<PAGE> 1
SCHWABFUNDS(R)
[LOGO]
SCHWAB INTERNATIONAL
INDEX FUND(TM)
ANNUAL REPORT
OCTOBER 31, 1995
[Photo of the Schwab Building, San Francisco, California]
<PAGE> 2
Dear Fellow Shareholder,
[Photo The SchwabFunds Family(R) is celebrating tremendous growth as a
of mutual fund complex. By placing your trust in SchwabFunds,(R)
Charles you've helped total assets under management grow by $8 billion
R. Schwab] in 1995 to reach over $31 billion. With over $31 billion in
assets under management, SchwabFunds ranks in the top 6% of all
mutual fund complexes.
We believe much of this success can be traced to the Schwab commitment to serve
the needs of the Fund shareholders, a commitment demonstrated by the entire
SchwabFunds staff and, in particular, by our experienced team of portfolio
managers.
The 20 professionals who make up our growing portfolio management team are
devoted to monitoring the financial markets for you. Through a careful and
disciplined selection of securities, the portfolio managers strive to construct
optimal portfolios that provide shareholders with competitive returns that meet
their investment goals. And shareholders continue to signal their trust in the
175 years of combined experience behind our SchwabFunds portfolio management by
keeping their money invested in SchwabFunds. In fact, a large number of the 1.5
million shareholders have been investing in the SchwabFunds Family since its
first year of operation.
We believe an important part of serving your needs is keeping you informed
about your investments. For example, last year we added the question and answer
section of this report, developed by our portfolio managers to address what
they feel were the most pressing questions we've heard from shareholders over
the period. It is one way we hope to keep communication open between you and
the people managing your investments.
During its six years, the SchwabFunds Family has grown to include a solid
selection of funds that meet the "core" needs of investors. SchwabFunds offers
a solution to investors who want the convenience and competitive costs of a
no-load mutual fund family. The 19 no-load funds available to retail investors,
including the new Schwab Asset Director(R) Funds, offer diversification of the
U.S. and international equity markets, both taxable and tax-free bonds and a
variety of money market investments.
With this level of diversification, you may use SchwabFunds to create an
efficient, well-rounded portfolio. Or you may use them to serve as building
blocks to an overall investment program that includes more specialized
investments.
I invite you to learn more about the SchwabFunds Family. To receive a brochure
and prospectus for the SchwabFunds, please call our toll-free number, 1-800-2
NO-LOAD, or visit any one of our more than 200 Schwab offices. A Schwab
representative will be happy to provide you with a prospectus that includes
more complete information on the Funds, including charges and expenses. Please
read it carefully before investing. If you normally invest in SchwabFunds with
the help of an investment manager, he or she can give you more information on
the other SchwabFunds.
I'd like to extend my personal gratitude for your trust in the SchwabFunds
Family as it continues to grow. You should feel confident that the outstanding
efforts of all those who are part of the SchwabFunds organization will continue
going forward. And we expect these efforts to help us to meet even higher
standards of excellence in the years ahead.
/s/ Charles R. Schwab
Charles R. Schwab
Cover: The Schwab Building, San Francisco, California
<PAGE> 3
COMMENTS FROM THE INVESTMENT MANAGER
We are pleased to report on the performance of the Schwab International Index
Fund(TM) for fiscal year 1995, which began November 1, 1994 and ended October
31, 1995. During the year, the Fund continued to help you participate in the
growth potential of the international equity markets by tracking the price and
dividend performance of the Schwab International Index(R).
GROWTH IN ASSETS AND SHAREHOLDERS
During the year, investors signaled their confidence in the Schwab
International Index Fund by investing over $33 million in the Fund. The Fund's
net assets grew from $142 million to more than $179 million as of October 31,
1995, while the number of shareholders increased from 21,680 to 24,599. We
believe this growth underscores the Fund's effectiveness as a way to tap the
long-term opportunities offered by international equities.
FUND ACHIEVED SUPERIOR PERFORMANCE
The Schwab International Index Fund and the Schwab International Index
outperformed the industry benchmark, Morgan Stanley Capital
International-Europe, Australia, Far-East Index (EAFE Index) during the year.
The Fund's performance is especially noteworthy because indices usually enjoy a
performance advantage since they have no trading costs or operational expenses,
unlike mutual funds. The Schwab International Index Fund's net asset value
(NAV) began the year at $10.89 and ended at $11.13. Additionally, the Fund paid
$0.12 per share in dividends during the year.
The table below compares the total return of the Schwab International Index
Fund, the Schwab International Index and the EAFE Index for various periods.
TOTAL RETURN
<TABLE>
<CAPTION>
Cumulative Since Average Annual
6 Months Ended One-Year Ended Fund Inception Since Fund Inception
October 31, 1995 October 31, 1995 (9/9/93 -10/31/95) (9/9/93 -10/31/95)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Schwab International
Index Fund(TM) 1.55% 3.35% 13.18% 5.95%
- -----------------------------------------------------------------------------------------------------------------------------------
Schwab International
Index(R) 1.01% 3.94% 14.61%
- -----------------------------------------------------------------------------------------------------------------------------------
EAFE Index -1.59% -0.33% 10.75%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total return assumes reinvestment of all dividends and capital gain
distributions. Past performance is no guarantee of future results. Principal
value and investment returns will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. A portion of the
Fund's fees were waived during the year. Without the waivers, the Fund's total
return for the year would have been 2.98%. Indices are unmanaged, and unlike
the Fund, do not reflect advisory and other fees associated with an investment
in the Fund.
<PAGE> 4
WORLD EQUITY MARKET OVERVIEW
While the U.S. stock market experienced nearly uninterrupted growth over the
12-month period, the performance of overseas equity markets was mixed. European
markets generally produced strong results, but the Japanese market continued to
be clouded by economic uncertainty. As a broadly based international index
fund, the Schwab International Index Fund(TM) experienced both the positive
and negative effects of these varying market conditions. You'll find a more
detailed discussion of factors that affected the Fund's performance during the
year in the "Questions to the Portfolio Management Team" section of this
report.
INDEXING: A SMART STRATEGY
Indexing offers you a smart, convenient way to participate in the long-term
growth potential of the international equity market. The Schwab International
Index Fund attempts to track the price and dividend performance of the Schwab
International Index(R), which comprises the stocks of 350 of the world's
largest publicly traded companies, ranked by market capitalization. 1 Under
normal circumstances, the Fund keeps nearly all of its assets invested in the
stocks that comprise the Index, maintaining only a small cash position to cover
shareholder redemptions and Fund expenses.
Index funds are designed to help you earn returns that keep pace with targeted
segments of the equity market. While actively managed funds regularly buy and
sell securities based on predictions of market movements, index funds follow a
"passive" investment strategy that seeks to track the market's performance. Few
professional money managers are actually able to beat the performance of the
stock market on a consistent basis. In fact, over the last five years, only
about one in four professionally managed equity funds outperformed the U.S.
stock market. 2 Trying to match market performance with an indexing approach
can be a sensible alternative.
HIGHER AFTER-TAX RETURNS
The Schwab International Index Fund seeks to maximize your after-tax returns
and minimize expenses and capital gain distributions. Since the Fund follows a
buy-and-hold investment strategy, it features relatively low portfolio turnover
which translates into lower portfolio trading expenses and reduces the
possibility of capital gain distributions. For the year ended October 31, 1995,
the Fund's portfolio turnover rate was zero, significantly below 61%, the
average for U.S. international equity funds. 3 When it does become necessary
to sell securities, the Fund's Investment Manager seeks to offset capital gains
with losses to avoid capital gain distributions. These strategies can help
maximize your after-tax returns by reducing or deferring the taxes you pay.
1 The Schwab International Index includes companies from 15 countries with
developed securities markets, and excludes non-operating companies and
U.S. companies.
2 U.S. Stock market performance as measured by Standard and Poor's 500
Index(R) (S&P500); equity fund performance measured by the total return
of 1,036 general equity funds as reported by Morningstar, Inc., 9/30/95.
3 Source: Morningstar, Inc. Average annual portfolio turnover for 327 U.S.
international equity funds, as of 10/31/95.
