio 0.25 0.32 0.36 0.47 0.41
Ratio of net investment income to
average net assets 4.11 3.87 3.99 4.08 4.06
Portfolio turnover rate 11 8 22 20 44
Net assets, end of period ($ x 1,000,000) 76 87 68 54 54
</TABLE>
1 Would have been 0.50% if certain non-routine expenses (proxy fees) had been
included.
84 BOND FUNDS
<PAGE> 80
FINANCIAL HIGHLIGHTS
SCHWAB LONG-TERM TAX-FREE BOND FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
9/1/99 - 9/1/98 - 9/1/97 - 9/1/96 - 9/1/95 -
8/31/00 8/31/99 8/31/98 8/31/97 8/31/96
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 10.11 11.01 10.53 10.13 10.16
-------------------------------------------------------------------
Income from investment operations:
Net investment income 0.50 0.50 0.53 0.53 0.52
Net realized and unrealized gains or losses 0.13 (0.85) 0.48 0.40 (0.03)
-------------------------------------------------------------------
Total income from investment operations 0.63 (0.35) 1.01 0.93 0.49
Less distributions:
Dividends from net investment income (0.50) (0.50) (0.53) (0.53) (0.52)
Distributions from net realized gains -- (0.05) -- -- --
-------------------------------------------------------------------
Total Distributions (0.50) (0.55) (0.53) (0.53) (0.52)
-------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.24 10.11 11.01 10.53 10.13
===================================================================
Total return (%) 6.59 (3.34) 9.81 9.36 4.87
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.49 1 0.49 0.49 0.49 0.49
Expense reductions reflected in above ratio 0.26 0.32 0.37 0.53 0.45
Ratio of net investment income to
average net assets 5.11 4.59 4.76 5.09 5.06
Portfolio turnover rate 25 35 39 61 50
Net assets, end of period ($ x 1,000,000) 76 90 70 47 44
</TABLE>
1 Would have been 0.50% if certain non-routine expenses (proxy fees) had been
included.
BOND FUNDS 85
<PAGE> 81
FINANCIAL HIGHLIGHTS
SCHWAB CALIFORNIA SHORT/INTERMEDIATE TAX-FREE BOND FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
9/1/99 - 9/1/98 - 9/1/97 - 9/1/96 - 9/1/95 -
8/31/00 8/31/99 8/31/98 8/31/97 8/31/96
----------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 10.09 10.26 10.16 10.04 10.06
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.39 0.39 0.41 0.43 0.43
Net realized and unrealized gains or losses 0.13 (0.17) 0.11 0.12 (0.02)
---------------------------------------------------------------------
Total income from investment operations 0.52 0.22 0.52 0.55 0.41
Less distributions:
Dividends from net investment income (0.39) (0.39) (0.42) (0.43) (0.43)
---------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 10.22 10.09 10.26 10.16 10.04
=====================================================================
Total return (%) 5.32 2.16 5.19 5.54 4.11
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.49 1 0.49 0.49 0.49 0.49
Expense reductions reflected in above ratio 0.21 0.28 0.30 0.40 0.38
Ratio of net investment income to
average net assets 3.91 3.81 4.02 4.21 4.23
Portfolio turnover rate 42 7 8 23 20
Net assets, end of period ($ x 1,000,000) 124 126 96 59 46
</TABLE>
1 Would have been 0.50% if certain non-routine expenses (proxy fees) had been
included.
86 BOND FUNDS
<PAGE> 82
FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS
SCHWAB CALIFORNIA LONG-TERM TAX-FREE BOND FUND
This section provides further details about the fund's financial history. "Total
return" shows the percentage that an investor in the fund would have earned or
lost during a given period, assuming all distributions were reinvested. The
fund's independent accountants, PricewaterhouseCoopers LLP, audited these
figures. Their full report is included in the fund's annual report (see back
cover).