<PAGE> 5
EXPENSE RATIO REDUCED
At Schwab, we have a commitment to keep fees and expenses low. The less you pay
in fees and expenses, the greater the portion of a fund's return you can
receive. In line with this commitment, the Schwab International Index Fund(TM)
does not impose sales loads or 12b-1 fees, both of which would increase
expenses and diminish total return. 4
To enhance your return potential, the Fund's total operating expense ratio was
lowered. Effective July 1, 1995, through at least June 30, 1996, the Fund's
total operating expense ratio was lowered from 0.95% to 0.69%--significantly
below 1.68%, the average for U.S. international equity funds. 5 While the
reduction occurred too late in the reporting period for its full impact to be
felt, the Fund's new, lower expense ratio will help you earn higher returns
going forward.
BROAD INTERNATIONAL DIVERSIFICATION
The Schwab International Index Fund's broadly diversified portfolio helps
reduce investment risk by investing in a wide variety of industries and markets
around the world. Since the world's equity markets aren't perfectly correlated,
investing in multiple securities and markets helps spread risk and limit the
impact of a downturn in any one particular security or market.
The Schwab International Index Fund invests in substantially all of the 350
stocks in the Schwab International Index(R). The map on the following page
shows how the Fund's portfolio is diversified across international borders. You
will also find a complete listing of the Fund's holdings at year-end following
the "Questions to the Portfolio Management Team" section of this report.
A LONG-TERM COMMITMENT
In addition to their diversification benefits, international stocks also offer
you attractive return potential over the long term. Over the long term,
international equities have outperformed large-cap U.S. stocks. For the 20-year
period ended 12/31/94, the average annual return for U.S. large-cap stocks was
14.5% and the average annual return for international stocks was 15.5%. 6
This performance is further explained in the "Questions to the Portfolio
Management Team" section.
It's important to realize, however, that overseas equity markets can be very
volatile, especially in the short-term. Moreover, international investing
involves special risks, including currency fluctuations, economic or political
instability and different tax laws and accounting standards. If you can accept
these risks, however, diversifying your portfolio internationally may smooth
its overall volatility and help you realize the attractive return potential
that international stocks offer.
4 To help keep Fund expenses low for long-term shareholders, investors who
hold their shares for less than six months will be charged a redemption
fee of 0.75%. This fee is paid directly to the Fund to offset the costs
associated with short-term trading.
5 Source: Morningstar, Inc. Avergae operating expenses reported for 327
U.S. international equity funds as of 10/31/95.
6 Source: BARRA, Inc. Specific sources for the data are S&P 500 for large
cap stock and EAFE Index for international stock performance. Indices are
unmanaged and do not incur management or transaction costs and cannot be
invested in. Past performance does not guarantee future results. Total
return assumes reinvestment of all dividends and capital gain
distributions.
<PAGE> 6
THE FUND PROVIDES INTERNATIONAL EQUITY OPPORTUNITIES
[Graph of Schwab International Index Fund(TM) Equity Holdings
as of October 31, 1995]
<TABLE>
<S> <C>
Canada 3
United Kingdom 20.1
Netherlands 5.1
Belgium 0.6
Denmark 0.4
Germany 8.7
Sweden 2.2
Japan 30.4
Spain 1.6
France 7.2
Switzerland 8
Italy 2.3
Hong Kong 3.7
Singapore 2.2
Australia 2.5
</TABLE>
SCHWAB INTERNATIONAL INDEX FUND(TM) EQUITY HOLDINGS
AS OF OCTOBER 31, 1995
LOOKING FORWARD
Whatever direction the world's equity markets take in the year ahead, we
believe the Schwab International Index Fund will continue to offer you a
convenient, low-cost way to diversify your portfolio internationally. With its
broadly diversified portfolio and potential for high return, we believe the
Fund can play an important role in your overall investment strategy. Going
forward, the Fund will also continue to strive to track the price and dividend
performance of the Schwab International Index(R) and to maintain its tax and
cost efficiencies.
Thank you for placing your confidence in SchwabFunds.(R) We recognize that we
earn your trust day by day, and we look forward to continuing to serve your
investment needs in the future.
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
- ------------------------------------------
<PAGE> 7
TRACKING OVERSEAS EQUITY MARKETS
The Schwab International Index(R) is designed to track the market performance
of some of the world's largest publicly held companies, excluding U.S.
companies. Developed by Schwab in 1993 as a broadly based indicator of overseas
equity markets, the Index currently spans 15 countries in Europe and the
Pacific Rim. The Index represents approximately 35% of the market value of all
publicly traded foreign companies. The stocks which comprise the Index have a
combined market capitalization exceeding $3 trillion.
To be included in the Index, a company must satisfy the following criteria:
- - it must be an operating company, not an investment company;
- - it must be based in a foreign country with a developed securities
market;
- - its shares must trade in a liquid market;
- - it must rank among the world's top 350 companies (after the above three
criteria have been met), based on market capitalization (shares
outstanding multiplied by share price).
To avoid overconcentration to any one national market, the total of all
companies from any one country may not exceed 35% of the Index at the time the
Index is rebalanced. The Index is revised at least semi-annually, and companies
that meet or no longer meet these criteria are added or deleted, as
appropriate. By investing in the stocks that comprise the Index, the Schwab
International Index Fund can help you diversify your portfolio through exposure
to leading foreign companies around the world.
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM OF
CHARLES SCHWAB INVESTMENT MANAGEMENT, INC.
Stephen B. Ward - Senior Vice President and Chief Investment Officer
Geri Hom - Portfolio Manager
Q. HOW DID THE PERFORMANCE OF THE SCHWAB INTERNATIONAL INDEX(R) COMPARE TO THE
EAFE INDEX DURING THE 12-MONTH REPORTING PERIOD?
A. The total return of the Schwab International Index was 3.94%, outperforming
the -0.33% total return of the EAFE Index. However, the returns of both indices
were below the long-term average for international stock returns. The 20-year
average annual return for international stocks, as measured by the EAFE Index,
for the period ended 12/31/94 was 15.5%.
The chart on the following page illustrates the cumulative total return of the
Schwab International Index, Schwab International Index Fund(TM) and the EAFE
Index since the Fund's inception on September 9, 1993.
<PAGE> 8
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT
(IN THE SCHWAB INTERNATIONAL INDEX FUND(TM),
THE SCHWAB INTERNATIONAL INDEX(R) AND THE EAFE INDEX)
SCHWAB INTERNATIONAL INDEX FUND
AVERAGE ANNUAL TOTAL RETURNS THROUGH OCTOBER 31, 1995
<TABLE>
<CAPTION>
ONE YEAR SINCE INCEPTION
-------- ---------------
<S> <C>
3.35% 5.95%
</TABLE>
[Line graph comparing value of $10,000 investment for the period 9/9/93 through
10/31/95 between the Schwab International Index(R) $11,461, the Schwab
International Index Fund(TM) $11,318, and the EAFE Index $11,075]
<TABLE>
<CAPTION>
Date Int'l Index Fund Int'l Index EAFE Index
- ---- ---------------- ----------- ----------
<S> <C> <C> <C>
9/3/93............. 10,000 10,000 10,000
9/30/93............. 9,767 9,786 9,776
10/31/93............. 10,150 10,167 10,079
11/30/93............. 9,420 9,454 9,200
12/31/93............. 10,146 10,137 9,867
1/31/94............. 10,769 10,823 10,703
2/28/94............. 10,558 10,623 10,676
3/31/94............. 10,156 10,172 10,218
4/30/94............. 10,458 10,544 10,654
5/31/94............. 10,408 10,448 10,593
6/30/94............. 10,488 10,508 10,743
7/31/94............. 10,649 10,692 10,846
8/31/94............. 10,941 10,999 11,103
9/30/94............. 10,559 10,621 10,753
10/31/94............. 10,951 11,026 11,113
11/30/94............. 10,427 10,478 10,579
12/31/94............. 10,484 10,564 10,645
1/31/95............. 10,108 10,254 10,237
2/28/95............. 10,189 10,282 10,207
3/31/95............. 10,759 10,964 10,847
4/30/95............. 11,145 11,346 11,255
5/31/95............. 11,176 11,303 11,121
6/30/95............. 11,064 11,168 10,926
7/31/95............. 11,623 11,826 11,607
8/31/95............. 11,237 11,384 11,165
9/30/95............. 11,470 11,661 11,382
10/31/95............. 11,318 11,461 11,075
</TABLE>
Past performance is no guarantee of future results. Principal value and
returns will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
The performance graph compares a hypothetical $10,000 investment in the
Schwab International Index Fund since inception with hypothetical
investments in the Schwab International Index and the EAFE Index.
Indices are unmanaged and assume reinvestment of all dividends.
Investors cannot invest directly in an index, therefore indices, unlike
the Fund, do not reflect the payment of advisory fees and other
expenses associated with an investment in the Fund. Fund total returns
assume the reinvestment of all dividends and capital gain distributions.
Q. WHAT ACCOUNTS FOR THE DIFFERENCE IN THE PERFORMANCE OF THE SCHWAB
INTERNATIONAL INDEX(R) AND THE SCHWAB INTERNATIONAL INDEX FUND(TM)?
A. Unlike the Fund, the Index does not incur management and other Fund costs
which reduce returns to the shareholders. In addition, the Fund, unlike the
Index, holds a small portion of its balances in cash to meet shareholder
redemptions and pay expenses. The cash portion earns interest at money market
rates, which may be more or less than the returns of the Index during a given
period. Also, the weighting of any particular security in the Fund can be
greater or less than in the Index.
Another factor accounting for the difference in performance is the Fund's goal
to minimize capital gain distributions. In order to avoid excessive realization
of capital gains, the Fund may continue to hold certain stocks which are no
longer in the Index. Depending on the performance of these non-Index stocks,
this practice may have positive or negative contributions to the Fund's
tracking error.
<PAGE> 9
Combined, these factors cause the difference in the returns of the Fund
compared to the Index, a difference referred to as the Fund's "tracking error."
The tracking error for the Fund during the reporting period was 0.59%, and the
average annual tracking error since the Fund's inception has been 0.62%. Given
the Fund's operating expense ratio of 0.69% and the components of tracking
error (as discussed above) we view this tracking error as favorable.
Q. HOW HAVE THE FLUCTUATING VALUES OF THE U.S. DOLLAR AND OTHER INTERNATIONAL
CURRENCIES AFFECTED THE SCHWAB INTERNATIONAL INDEX AND SCHWAB INTERNATIONAL
INDEX FUND DURING THE REPORTING PERIOD?
A. Since investments in the Fund are denominated in U.S. dollars, the return
on international equities to Fund investors is made up of two primary
components-- the market movement of securities, and the value of the dollar in
relation to the securities' local currencies. As a result, fluctuations in the
exchange rate between the U.S. dollar and the local currencies will affect the
U.S. dollar-denominated returns the Fund earns on international equities. If
the U.S. dollar rises against the local currency, it will decrease the return
on your investment in the Fund. However, if the U.S. dollar falls against the
local currency, it will increase the return on your investment.
The three countries with the largest representation as a percentage of the
Fund's investments were Japan (30%), the United Kingdom (20%) and Germany (9%).
In terms of currency fluctuations, the Japanese yen had the greatest effect on
the Index and the Fund's performance. During the first half of the reporting
period, the U.S. dollar fell dramatically against the Japanese yen, which
increased total return for Fund investors. The situation reversed itself during
the second half of the reporting period, with the U.S. dollar rebounding
against the Japanese yen, which had a negative impact on the Index and the
Fund's total return. Therefore, the net effect of currency fluctuations on the
Index and the Fund's performance over the entire reporting period was minor.
However, within the reporting period the value of the Index, and therefore Fund
shares, was affected by currency movements. The graph on the following page
illustrates how currency fluctuations affected the Index.
The bold line represents Schwab International Index U.S. dollar-denominated
returns. The gray line represents local currency returns for the Schwab
International Index prior to conversion to U.S. dollars. The impact of the weak
U.S. dollar in the second quarter of 1995 caused the spread between returns
earned by U.S. dollar-denominated investments and local currency returns to
widen, as shown by the graph. Later in the year, although stock prices rose in
local currency terms, this increase was offset by the strengthening dollar, and
the spread decreased. It is important to remember that currency fluctuations,
such as those experienced during the reporting period, are not unusual and
should be an expected element of international investing. In fact, if an
investor's diversified portfolio includes both U.S. and international
securities, these exchange rate fluctuations may have a beneficial impact on
total portfolio risk by reducing the correlation of returns among asset classes
within the portfolio.
<PAGE> 10
[Line graph comparing value of $10,000 investment in the Schwab
International Index(R) for the period 10/31/94 through 10/31/95
in U.S. dollars $10,394 and in local currency $10,408]
SCHWAB INTERNATIONAL INDEX(R) TOTAL RETURN
EXPRESSED IN U.S. DOLLARS AND LOCAL CURRENCY
<TABLE>
<CAPTION>
Date U.S. Dollar Local Currency
---- ----------- --------------
<S> <C> <C>
10/31/94 10,000 10,000
11/30/94 9,503 9,790
12/31/94 9,581 9,869
1/31/95 9,300 9,473
2/28/95 9,325 9,362
3/31/95 9,944 9,349
4/30/95 10,290 9,631
5/31/95 10,251 9,697
6/30/95 10,129 9,534
7/31/95 10,725 10,160
8/31/95 10,324 10,387
9/30/95 10,576 10,495
10/31/95 10,394 10,408
</TABLE>
Principal value and returns will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original
cost.
The graph compares a hypothetical investment in the Schwab
International Index. Indices are unmanaged and assume reinvestment of
all dividends. Investors cannot invest directly in an index, therefore
indices, unlike Funds, do not reflect payment of advisory fees and
other expenses associated with an investment in a Fund. Past
performance does not indicate future performance.
Q. WHICH FOREIGN COUNTRIES' EQUITIES PROVIDED THE GREATEST RETURN DURING THE
PAST 12-MONTHS FOR U.S. INTERNATIONAL INVESTORS?
A. Switzerland was clearly the strongest performing equity market during the
period. The total return for Swiss stocks in the EAFE Index was 38.26% 7.
Swiss stocks represented approximately 8% of Fund net assets at the end of the
reporting period. Other countries that exhibited strong market performance
during the period were Sweden and Belgium, whose total returns in the EAFE
Index were 26.95% 7, and 18.19% 7, respectively. Sweden and Belgium
represented approximately 2% and 1% of Fund net assets at the end of the
period, respectively.
Q. WHY ARE INTERNATIONAL INDEX FUNDS AN ATTRACTIVE INVESTMENT OPTION, AND WHAT
ROLE SHOULD AN INTERNATIONAL INDEX FUND PLAY IN AN INVESTMENT PORTFOLIO?
A. As with other types of securities, investing in international stocks using
an index fund as the investment vehicle offers the advantages of broad company
diversification, typically lower operating expense ratios than actively managed
funds 8, and, in the case of the Schwab International Index Fund(TM), a
tax-smart management strategy which seeks to minimize portfolio turnover and
capital gain distributions.
7 Source: Morgan Stanley, Inc. Morgan Stanley Capital International total
returns. These total returns do not represent those of the Schwab
International Index(R) or the Schwab International Index Fund.
8 Source: Morningstar, Inc. The average annual operating expense ratio for
316 actively managed international funds was 1.69% compared to 1.16% for
11 international index funds as of 10/31/95.
<PAGE> 11
International stocks also manifest certain characteristics which make them
attractive elements of a well-diversified investment portfolio. Historically,
international stocks have demonstrated high return potential and correlations
of return which differ significantly from domestic stock returns. For example,
for the 20-year period ended 12/31/94, international stocks, as measured by the
EAFE Index provided an average annual return of 15.5%. 9 During the same
period, international stocks had total return correlations of 0.469, 0.379 and
0.269 with domestic large-cap stocks, domestic small-cap stocks and long-term
U.S Government bonds, respectively. A correlation of 1.0 means that the returns
of the asset classes move together perfectly in relation to each other. A
correlation of 0.0 means that the returns of the asset classes have no
relationship whatsoever. A negative correlation means that the returns of the
asset classes move in opposite directions in relation to each other. When
combining asset classes to formulate an investment portfolio, utilizing asset
classes with low or even negative return correlations will result in lower
total return volatility.