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
9/1/99- 9/1/98- 9/1/97- 9/1/96- 9/1/95-
8/31/00 8/31/99 8/31/98 8/31/97 8/31/96
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER-SHARE DATA ($)
----------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 10.82 11.52 11.10 10.63 10.53
----------------------------------------------------------------------
Income from investment operations:
Net investment income 0.55 0.54 0.54 0.56 0.57
Net realized and unrealized gains or losses 0.24 (0.70) 0.43 0.47 0.10
----------------------------------------------------------------------
Total income from investment operations 0.79 (0.16) 0.97 1.03 0.67
Less distributions:
Dividends from net investment income (0.55) (0.54) (0.55) (0.56) (0.57)
----------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 11.06 10.82 11.52 11.10 10.63
======================================================================
Total return (%) 7.67 (1.57) 8.96 9.95 6.43
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.49 1 0.49 0.49 0.49 0.49
Expense reductions reflected in above ratio 0.19 0.26 0.27 0.33 0.33
Ratio of net investment income to
average net assets 5.19 4.69 4.79 5.17 5.30
Portfolio turnover rate 36 55 28 35 36
Net assets, end of period ($ x 1,000,000) 179 202 190 125 102
</TABLE>
1 Would have been 0.50% if certain non-routine expenses (proxy fees) had been
included.
BOND FUNDS 87
<PAGE> 83
INVESTMENT MANAGEMENT
THE INVESTMENT ADVISER for all of the SchwabFunds(R) is Charles Schwab
Investment Management, Inc. (CSIM), 101 Montgomery Street, San Francisco, CA
94104. Founded in 1989, the firm manages assets for more than 5 million
shareholder accounts and has more than $120 billion under management. (All
figures on this page are as of August 31, 2000 unless otherwise noted).
As the investment adviser, the firm oversees the asset management and
administration of the SchwabFunds described in this prospectus. As compensation
for these services, the firm receives a management fee from each fund. The table
below describes the actual management fee paid by each fund (including the
effects of any reductions) for the 12 months prior to the fiscal year end
indicated.
<TABLE>
<CAPTION>
FEE PAID
(% OF AVERAGE
NAME OF FUND NET ASSETS) FISCAL YEAR END
----------------------------------------------------------------------------------
<S> <C> <C>
SCHWAB ANALYTICS FUND(R) 0.42% 10/31/99
SCHWAB BOND INDEX FUNDS
Schwab Short-Term Bond Market Index Fund 0.00% 8/31/00
Schwab Total Bond Market Index Fund 0.04% 8/31/00
SCHWAB CALIFORNIA TAX-FREE BOND FUNDS
Schwab California Short/Intermediate
Tax-Free Bond Fund 0.11% 8/31/00
Schwab California Long-Term
Tax-Free Bond Fund 0.13% 8/31/00
SCHWAB EQUITY INDEX FUNDS
Schwab S&P 500 Fund 0.12% 10/31/99
Schwab 1000 Fund(R) 0.21% 10/31/99
Schwab Small-Cap Index Fund(R) 0.20% 10/31/99
Schwab Total Stock Market Index Fund(TM) 0.00% 10/31/99
Schwab International Index Fund(R) 0.25% 10/31/99
SCHWAB MARKETMANAGER PORTFOLIOS(TM)
Growth Portfolio 0.43% 10/31/99
Balanced Portfolio 0.41% 10/31/99
Small Cap Portfolio 0.35% 10/31/99
International Portfolio 0.38% 10/31/99
SCHWAB MARKETTRACK PORTFOLIOS(TM)
All Equity Portfolio 0.17% 10/31/99
Growth Portfolio 0.27% 10/31/99
Balanced Portfolio 0.26% 10/31/99
Conservative Portfolio 0.25% 10/31/99
SCHWAB TAX-FREE BOND FUNDS
Schwab Short/Intermediate
Tax-Free Bond Fund 0.07% 8/31/00
Schwab Long-Term Tax-Free Bond Fund 0.06% 8/31/00
</TABLE>
For the following funds that have not had a fiscal year end, the management fee
as a percentage of average daily net assets is calculated as follows:
<TABLE>
<CAPTION>
SCHWAB YIELDPLUS FUND(TM)
<S> <C>
First $500 million of assets 0.35%
Assets above $500 million 0.30%
SCHWAB FOCUS FUNDS 0.54%
</TABLE>
For the Schwab Analytics Fund, a portion of the management fee is used to pay
the subadviser.