Typically, investors with higher risk tolerances and longer term investment
horizons may be able to consider a larger allocation to international stocks.
Investors with lower risk tolerances and shorter term investment horizons may
want to consider a smaller, or no, allocation to international stocks. An
investment portfolio which uses only international stocks will not realize the
benefits of asset class diversification described above. To take maximum
advantage of these investment principles, an investor should consider combining
international stocks with other major equity asset classes (such as large
company stocks and small company stocks) to form the equity component of a
well-diversified investment portfolio.
9 Source: BARRA, Inc. Specific sources for the data are EAFE Index for
international stock; S&P 500 for large-cap stock; Ibbotson and BARRA
Small Company Index for small-cap stock and Ibbotson and Lehman
Long-Term Bond Index for government bond performance. Total return
assumes reinvestment of all dividends and capital gain distributions.
Indices are unmanaged and do not incur management or transaction costs
and cannot be invested in. Past perfromance does not guarantee future
results.
<PAGE> 12
SchwabFunds(R) 1
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
COMMON STOCK--97.3%
AUSTRALIA--2.4%
Australia & New Zealand
Banking Group 53,322 $ 223
BTR Nylex, Ltd. 116,332 316
Broken Hill Proprietary Co.,
Ltd. 83,813 1,135
CRA 27,600 426
Coles Myer, Ltd. 51,855 179
Commonwealth Bank Group 41,124 313
National Australia Bank 63,258 542
News Corp., Ltd. 91,896 463
Western Mining Corp. 53,600 344
Westpac Banking Corp. 79,986 328
--------
4,269
--------
BELGIUM--0.6%
Electrabel 2,000 449
Electrabel, AFV1 500 114
Petrofina SA 1,100 341
Societe Generale de Belgique 3,040 230
--------
1,134
--------
CANADA--3.0%
Alcan Aluminum 10,050 322
BCE Inc. 14,279 481
Bank of Montreal 11,886 268
Bank of Nova Scotia 8,524 184
Barrick Gold Corp. 16,500 385
Canadian Imperial Bank of
Commerce 9,595 260
Canadian Pacific Ltd. 16,700 266
Imperial Oil Ltd. 8,919 327
Newbridge Networks Corp.* 3,300 101
Northern Telecom Ltd. 12,000 433
Nova Corp. 19,200 149
PanCanadian Petroleum Ltd. 5,000 168
Placer Dome Inc. 21,200 467
Royal Bank of Canada 15,200 342
Seagram Co. Ltd. 17,400 633
Thomson Corp. 27,100 367
Toronto-Dominion Bank 14,000 248
--------
5,401
--------
DENMARK--0.4%
D/S 1912 Series B 10 196
D/S Svendborg Series B 5 140
Tele Danmark AS Series B 5,910 308
--------
644
--------
FRANCE--7.2%
AXA Groupe SA 13,366 742
Alcatel Alsthom Cie Generale
d'Electricite SA 6,954 594
Alcatel Cable 1,723 100
Assurances Generales de
France 15,800 456
Banque Nationale de Paris 10,161 418
Canal Plus 819 142
Carrefour 1,200 705
Cie Financiere de Paribas
(Bearer) 5,425 298
Cie Generale des Eaux 5,221 485
Compagnie de Saint-Gobain SA 3,931 469
Danone Groupe 3,350 535
Elf Aquitaine 12,835 874
L'Air Liquide 3,073 515
L'Oreal SA 2,900 709
LVMH Moet Hennessy Louis
Vuitton 7,100 1,413
Lafarge Coppee SA 8,596 570
Lyonnaise des Eaux-Dumez 2,780 271
Michelin Class B (Reg.) 5,300 214
PSA Peugeot Citroen 2,200 287
Renault (Regie Nationale) 10,500 329
Rhone-Poulenc SA A Shares 15,400 336
Sanofi 4,510 288
Schneider SA 8,900 343
Societe Generale 3,978 456
Suez Group 7,455 281
TOTAL Class B 10,604 655
Union des Assurances de Paris 14,389 374
--------
12,859
--------
GERMANY--8.1%
BASF Group 2,653 582
Bankgesellschaft Berlin 1,206 356
Bayer AG 3,167 842
Bayerische Hypotheken &
Wechsel Bank AG 11,380 275
Bayerische Motoren Werke AG 910 488
Bayerische Vereinsbank AG 11,590 328
Commerzbank AG 1,535 355
Daimler-Benz AG 2,721 1,312
Deutsche Bank AG 21,400 968
Dresdner Bank AG 20,130 538
Hoechst AG 2,762 725
Linde AG 400 246
Lufthansa AG (Bearer) 1,600 223
Mannesmann AG 1,734 571
Muenchener Rueckversicherung 11 19
Muenchener Rueckversicherung
(Reg.) 744 1,544
Preussag AG 721 205
RWE AG 1,581 563
SAP AG 2,840 450
Schering AG 3,500 244
Siemens AG 2,610 1,368
Thyssen AG 1,411 254
VIAG AG 970 394
Veba AG 22,470 923
Vereinigte Elektrizitatswerke
Westfalen Series B 903 300
Volkswagen AG 1,246 393
--------
14,466
--------
HONG KONG--3.7%
CITIC Pacific 98,000 306
Cathay Pacific Airways 141,000 208
Cheung Kong Holdings 50,000 282
China Light & Power 94,900 506
Hang Seng Bank Ltd. 88,900 745
Henderson Land
Development Co. 76,000 455
Hongkong Electric Holdings
Ltd. 99,000 337
Hongkong Telecom
International 520,000 908
Hutchison Whampoa Ltd. 165,000 909
New World Development Co. 69,709 271
Sun Hung Kai Properties 107,500 859
Swire Pacific Ltd. Class A 75,500 566
Wharf Holdings 101,000 341
--------
6,693
--------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 13
SchwabFunds(R) 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
ITALY--2.3%
Alleanza Assicurazioni 22,500 $ 192
Alleanza Assicurazioni
(Non-Convertible) 3,750 26
Assicurazioni Generali 37,200 867
Banco di Roma SpA 141,900 127
Fiat Finance SpA 113,000 368
Fiat Finance SpA
(Non-Convertible) 42,000 79
First Bank San Paolo di
Torino 27,700 153
IMI 24,800 136
INA 201,000 264
Montedison SpA 213,000 147
RAS Assicurazioni 6,310 63
RAS Assicurazioni
(Non-Convertible) 2,790 15
STET 177,000 501
STET (Non-Convertible) 66,000 144
Telecom Italia 260,000 395
Telecom Italia
(Non-Convertible) 65,000 77
Telecom Italia Mob* 260,000 436
Telecom Italia Mob di Risp* 65,000 72
--------
4,062
--------
JAPAN--30.4%
Ajinomoto Co., Inc. 14,000 138
All Nippon Airways Co., Ltd. 31,000 300
Asahi Bank 48,000 479
Asahi Breweries 8,000 87
Asahi Chemical Industry Co. 28,000 197
Asahi Glass Co., Ltd. 24,000 235
Ashikaga Bank 15,000 89
Bank of Fukuoka 11,000 81
Bank of Tokyo 58,000 845