88 INVESTMENT MANAGEMENT
<PAGE> 84
INVESTMENT MANAGERS
The following are responsible for the management of the funds or portfolios
indicated.
SCHWAB BOND INDEX FUNDS, SCHWAB MARKETTRACK PORTFOLIOS,(TM) SCHWAB YIELDPLUS
FUND(TM)
KIMON DAIFOTIS, CFA, a vice president of the investment adviser, has overall
responsibility for management of the Schwab Bond Funds and Schwab YieldPlus
Fund. He is responsible for the day-to-day management of the bond and cash
portions of Schwab MarketTrack Portfolios. Prior to joining the firm in
September 1997, he worked for more than 17 years in research and asset
management.
SCHWAB ANALYTICS FUND(R)
PRAVEEN GOTTIPALLI, a portfolio manager for the day-to-day management of Schwab
Analytics Fund, has been Director of Investment for Symphony Asset Management
since 1994. Prior to this position, he was at BARRA, Inc. for nine years.
SYMPHONY ASSET MANAGEMENT, INC. is the subadvisor for Schwab Analytics Fund.
Symphony is located at 555 California Street, San Francisco, CA 94104. Founded
in 1994, Symphony is owned by BARRA, Inc., which was founded in 1975 and is a
leading provider of analytical models. Symphony and its affiliate, Symphony
Asset Management, LLC, currently have more than $2.7 billion under management.
SCHWAB EQUITY INDEX FUNDS, SCHWAB ANALYTICS FUND, SCHWAB MARKETTRACK PORTFOLIOS,
SCHWAB FOCUS FUNDS
GERI HOM, a vice president of the investment adviser, is responsible for the
day-to-day management of Schwab Equity Index Funds (not including Schwab Total
Stock Market Index Fund(TM)), the equity portions of the Schwab MarketTrack
Portfolios and Schwab Focus Funds, and she has overall responsibility for the
Schwab Analytics Fund. She joined the firm in 1995 and has nearly 20 years of
experience in equity index management.
SCHWAB CALIFORNIA TAX-FREE BOND FUNDS, SCHWAB TAX-FREE BOND FUNDS
JOANNE LARKIN, a vice president of the investment adviser, has had overall
responsibility for management of Schwab California Tax-Free Bond Funds and
Schwab Tax-Free Bond Funds since each fund's inception. Prior to joining the
firm in February 1992, she worked for more than eight years in research and
asset management at another firm.
SCHWAB TOTAL STOCK MARKET INDEX FUND, SCHWAB FOCUS FUNDS
LARRY MANO, a portfolio manager, is responsible for the day-to-day management of
Schwab Total Stock Market Index Fund and Schwab Focus Funds. Prior to joining
the firm in 1998, he worked for 20 years in equity index management, most
recently as a vice president and principal of the Institutional Services Group
at Wilshire Associates, Inc.
SCHWAB MARKETMANAGER PORTFOLIOS(TM)
JEFFREY MORTIMER, CFA, a vice president of the investment adviser, is
responsible for overall management of the Schwab MarketManager Portfolios. Prior
to joining the firm in October 1997, he worked for more than eight years in
asset allocation and manager selection.
The Schwab MarketManager Portfolios may invest in the Excelsior Funds without
limitation, just as the Schwab MarketManager Portfolios can invest without
limitation in affiliated SchwabFunds. The advisers to the Excelsior Funds are
United States Trust Company of New York, U.S. Trust Company (Connecticut) and/or
other subsidiaries of U.S. Trust Corporation (U.S. Trust). U.S. Trust and
Charles Schwab Investment Management, Inc. are under the common control of The
Charles Schwab Corporation.
SCHWAB BOND INDEX FUNDS
BIRGER NESTEBY, a portfolio manager, co-manages the funds' portfolio and has
over 10 years of experience in the fixed income securities markets. He joined
the firm in August, 1999.