Bank of Yokohama 24,000 170
Bridgestone Corp. 15,000 208
Canon Inc. 18,000 308
Chiba Bank 16,000 133
Chubu Electric Power Co. 16,100 375
Chugoku Electric Power
Co., Inc. 7,854 183
Cosmo Oil Co. 11,000 54
DDI Corp. 100 810
Dai Nippon Printing Co. 15,000 239
Dai-Ichi Kangyo Bank, Ltd. 97,000 1,640
Daiei Inc. 14,000 146
Daiichi Pharmaceutical Co. 5,000 70
Daiwa Bank 33,000 197
Daiwa House Industry Co. 11,000 165
Daiwa Securities Co. 29,000 340
East Japan Railway Co. 100 472
Ebara Corp. 5,000 69
Eisai Co. 5,000 85
Fanuc 5,000 217
Fuji Bank, Ltd. 93,000 1,727
Fuji Photo Film Co. 11,000 272
Fujitsu Ltd. 38,000 453
Furukawa Electric Co., Ltd. 13,000 58
Gunma Bank 10,000 102
Hachijuni Bank 13,000 145
Hankyu Corp. 17,000 88
Hanwa Co. 5,000 15
Hiroshima Bank 13,000 64
Hitachi Ltd. 96,000 985
Hitachi Zosen 19,000 93
Hokkaido Electric Power Co. 4,080 95
Hokkaido Takushoku Bank 12,000 30
Hokuriku Bank 13,000 76
Hokuriku Electric Power Co. 4,080 94
Honda Motor Co., Ltd. 20,000 348
Industrial Bank of Japan,
Ltd. 76,000 2,073
Ishikawajima-Harima Heavy
Industries 25,000 101
Isuzu Motors Ltd. 20,000 81
Ito-Yokado Co., Ltd. 9,000 492
Itochu Corp. 28,000 166
Japan Airlines Co., Ltd. 35,000 210
Japan Energy Co. 21,000 60
Japan Telecom Co. 10 222
Japan Tobacco Inc. 100 854
Joyo Bank 18,000 129
Jusco Co. 6,000 141
Kajima Corp. 20,000 185
Kandenko Co., Ltd. 5,000 62
Kansai Electric Power Co. 20,200 474
Kao Corp. 12,000 145
Kawasaki Heavy Industries 25,000 105
Kawasaki Steel Co. 72,000 239
Keio Teito Railway Co. 8,000 45
Kinden Co. 3,000 52
Kinki Nippon Railway Co. 35,000 270
Kirin Brewery Co., Ltd. 22,000 222
Kobe Steel 59,000 155
Kokusai Denki 1,500 121
Komatsu Ltd. 22,000 172
Kubota Corp. 27,000 167
Kyocera Corp. 4,000 328
Kyowa Hakko Kogyo 6,000 56
Kyushu Electric Power Co. 9,797 232
Kyushu Matsushita Electric
Co. 3,000 48
Long-Term Credit Bank of
Japan 52,000 406
Marubeni Corp. 34,000 166
Marui Co. 7,000 121
Matsushita Communication
Industrial 4,000 90
Matsushita Electric
Industrial Co., Ltd. 61,000 865
Matsushita Electric Works 15,000 148
Matsushita-Kotokuki
Electronics 3,000 61
Mazda Motor Corp. 21,000 66
Mitsubishi Bank 82,000 1,603
Mitsubishi Chemical Corp. 34,000 154
Mitsubishi Corp. 33,000 365
Mitsubishi Electric Corp. 43,000 321
Mitsubishi Estate Co. 28,000 298
Mitsubishi Heavy Industries 71,000 548
Mitsubishi Materials Co. 21,000 95
Mitsubishi Motors 17,000 142
Mitsubishi Oil Co. 8,000 64
Mitsubishi Trust & Banking
Corp. 27,000 377
Mitsui & Co. 34,000 271
Mitsui Fudosan Co. 16,000 183
Mitsui Marine & Fire
Insurance 14,000 84
Mitsui O.S.K. Lines 14,000 37
Mitsui Trust & Banking Co. 25,000 200
Mitsukoshi Ltd. 9,000 71
Murata Manufacturing Co. 5,000 175
NEC Corp. 34,000 449
NGK Insulators 5,000 46
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 14
SchwabFunds(R) 3
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
NKK Corp. 67,000 $ 162
Nagoya Railroad Co. 10,000 47
New Oji Paper Co. 16,000 147
Nichii Co. 4,000 47
Nikko Securities Co. 29,000 270
Nikon Corp. 11,000 157
Nintendo Co., Ltd. 3,000 221
Nippon Credit Bank 34,000 133
Nippon Express Co. 21,000 170
Nippon Fire & Marine
Insurance Co. 7,000 38
Nippon Oil Co. 26,000 138
Nippon Paper Industries Co. 39,000 268
Nippon Steel Corp. 145,000 481
Nippon Telegraph &
Telephone Corp. 596 4,888
Nippon Yusen Kabushiki Kaisha 27,000 144
Nippondenso 17,000 311
Nissan Motor Co., Ltd. 54,000 364
Nisshin Steel Co. 20,000 74
Nomura Securities Co., Ltd. 51,000 932
Obayashi Corp. 17,000 126
Odakyu Electric Railway Co. 14,000 94
Oki Electric Industry Co.,
Ltd. 12,000 111
Omron Corp. 8,000 187
Ono Pharmaceutical Co. 3,000 119
Osaka Gas Co. 53,000 178
Pioneer Electronic Corp. 4,000 61
Ricoh Co., Ltd. 13,000 140
Rohm Co. 4,000 243
SEGA Enterprises, Ltd. 2,000 106
Sakura Bank 86,000 832
Sankyo Co. 7,000 154
Sanwa Bank 92,000 1,565
Sanyo Electric Co., Ltd. 40,000 207
Secom Co. 3,000 195
Seibu Railway Co. 11,000 484
Sekisui Chemical Co. 11,000 143
Sekisui House 14,000 161
Seven-Eleven Japan Co. 7,000 467
Sharp Corp. 22,000 305
Shikoku Electric Power Co. 6,222 145
Shimizu Corp. 17,000 158
Shin-Etsu Chemical Co. 6,000 123
Shiseido Co., Ltd. 8,000 81
Shizuoka Bank 16,000 189
Showa Shell Sekiyu 8,000 64
Sony Corp. 8,000 360
Sony Music Entertainment
(Japan) 2,100 90
Sumitomo Bank 90,000 1,592
Sumitomo Chemical Co. 35,000 163
Sumitomo Corp. 21,000 191
Sumitomo Electric Industries 15,000 173
Sumitomo Marine & Fire
Insurance Co. 13,000 93
Sumitomo Metal Industries 60,000 162
Sumitomo Metal Mining Co. 11,000 87
Sumitomo Trust & Banking Co. 25,000 288
Suzuki Motor Corp. 10,000 101
TDK 3,000 155
Taisei Corp. 19,000 113
Taisho Pharmaceutical Co. 8,000 145
Takeda Chemical Industries 17,000 239
Teijin Ltd. 19,000 87
Tobu Railway Co. 16,000 91
Tohoku Electric Power Co. 10,100 237
Tokai Bank 42,000 439
Tokio Marine & Fire
Insurance Co. 33,000 339
Tokyo Electric Power Co.,
Inc. 39,087 1,024
Tokyo Electron 3,000 130
Tokyo Gas & Electric
Industrial 57,000 201
Tokyu Corp. 23,000 146
Tonen 13,000 184
Toppan Printing Co. 15,000 198
Toray Industries 29,000 181
Toshiba Corp. 68,000 493
Tostem Corp. 5,000 153
Toto 8,000 108
Toyo Seikan 4,000 115
Toyo Trust & Banking Co. 17,000 115
Toyoda Automatic Loom 6,000 94
Toyota Motor Corp. 118,000 2,192
Yamaichi Securities Co. 25,000 131
Yamanouchi Pharmaceutical Co. 6,000 134
Yamazaki Baking Co. 5,000 88
Yasuda Fire & Marine
Insurance Co. 20,000 121
Yasuda Trust & Banking Co. 23,000 103
--------
54,676
--------
NETHERLANDS--5.1%
ABN-AMRO Holding NV 12,240 514
Aegon NV 11,115 422
Akzo Nobel NV 3,300 376
Elsevier NV 31,600 409
Heineken NV 2,250 399
Internationale Nederlanden
Groep 13,042 778
Koninklijke PTT Nederland 22,140 779
Philips Electronics NV 15,400 595
PolyGram NV 8,700 543
Royal Dutch/Shell Group
(Bearer) 25,200 3,129
Unilever NV 7,500 983
Wolters Kluwer CVA 3,139 286
--------
9,213
--------
SINGAPORE--2.2%
Development Bank Singapore 45,000 516
Hong Kong Land Holdings 233,331 420
Jardine Matheson Holdings
Ltd. 35,811 218
OCBC Bank 41,833 491
Singapore Airlines Ltd. 62,000 575
Singapore Telecom 709,000 1,445
United Overseas Bank 39,600 348
--------
4,013
--------
SPAIN--1.6%
Argentaria 5,700 201
Banco Central SA (Reg.) 5,500 114
Banco Espanol de Credito 26,000 176
Banco de Bilbao Vizcaya SA
(Reg.) 11,200 342
Banco de Santander SA (Reg.) 6,800 296
Empresa Nacional de
Electricidad 11,700 582
Iberdrola SA 39,600 298
Repsol, SA 12,800 382
Telefonica Internacional de
Espana, SA 42,300 534
--------
2,925
--------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 15
SchwabFunds(R) 4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
SWEDEN--2.2%
ASEA AB Series A Free shares 3,300 $ 330
ASEA AB Series B Free shares 800 79
Astra AB Series A Free shares 22,400 823
Astra AB Series B Free shares 3,400 123
Branded Consumer Products
(Compulsory Acquisition)
Series A* 5,300 75
Branded Consumer Products
(Compulsory Acquisition)
Series B* 2,800 39
Ericsson(LM) Telephone* 6,280 133
Ericsson(LM) Telephone
Series B 62,800 1,333
Pharmacia AB Series A
Free shares 5,300 184
Pharmacia AB Series B
Free shares 2,800 98
Sandvik AB Series A
Free shares 8,600 161
Volvo AB Series A Free shares 5,000 114
Volvo AB Series B Free shares 20,700 466
--------
3,958
--------
SWITZERLAND--8.0%
BBC Brown Boveri 370 429
BBC Brown Boveri (Reg.) 189 43
CS Holding (Reg.) 13,670 1,397
Ciba-Geigy Ltd. (Bearer) 170 147
Ciba-Geigy Ltd. (Reg.) 1,175 1,017
Cie Financiere Richemont
Series A (Bearer) 259 360
Holderbank Fn Glarus (Bearer) 1,000 803
Nestle Ltd. (Reg.) 1,823 1,911
Roche Group 323 2,347
Roche Group (Bearer) 75 960
SMH AG (Bearer) 156 97
SMH AG (Reg.) 682 92
Sandoz Ltd. (Bearer) 491 409
Sandoz Ltd. (Reg.) 1,673 1,381
Schweizerische
Bankgesellschaft (Bearer) 979 1,061
Schweizerische
Bankgesellschaft (Reg.) 950 218
Schweizerische Bankverein
(Bearer) 1,129 463
Schweizerische Bankverein
(Reg.) 1,251 256
Winterthur (Reg.) 500 329
Zurich Versicherun (Reg.) 2,095 600
--------
14,320
--------
UNITED KINGDOM--20.1%
Abbey National 61,900 524
Allied-Lyons 48,700 393
Argyll Group 54,708 278
BAA PLC 48,456 377
BAT Industries PLC 144,756 1,188
BOC Group 21,850 300
BTR PLC 165,615 880
Barclays PLC 75,223 883
Bass PLC 42,400 444
Boots Co. PLC 46,648 413
British Airways PLC 46,400 334
British Gas PLC 201,400 767
British Petroleum Co. PLC 259,375 1,907
British Sky Broadcast 76,400 457
British Steel 94,600 244
British Telecommunications
PLC 294,200 1,749
Cable & Wireless PLC 146,900 959
Cadbury Schweppes PLC 40,210 332
Commercial Union
Assurance Co. 31,400 304
General Accident 17,300 177
General Electric Co. PLC 125,200 622
Glaxo PLC 149,529 2,017
Grand Metropolitan PLC 98,003 679
Great Universal Stores 47,800 431
Guinness PLC 93,500 749
HSBC Holdings PLC 40,757 606
HSBC Holdings PLC
(Hong Kong) 82,896 1,217
Hanson PLC 240,444 737
Imperial Chemical
Industries PLC 32,100 393
Inchcape 22,221 110
J. Sainsbury PLC 85,028 569
Kingfisher 29,415 221
Lloyds Abbey Life 26,700 193
Lloyds Bank 59,098 727
Marks & Spencer PLC 127,500 855
National Power Development 59,600 465
National Westminster Bank PLC 75,443 753
Pearson PLC 25,137 250
Peninsular & Oriental Steam
Navigation Co. 26,291 200
Powergen PLC 37,400 336
Prudential Corp. 85,865 537
RTZ Corp. PLC (Reg.) 48,503 672
Rank Organisation PLC 40,800 272
Redland 22,248 123
Reed International PLC 26,000 395
Reuters Holdings PLC 86,500 804
Royal Bank of Scotland 36,413 295
Scot & Newcastle 20,100 186
Scottish Power 31,400 173
Shell Transport & Trading
Co. (Reg.) 157,000 1,837
SmithKline Beecham PLC
Series A 65,635 685
SmithKline Beecham PLC
(units) 62,700 642
Standard Chartered PLC 10,264 84
Sun Alliance Group 31,988 191
TSB Group PLC 76,700 452
Tesco 95,403 453
Thorn EMI PLC 19,666 458
Tomkins 47,801 189
Unilever PLC 36,900 717
Vendome (units) 34,050 301
Vodafone Group PLC 146,192 604
Waste Management
International* 16,000 75
Zeneca Group 45,200 842
--------
36,027
--------
TOTAL COMMON STOCK
(Cost $162,414) 174,660
--------
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 16
SchwabFunds(R) 5
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF NET ASSETS
October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- --------
<S> <C> <C>
PREFERRED STOCK--0.7%
AUSTRALIA--0.1%
News Corp. Ltd. (Limited
Voting Shares) 39,718 $ 182
--------
GERMANY--0.6%
Henkel KGaA 629 235
RWE AG (Non Voting) 1,832 519
SAP AG Non Voting Preference 2,010 308
Volkswagen AG (Non Voting) 350 80
--------
1,142
--------
ITALY--0.0%
Fiat Finance SpA 38,800 77
--------
TOTAL PREFERRED STOCK
(Cost $1,168) 1,401
--------
WARRANTS--0.0%
UNITED KINGDOM--0.0%
BTR Nylex Ltd.
(expire 11/26/98)* 4,019 2
--------
TOTAL WARRANTS
(Cost $3) 2
--------
REPURCHASE AGREEMENT--1.2%
UNITED STATES--1.2%
State Street Bank & Trust
4.75%
Dated 10/31/95
Due 11/01/95
Collateralized By:
U.S. Treasury Bond
$1,440,000 Par; 12%
Due 8/15/13 $ 2,144 2,144
--------
TOTAL REPURCHASE AGREEMENT
(Cost $2,144) 2,144
--------
TOTAL INVESTMENTS--99.2%
(Cost $165,729) 178,207
--------
OTHER ASSETS AND LIABILITIES--0.8%
Other Assets 1,793
Liabilities (388)
--------
1,405
--------
NET ASSETS--100.0%
Applicable to 16,137,640
outstanding $0.00001
par value shares
(unlimited shares
authorized) $179,612
========
NET ASSET VALUE PER SHARE $11.13
=====
</TABLE>
- ------------------
*Non-Income Producing Security
See accompanying Notes to Financial Statements.