The funds' investment adviser, Charles Schwab Investment Management, Inc.,
has more than $120 billion under management.
INDEX OWNERSHIP
--------------------------------------------------------------------------------
Standard & Poor's,(R) S&P,(R) S&P 500,(R) Standard & Poor's 500(R) and 500(R)
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by the fund. The Schwab S&P 500 Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's, and Standard & Poor's makes no representation
regarding the advisability of investing in the fund. More complete information
may be found in the Statement of Additional Information (see back cover).
Wilshire and Wilshire 5000 are registered service marks of Wilshire Associates,
Inc. The Schwab Total Stock Market Index Fund is not sponsored, endorsed, sold
or promoted by Wilshire Associates, and Wilshire Associates is not in any way
affiliated with the fund. Wilshire Associates makes no representation regarding
the advisability of investing in the fund or in any stock included in the
Wilshire 5000.
INVESTMENT MANAGEMENT 89
<PAGE> 85
INVESTING IN THE FUNDS/PORTFOLIOS
As a SchwabFunds(R) investor, you have a number of WAYS TO DO BUSINESS with us.
On the following pages, you will find information on BUYING, SELLING AND
EXCHANGING shares using the method that is most CONVENIENT FOR YOU. You also
will see how to choose a share class and a distribution option for your
investment. Helpful information on TAXES is included as well.
The information on these pages outlines how Schwab brokerage account investors
can place "good orders" to buy, sell and exchange shares of the funds. If you
are investing through a third-party investment provider, some of the
instructions, minimums and policies may be different. Some investment providers
may charge transaction or other fees. Contact your investment provider for more
information.
SCHWAB ACCOUNTS
--------------------------------------------------------------------------------
Different types of Schwab brokerage accounts are available, with varying account
opening and balance requirements. Some Schwab brokerage account features can
work in tandem with features offered by the funds.
For example, when you sell shares in a fund or portfolio, the proceeds
automatically are paid to your Schwab brokerage account. From your account, you
can use features such as MoneyLink, which lets you move money between your
brokerage accounts and bank accounts and Automatic Investment Plan (AIP), which
lets you set up periodic investments.
For more information on Schwab brokerage accounts, call 800-435-4000 or visit
the Schwab Web site at www.schwab.com.
METHODS FOR PLACING DIRECT ORDERS
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabInstitutional.com manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds at:
P.O. Box 7575
San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
90 INVESTING IN THE FUNDS/PORTFOLIOS
<PAGE> 86
BUYING SHARES
Shares of the funds or portfolios may be purchased through a Schwab brokerage
account or through certain third-party investment providers, such as other
financial institutions, investment professionals and workplace retirement plans.
--------------------------------------------------------------------------------
STEP 1
--------------------------------------------------------------------------------
CHOOSE A FUND. If applicable, choose a share class. Your choice of share class
may depend on the amount of your investment.
SCHWAB ANALYTICS FUND,(R) SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO, SCHWAB
MARKETMANAGER INTERNATIONAL PORTFOLIO:
<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$2,500 ($1,000 for retirement and $500 ($100 for Automatic Investment Plan) $500 ($250 for retirement and
custodial accounts) custodial accounts)
</TABLE>
SCHWAB FOCUS FUNDS:
<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$5,000 $500 ($100 for Automatic Investment Plan)
</TABLE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO, SCHWAB MARKETMANAGER BALANCED PORTFOLIO,
SCHWAB MARKETTRACK PORTFOLIOS:(TM)
<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1,000 ($500 for retirement and $500 ($100 for Automatic Investment Plan) $500 ($250 for retirement and
custodial accounts) custodial accounts)
</TABLE>
SCHWAB EQUITY INDEX FUNDS:
<TABLE>
<CAPTION>
SHARE CLASS MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares $2,500 ($1,000 for retirement and $500 ($100 for Automatic Investment Plan) $1,000 ($500 for retirement
custodial accounts) and custodial accounts)
Select Shares(R) $50,000 $1,000 $40,000
e.Shares(R) $2,500 ($500 for retirement $100 $1,000 ($500 for retirement
and custodial accounts) and custodial accounts)
</TABLE>
Currently, e.Shares are available only for the S&P 500 Fund and are offered to
clients of Schwab Institutional, The Charles Schwab Trust Company and certain
retirement plans.
SCHWAB BOND INDEX FUNDS, SCHWAB CALIFORNIA TAX-FREE BOND FUNDS, SCHWAB TAX-FREE
BOND FUNDS:
<TABLE>
<CAPTION>
MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$2,500 ($1,000 for retirement* and $500 ($100 for Automatic $1,000 ($500 for retirement*
custodial accounts) Investment Plan) and custodial accounts)
</TABLE>
* Tax-free funds are not appropriate investments for IRAs and other tax
deferred accounts. Please consult with your tax advisor about your situation.
SCHWAB YIELDPLUS FUND:(TM)
<TABLE>
<CAPTION>
SHARE CLASS MINIMUM INITIAL INVESTMENT MINIMUM ADDITIONAL INVESTMENTS MINIMUM BALANCE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investor Shares $2,500 ($1,000 for retirement and $500 ($100 for Automatic Investment Plan) $1,000 ($500 for retirement
custodial accounts) and custodial accounts)
Select Shares $50,000 $1,000 $40,000
</TABLE>
--------------------------------------------------------------------------------
STEP 2
--------------------------------------------------------------------------------
CHOOSE AN OPTION FOR FUND DISTRIBUTIONS. The three options are described below.
If you don't indicate a choice, you will receive the first option.
<TABLE>
<CAPTION>
OPTION FEATURES
--------------------------------------------------------------------------------
<S> <C>
Reinvestment All dividends and capital gain distributions are
invested automatically in shares of your fund and share
class.
Cash/reinvestment mix You receive payment for dividends, while any capital
gain distributions are invested in shares of your fund
and share class.
Cash You receive payment for all dividends and capital gain
distributions.
</TABLE>
--------------------------------------------------------------------------------
STEP 3
--------------------------------------------------------------------------------
PLACE YOUR ORDER. Use any of the methods described on the previous page. Make
checks payable to Charles Schwab & Co., Inc.
INVESTING IN THE FUNDS/PORTFOLIOS 91
<PAGE> 87
SELLING/EXCHANGING SHARES
POLICIES TO KEEP IN MIND
- A fund may take up to seven days to pay sale proceeds.
- If you are selling shares that were recently purchased by check, the
proceeds may be delayed until the check for purchase clears; this may take
up to 15 days from the date of purchase.
- Exchange orders are limited to other Schwab non-Sweep Investments as well
as variable NAV funds and must meet the minimum investment and other
requirements for the fund and, if applicable, the share class into which
you are exchanging.
- You must obtain and read the prospectus for the fund into which you are
exchanging prior to placing your order.
- The fund reserves the right to honor redemptions in portfolio securities
instead of cash when your redemptions over a 90-day period exceed $250,000
or 1% of a fund's assets.
- As indicated in their fee tables, the Schwab Equity Index Funds, Schwab
Focus Funds, Schwab MarketManager International Portfolio and Schwab
YieldPlus Fund(TM) charge a redemption fee, payable to each fund, on
shares you sell or exchange within 180 days (90 days for the Schwab Yield
Plus Fund) of buying them; in attempting to minimize this fee, a fund will
first sell any shares in your account that aren't subject to the fee
(including shares acquired through reinvestment or exchange).
- In a multi-class fund, there is no redemption fee when you exchange
between share classes of that fund.
METHODS FOR PLACING DIRECT ORDERS
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
SCHWABLINK
Investment professionals should follow the transaction instructions in the
SchwabInstitutional.com manual; for technical assistance, call 800-367-5198.
MAIL
Write to SchwabFunds(R) at:
P.O. Box 7575
San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signature of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab branch office.