<PAGE> 17
SchwabFunds(R) 6
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF OPERATIONS (in thousands)
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment income:
Dividends (net of foreign tax withheld of $515) $ 3,386
Interest 161
-------
Total investment income 3,547
-------
Expenses:
Investment advisory and administration fee 1,080
Transfer agency and shareholder service fees 386
Custodian fees 206
Registration fees 45
Professional fees 50
Shareholder reports 46
Trustees' fees 43
Amortization of deferred organization costs 24
Insurance and other expenses 6
-------
1,886
Less expenses reduced (577)
-------
Total expenses incurred by Fund 1,309
-------
Net investment income 2,238
-------
Net realized gain (loss) on investments and foreign currency
transactions:
Proceeds from sales of investments 9,597
Cost of investments sold (9,437)
-------
Net realized gain on investments from changes in market
value 160
Net realized loss on investments from changes in foreign
exchange rates (137)
-------
Net realized gain on investments sold 23
Net realized gain on foreign currency transactions 170
-------
Net realized gain on investments sold and foreign
currency transactions 193
-------
Change in net unrealized gain (loss) on investments and foreign
currency translation:
Changes in market value:
Beginning of period unrealized gain 413
End of period unrealized gain 4,832
-------
Increase in net unrealized gain in market value 4,419
-------
Changes in foreign exchange rates:
Beginning of period unrealized gain 9,494
End of period unrealized gain 7,646
-------
Decrease in net unrealized gain in foreign exchange rates (1,848)
-------
Increase in net unrealized gain on investments from
changes in market value and foreign exchange rates 2,571
Decrease in net unrealized gain on translating assets
and liabilities into the reporting currency (14)
-------
Increase in net unrealized gain on investments and
foreign currency translation 2,557
-------
Net gain on investments 2,750
-------
Increase in net assets resulting from operations $ 4,988
=======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 18
SchwabFunds(R) 7
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended
October 31,
1995 1994
-------- --------
<S> <C> <C>
Operations:
Net investment income $ 2,238 $ 1,412
Net realized gain (loss) on investments sold
and foreign currency transactions 193 (580)
Increase in net unrealized gain on investments
and foreign currency translation 2,557 8,889
-------- --------
Increase in net assets resulting from
operations 4,988 9,721
-------- --------
Distributions to Shareholders From:
Net investment income (1,532) (433)
Capital gains -- (188)
-------- --------
Total distributions to shareholders (1,532) (621)
-------- --------
Capital Share Transactions:
Proceeds from shares sold 73,349 61,237
Net asset value of shares issued in
reinvestment of distributions 1,372 560
Early withdrawal fees 49 129
Less payments for shares redeemed (40,969) (34,756)
-------- --------
Increase in net assets from capital share
transactions 33,801 27,170
-------- --------
Total increase in net assets 37,257 36,270
Net Assets:
Beginning of period 142,355 106,085
-------- --------
End of period (including undistributed
net investment income of $2,051 and
$1,306, respectively) $179,612 $142,355
======== ========
Number of Fund Shares:
Sold 6,778 5,947
Reinvested 134 56
Redeemed (3,840) (3,392)
-------- --------
Net increase in shares outstanding 3,072 2,611
Shares Outstanding:
Beginning of period 13,066 10,455
-------- --------
End of period 16,138 13,066
======== ========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 19
SchwabFunds(R) 8
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
The Schwab International Index Fund (the "Fund") is a series of Schwab Capital
Trust (the "Trust"), an open-end, management investment company organized as a
Massachusetts business trust on May 7, 1993 and registered under the Investment
Company Act of 1940, as amended.
In addition to the Fund, the Trust also offers the Schwab Small-Cap Index
Fund(R), the Schwab Asset Director(R)-High Growth Fund, the Schwab Asset
Director(R)-Conservative Growth Fund and the Schwab Asset Director(R)-Balanced
Growth Fund. The assets of each series are segregated and accounted for
separately.
The investment objective of the Fund is to attempt to track the price and
dividend performance (total return) of the Schwab International Index(R), an
index created to represent the performance of common stocks and other equity
securities issued by large, publicly traded companies from countries around the
world with major developed securities markets, excluding the United States.
2. SIGNIFICANT ACCOUNTING POLICIES
Security valuation -- Investments in securities traded on an exchange are valued
at the last quoted sale price for a given day, or if a sale is not reported for
that day, at the mean between the most recent quoted bid and asked prices.
Unlisted securities for which market quotations are readily available are valued
at the mean between the most recent bid and asked prices. Securities for which
no quotations are readily available are valued at fair value as determined in
good faith by the Fund's investment manager pursuant to Board of Trustees'
guidelines. Short-term securities with 60 days or less to maturity are stated at
amortized cost, which approximates market value.
Security transactions and investment income -- Security transactions, in the
accompanying financial statements, are accounted for on a trade date basis (date
the order to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on the ex-dividend date; interest income is recorded
on the accrual basis. Realized gains and losses from security transactions are
determined on an identified cost basis.
Repurchase agreements -- Repurchase agreements are fully collateralized by U.S.
Treasury or Government agency securities. All collateral is held by the Fund's
custodian and is monitored daily to ensure that its market value at least equals
the repurchase price under the agreement.
Foreign currency translation -- The accounting records of the Fund are
maintained in U.S. dollars. Investment securities and all other assets and
liabilities of the Fund denominated in a foreign currency are translated into
U.S. dollars at the exchange rates on October 31. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the exchange rate in effect on the dates of the respective
transactions.
The Fund separates within its statement of operations the portion of realized
and unrealized gains and losses resulting from changes in foreign exchange rates
from that arising from changes in securities' market values.
<PAGE> 20
SchwabFunds(R) 9
- --------------------------------------------------------------------------------
SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
Forward currency contracts -- A forward currency contract ("Forward") is an
agreement between two parties to buy and sell a currency at a set price on a
future date. The value of the Forward fluctuates with changes in currency
exchange rates. The Forward is marked-to-market daily and the change in value is
recorded by the Fund as an unrealized gain or loss. When the Forward is closed,
the Fund records a realized gain or loss equal to the difference between the
value at the time the contract was opened and the value at the time the contract
was closed. The Fund engages in Forwards in connection with the purchase and
sale of portfolio securities to minimize the uncertainty of changes in future
exchange rates.
Deferred organization costs -- Costs incurred in connection with the
organization of the Fund, its initial registration with the Securities and
Exchange Commission and with various states are amortized on a straight-line
basis over a five year period from the Fund's commencement of operations.
Expenses -- Expenses arising in connection with the Fund are charged directly to
the Fund. Expenses common to all series of the Trust are allocated to each
series in proportion to their relative net assets.
Federal income taxes -- It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. The Fund is considered a separate entity for tax purposes.
At October 31, 1995, (for financial reporting and federal income tax purposes),
net unrealized gain aggregated $12,478,000, of which $22,819,000 related to
appreciated securities and $10,341,000 related to depreciated securities.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Fund pays an annual fee, payable monthly, of .70% of the first $300 million
of average daily net assets and .60% of such assets over $300 million. Under
this agreement, the Fund incurred investment advisory and administration fees of
$1,080,000 during the year ended October 31, 1995, before the Investment Manager
reduced its fee (see Note 5).
Sub-advisory agreement -- Prior to June 30, 1995, the Investment Manager had a
sub-advisory agreement with Dimensional Fund Advisors Inc. ("Dimensional") under
which Dimensional performed day-to-day portfolio management for the Fund.
Dimensional did not receive compensation directly from the Fund. However, the
Investment Manager did pay Dimensional an annual fee, payable monthly, of .15%
of the first $300 million of average daily net assets and .05% of such assets
over $300 million. Effective June 30, 1995, the sub-advisory agreement for the
Fund was terminated and the Investment Manager assumed day-to-day portfolio
management responsibility for the Fund.
<PAGE> 21
SchwabFunds(R) 10
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of .05% of average daily net assets for transfer
agency services and .20% of such assets for shareholder services. For the year
ended October 31, 1995, the Fund incurred transfer agency and shareholder
service fees of $386,000, before Schwab reduced its fees (see Note 5).
Officers and trustees -- During the period, certain officers and trustees of the
Trust were also officers or directors of the Investment Manager and/or Schwab.
During the year ended October 31, 1995, the Trust made no direct payments to its
officers or trustees who were "interested persons" within the meaning of the
Investment Company Act of 1940, as amended. The Fund incurred fees of $43,000
related to the Trust's unaffiliated trustees.
4. BORROWING AGREEMENT
The Trust has an arrangement with State Street Bank and Trust Company, the
Fund's custodian, whereby the Fund may borrow up to $10,000,000, on a temporary
basis, to fund redemptions. Amounts borrowed under this arrangement bear
interest at periodically negotiated rates and may be collateralized by the
assets of the Fund. During the year ended October 31, 1995, no borrowings were
made under this arrangement.
5. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees in order to
limit the Fund's ratio of operating expenses to average net assets. For the year
ended October 31, 1995, the total of such fees reduced by the Investment Manager
was $415,000 and the total of such fees reduced by Schwab was $162,000.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
aggregated $43,932,000 and $9,597,000, respectively, for the year ended October
31, 1995.