WHEN PLACING ORDERS
--------------------------------------------------------------------------------
With every order to buy, sell or exchange shares, you will need to include the
following information:
- Your name or, for internet orders, your account number/"Login ID"
- Your account number
(for SchwabInstitutional.com transactions, include the master account and
subaccount numbers) or, for internet orders, your password
- The name and, if applicable, the share class of the fund whose shares you
want to buy or sell
- The dollar amount or number of shares you would like to buy, sell or
exchange
- For exchanges, the name and share class of the fund into which you want to
exchange and the distribution option you prefer
- When selling shares, how you would like to receive the proceeds
Please note that orders to buy, sell or exchange become irrevocable at the time
you mail them.
92 INVESTING IN THE FUNDS/PORTFOLIOS
<PAGE> 88
TRANSACTION POLICIES
THE FUNDS OR PORTFOLIOS ARE OPEN FOR BUSINESS EACH DAY THAT THE NEW YORK STOCK
EXCHANGE (NYSE) IS OPEN. The funds or portfolios calculate their share prices
(for each share class, if necessary) each business day, after the close of the
NYSE. A fund's or portfolio's share price is its net asset value per share, or
NAV, which is the fund's or portfolio's net assets divided by the number of its
shares outstanding.
POLICIES FOR WHEN YOUR ORDER WILL BE EXECUTED depend on the fund or portfolio
concerned:
SCHWAB ANALYTICS FUND,(R) SCHWAB EQUITY INDEX FUNDS, SCHWAB FOCUS FUNDS, SCHWAB
MARKETMANAGER PORTFOLIOS,(TM) SCHWAB MARKETTRACK PORTFOLIOS(TM):
Orders to buy, sell or exchange shares that are received in good order prior to
the close of a fund or portfolio (generally 4 p.m. Eastern Time) will be
executed at the next share price calculated that day.
SCHWAB BOND INDEX FUNDS, SCHWAB CALIFORNIA TAX-FREE BOND FUNDS, SCHWAB TAX-FREE
BOND FUNDS, SCHWAB YIELDPLUS FUND(TM):
Orders that are received in good order are executed at the next NAV to be
calculated (generally 4 p.m. Eastern Time). Orders to buy shares that are
accepted prior to the close of the fund generally will receive the next day's
dividend. Orders to sell or exchange shares that are accepted and executed prior
to the close of the fund on a given day generally will receive that day's
dividend.
IN VALUING PORTFOLIO SECURITIES, all funds except the Schwab MarketTrack and
Schwab MarketManager Portfolios use market quotes if they are readily available.
In cases where quotes are not readily available, a fund may value securities
based on fair values developed using methods approved by the fund's Board of
Trustees.
The Schwab MarketTrack and Schwab MarketManager Portfolios use the NAVs reported
by their underlying funds to value underlying fund investments.
SHAREHOLDERS OF FUNDS OR PORTFOLIOS WITH EXPOSURE TO FOREIGN MARKETS should be
aware that because these markets are often open on weekends and other days when
the funds and portfolios are closed, the value of some or all securities owned
by a fund or portfolio may change on days when it is not possible to buy or sell
shares of the fund or portfolio.
EACH DAY, REPORTING SERVICES, SUCH AS NEWSPAPERS, MAY PUBLISH THE SHARE PRICES
OF MUTUAL FUNDS from the close of business on the previous day. For the Schwab
MarketTrack and Schwab MarketManager Portfolios, these prices are generally
reported one day behind other mutual funds. This is because these portfolios use
the share prices of their underlying funds to calculate NAV, and this
information is typically received and calculated after the publishing deadlines
of reporting services. Each portfolio still calculates its share price daily,
and this is the price at which you may buy and sell shares each day.
THE FUNDS, PORTFOLIOS AND SCHWAB RESERVE CERTAIN RIGHTS, including the
following:
- To automatically redeem your shares if the account they are held in is
closed for any reason or your balance falls below the minimum for your
share class as a result of selling or exchanging your shares
- To modify or terminate the exchange privilege upon 60 days' written notice
to shareholders
- To refuse any purchase or exchange order, including large purchase orders
that may negatively affect a fund's operations or orders that appear to be
associated with short-term trading activities
- To change or waive a fund's or portfolio's investment minimums
- To suspend the right to sell shares back to the fund or portfolio, and
delay sending proceeds, during times when trading on the NYSE is
restricted or halted, or otherwise as permitted by the SEC
- To withdraw or suspend any part of the offering made by this prospectus
INVESTING IN THE FUNDS/PORTFOLIOS 93
<PAGE> 89
DISTRIBUTIONS AND TAXES
ANY INVESTMENT IN A FUND OR PORTFOLIO TYPICALLY INVOLVES SEVERAL TAX
CONSIDERATIONS. The information below is meant as a general summary for U.S.
citizens and residents. Because each person's tax situation is different, you
should consult your tax advisor about the tax implications of your investment in
a fund or portfolio. You also can visit the Internal Revenue Service (IRS) Web
site at www.irs.gov.
AS A SHAREHOLDER, YOU ARE ENTITLED TO YOUR SHARE OF THE DIVIDENDS AND GAINS YOUR
FUND OR PORTFOLIO EARNS. Each fund and portfolio distributes to all shareholders
of record substantially all of its net investment income and net capital gains,
if any, according to the following schedules:
SCHWAB ANALYTICS FUND,(R) SCHWAB EQUITY INDEX FUNDS, SCHWAB FOCUS FUNDS, SCHWAB
MARKETMANAGER PORTFOLIOS,(TM) SCHWAB MARKETTRACK PORTFOLIOS(TM):
These funds and portfolios typically pay income and capital gains distributions
in December, except for the Schwab MarketTrack Conservative Portfolio, which
typically makes income distributions at the end of every calendar quarter.
SCHWAB BOND INDEX FUNDS, SCHWAB CALIFORNIA TAX-FREE BOND FUNDS, SCHWAB TAX-FREE
BOND FUNDS, SCHWAB YIELDPLUS FUND(TM):
Each of these funds declares a dividend every business day, based on its
determination of its net investment income. Each fund pays its dividends on the
25th of every month (or next business day, if the 25th is not a business day),
except that in December dividends are paid on the last business day of the
month. The funds expect to pay any capital gain distributions every year,
typically in December.
FOR ALL TAXABLE FUNDS AND PORTFOLIOS, UNLESS YOU ARE INVESTING THROUGH A
TAX-DEFERRED OR ROTH RETIREMENT ACCOUNT, YOUR DISTRIBUTIONS GENERALLY HAVE TAX
CONSEQUENCES. The net investment income and short-term capital gains of each
fund and portfolio are distributed as dividends and are taxable as ordinary
income. Other capital gain distributions are taxable as long-term capital gains,
regardless of how long you have held your shares in the fund or portfolio.
Distributions generally are taxable in the tax year in which they are declared,
whether you reinvest them or take them in cash.
GENERALLY, ANY SALE OF YOUR SHARES IS A TAXABLE EVENT. A sale may result in a
capital gain or loss for you. The gain or loss generally will be treated as
short term if you held the shares for 12 months or less, long term if you held
the shares longer.
FOR TAX PURPOSES, AN EXCHANGE BETWEEN FUNDS OR PORTFOLIOS IS DIFFERENT FROM AN
EXCHANGE BETWEEN CLASSES. An exchange between funds or portfolios is considered
a sale. An exchange between classes within a fund is not reported as a taxable
sale.
SHAREHOLDERS IN THE SCHWAB INTERNATIONAL INDEX FUND(R) MAY HAVE ADDITIONAL TAX
CONSIDERATIONS as a result of foreign tax payments made by the fund. Typically,
these payments will reduce the fund's dividends but will still be included in
your taxable income. You may be able to claim a tax credit or deduction for your
portion of foreign taxes paid by the fund, however.
94 INVESTING IN THE FUNDS/PORTFOLIOS
<PAGE> 90
IF YOU OWN SHARES IN A TAX-FREE BOND FUND, you should be aware that your fund's
distributions may have tax consequences. Each fund's dividends typically are
free from federal income tax. Dividends from the California Tax-Free Bond Funds
typically are free from federal and California state income tax. Dividends from
the Tax-Free Bond Funds typically are subject to any state and local personal
income taxes, although a portion of each fund's dividends may be free from state
or local income taxes, depending on the extent to which a fund invests in bonds
that are tax-exempt in your state. Each fund's capital gain distributions
generally are taxable in the tax year in which they are declared, whether you
reinvest them or take them in cash.