7. EARLY WITHDRAWAL FEES PAID TO THE FUND
The Fund assesses a .75% early withdrawal fee on redemption proceeds
attributable to shares purchased and held less than six months. The early
withdrawal fee is retained by the Fund and is treated as a contribution to
capital. For the year ended October 31, 1995, total early withdrawal fees
retained by the Fund amounted to $49,000.
<PAGE> 22
SchwabFunds(R) 11
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SCHWAB INTERNATIONAL INDEX FUND(TM)
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1995
- --------------------------------------------------------------------------------
8. COMPOSITION OF NET ASSETS
At October 31, 1995, net assets consisted of:
<TABLE>
<S> <C>
Capital paid in $165,464,000
Accumulated undistributed net investment income 2,051,000
Accumulated net realized loss on investments sold and
foreign currency transactions (402,000)
Net unrealized gain on investments 12,478,000
Net unrealized gain on translating assets and liabilities
into the reporting currency 21,000
------------
Total $179,612,000
============
</TABLE>
The Fund follows Statement of Position 93-2 Determination, Disclosure, and
Financial Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies, which will generally present
undistributed income and realized gains on a tax basis. As a result, certain
reclassifications to increase undistributed net investment income and net
realized loss on investments sold and foreign currency transactions by $39,000
and $15,000 respectively, and to decrease capital paid in by $24,000 have
occurred. These reclassifications have no impact on the net asset value of the
Fund.
At October 31, 1995, the Fund's Statement of Net Assets included liabilities of
$149,000 for Fund shares redeemed and $61,000 for investment advisory and
administration fee payable.
<PAGE> 23
SchwabFunds(R) 12
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9. FINANCIAL HIGHLIGHTS
Per share income and capital changes for a share outstanding throughout the
period:
<TABLE>
<CAPTION>
For the period
September 9,
1993
(commencement of
For the year ended operations) to
October 31, October 31,
1995 1994 1993
-------- -------- ----------------
<S> <C> <C> <C>
Net asset value at beginning of period $ 10.89 $ 10.15 $ 10.00
Income from Investment Operations
- -------------------------------
Net investment income .14 .11 .03
Net realized and unrealized gain on
investments and foreign currency
transactions .22 .69 .12
-------- -------- --------
Total from investment operations .36 .80 .15
Less Distributions
- ---------------
Dividends from net investment income (.12) (.04) --
Distributions from realized gain
on investments -- (.02) --
-------- -------- --------
Total distributions (.12) (.06) --
-------- -------- --------
Net asset value at end of period $ 11.13 $ 10.89 $ 10.15
======== ======== ========
Total return (%) 3.35 7.89 1.50
- --------------
Ratios/Supplemental Data
- -----------------------
Net assets, end of period (000s) $179,612 $142,355 $106,085
Ratio of expenses to
average net assets (%) .85 .90 .60*
Ratio of net investment income to
average net assets (%) 1.45 1.14 2.15*
Portfolio turnover rate (%) 0 6 2
</TABLE>
The Investment Manager and Schwab have reduced a portion of their fees and
absorbed certain expenses in order to limit the Fund's ratio of operating
expenses to average net assets. Had these fees and expenses not been reduced and
absorbed, the ratio of expenses to average net assets for the periods ended
October 31, 1995, 1994 and 1993, would have been 1.22%, 1.30% and 2.10%*,
respectively, and the ratio of net investment income to average net assets would
have been 1.08%, .74% and .65%*, respectively.
* Annualized
<PAGE> 24
SchwabFunds(R) 13
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To the Board of Trustees
and Shareholders of the Schwab International Index Fund(TM)
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets present fairly, in all
material respects, the financial position of the Schwab International Index Fund
(one of the series constituting Schwab Capital Trust, hereafter referred to as
the "Trust") at October 31, 1995, and the results of its operations and the
changes in its net assets for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
San Francisco, California
November 22, 1995
<PAGE> 25
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 26
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE> 27
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio with one investment in any of three
Asset Director(R) Funds, or choose several different equity markets with our
three equity index funds. You can also select from different maturities with
our bond fund choices and take advantage of an array of money market funds.
SCHWAB ASSET DIRECTOR FUNDS
The three Asset Director Funds offer a mix of stocks, bonds and
cash-equivalents with varying degrees of risk and return potential.
- - High Growth Fund seeks to provide high capital growth with less volatility
than an all-stock portfolio.This Fund has the largest stock component and
offers the highest risk and return potential.
- - Balanced Growth Fund seeks to provide maximum total return, including capital
growth and income.This Fund invests in a more balanced mix of stocks and
bonds and offers moderate risk and return potential.
- - Conservative Growth Fund seeks to provide income with growth potential. This
Fund has the smallest stock component, which is designed to help offset
inflation, and generally keeps the majority of its assets invested in bonds.
It offers the lowest risk and return potential.
SCHWAB INDEX FUNDS
- - Schwab 1000 Fund(R) is designed to match the total return of the Schwab 1000
Index,(R) which is comprised of the largest 1,000 publicly traded U.S.
companies-the stocks of which represent about 85% of the total market
capitalization of the U.S. Stock Market. 1
- - Schwab Small-Cap Index Fund(R) is designed to track the total return of the
Schwab Small-Cap Index,(TM) which tracks the performance of
small-capitalization companies. The Schwab Small-Cap Index is comprised of
the second 1,000 largest publicly traded companies in the United States. 1
- - Schwab International Index Fund(TM) is designed to track the total return of
the Schwab International Index,(R) which is comprised of 350 of the largest
companies, based on market capitalization, in foreign countries with
developed securities markets. 2
SCHWAB BOND FUNDS
- - Schwab Government Bond Funds include two different Funds designed to offer
high current yields with the credit safety of high-quality U.S. government
securities. The level of income you are seeking and your tolerance for
fluctuation in share price should determine your selection of either our
Short/Intermediate Fund or our Long-Term Fund. 3
- - Schwab Tax-Free Bond Funds help investors take advantage of one of the last
remain-ing tax breaks: tax-free municipal bonds. We offer a
Short/Intermediate Fund and a Long-Term Fund, both of which pay monthly
income free from federal personal income tax. 4, 5
- - Schwab California Tax-Free Bond Funds give California residents two different
opportunities to earn double tax-free income--free from both federal and
California state personal income taxes. Choose from the Short/Intermediate
Fund or the Long-Term Fund. 5
SCHWAB MONEY FUNDS
Schwab offers an array of money funds that seek high current income with safety
and liquidity. Most can be linked to your Schwab account to "sweep" cash
balances automatically when you're in between other investments. 6
To find out more about any of the SchwabFunds,(R) please call the toll-free
number below. We will be happy to provide you with a free prospectus and
brochure. EACH PROSPECTUS PROVIDES MORE COMPLETE INFORMATION, INCLUDING CHARGES
AND EXPENSES. PLEASE READ IT CAREFULLY BEFORE INVESTING.
1-800-2 NO-LOAD (1-800-266-5623)
1 The Schwab 1000 Index and the Schwab Small-Cap Index consist of publicly
traded companies ranked by market capitalization. These indices do not
include privately held companies, investment companies and companies
incorporated outside of the United States.
2 The Schwab International Index is comprised of publicly traded companies
ranked by market capitalization in countries with developed securities
markets. Currently invested in 15 countries, the Index does not include
privately held companies, investment companies or companies from the United
States.
3 Investors in the Schwab Government Bond Funds may experience a decline in
share price due to prepayment of obligations held by the Funds.
4 Income may be subject to state and local taxes.
5 Income may be subject to the Alternative Minimum Tax (AMT), and capital
appreciation from discounted bonds may be subject to state and federal
income tax.
6 Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the Funds will be able to
maintain a stable share price of $1.
<PAGE> 28
----------------
BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
----------------
[SCHWABFUNDS FAMILY(R) LOGO]
101 Montgomery Street
San Francisco, CA 94104
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C)1995 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE.
2536R(12/95) CRS 3890 Printed on recycled paper.