While interest from municipal securities generally is free from federal income
tax, some types of securities produce income that is subject to the federal
alternative minimum tax (AMT). To the extent that a fund invests in these
securities, shareholders who are subject to the AMT may have to pay this tax on
some or all dividends received from that fund.
Any dividends derived from U.S. Government securities are generally free from
state and local income taxes. However, some states may limit this benefit, and
some agency-backed securities may not qualify for tax-exempt status.
AT THE BEGINNING OF EVERY YEAR, THE FUNDS AND PORTFOLIOS PROVIDE SHAREHOLDERS
WITH INFORMATION detailing the tax status of any distributions the fund or
portfolio paid during the previous calendar year. For Schwab Bond Index Funds,
this information includes the percentage of dividends paid that may qualify for
tax-exempt status. For Schwab Tax-Free Bond Funds, this information includes a
breakdown of the fund's income from each state. Schwab brokerage account
customers also receive information on distributions and transactions in their
monthly account statements.
SCHWAB BROKERAGE ACCOUNT CUSTOMERS WHO SELL FUND OR PORTFOLIO SHARES typically
will receive a report that calculates their gain or loss using the "average
cost" single-category method. This information is not reported to the IRS, and
you still have the option of calculating gains or losses using any other methods
permitted by the IRS.
MORE ON DISTRIBUTIONS
--------------------------------------------------------------------------------
If you are investing through a taxable account and purchase shares of a fund or
portfolio just before it declares a distribution, you may receive a portion of
your investment back as a taxable distribution. This is because when a fund or
portfolio makes a distribution, the share price is reduced by the amount of the
distribution.
You can avoid "buying a dividend," as it is often called, by finding out if a
distribution is imminent and waiting until afterwards to invest. Of course, you
may decide that the opportunity to gain a few days of investment performance
outweighs the tax consequences of buying a dividend.
INVESTING IN THE FUNDS/PORTFOLIOS 95
<PAGE> 91
TO LEARN MORE
This prospectus contains important information on the funds and portfolios and
should be read and kept for reference. You also can obtain more information from
the following sources.
SHAREHOLDER REPORTS, which are mailed to current fund and portfolio investors,
discuss recent performance and holdings.
Each fund's STATEMENT OF ADDITIONAL INFORMATION (SAI) includes a more detailed
discussion of investment policies and the risks associated with various
investments. Each SAI is incorporated by reference into the prospectus, making
it legally part of the prospectus.
You can obtain copies of these documents by contacting SchwabFunds(R) or the
SEC. All materials from SchwabFunds are free; the SEC charges a duplicating fee.
You can also review and copy these materials in person at the SEC's Public
Reference Room or by computer using the SEC's EDGAR database at www.sec.gov or
by electronic request (after paying a duplicating fee) at [email protected].
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-6009
800-SEC-0330 (Public Reference Section)
202-942-8090
www.sec.gov
[email protected]
SCHWABFUNDS
P.O. Box 7575
San Francisco, CA 94104
800-435-4000
www.schwab.com/schwabfunds
SEC FILE NUMBERS
SCHWAB EQUITY INDEX FUNDS 811-7704
SCHWAB 1000 FUND(R) 811-6200
SCHWAB ANALYTICS FUND(R) 811-7704
SCHWAB FOCUS FUNDS 811-7704
SCHWAB MARKETTRACK PORTFOLIOS(TM) 811-7704
SCHWAB MARKETMANAGER PORTFOLIOS(TM) 811-7704
SCHWAB BOND INDEX FUNDS 811-6200
SCHWAB YIELD PLUS FUND(TM) 811-6200
SCHWAB TAX-FREE BOND FUNDS 811-6200
--------------------------------------------------------------------------------
MKT 4696-1 [CHARLES SCHWAB LOGO]
--------------------------------------------------------------------------------
