<PAGE>
SchwabFunds-Registered Trademark-
Schwab MarketManager
Portfolios-TM-
- - Growth
- - Balanced
- - Small Cap
- - International
Annual Report
October 31, 1998
<PAGE>
SCHWAB MARKETMANAGER PORTFOLIOS-TM-
We are pleased to bring you this annual report for the Schwab MarketManager
Portfolios (the Portfolios) for the one-year period ended October 31, 1998. In
this report you will find performance statistics and other useful information
for the following four Portfolios:
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
Schwab MarketManager Small Cap Portfolio
Schwab MarketManager International Portfolio
We appreciate that our investors recognize that the MarketManager Portfolios can
be a smart and efficient way to participate in a professionally managed
portfolio of actively managed mutual funds. Senior Portfolio Manager Cynthia Liu
and her team, supported by the Schwab Center for Investment Research, use
sophisticated quantitative tools and techniques to provide a level of day-to-day
portfolio analysis and management that few investors could replicate.
FUND LISTINGS
The MarketManager Portfolios are listed in THE WALL STREET JOURNAL, USA TODAY,
INVESTOR'S BUSINESS DAILY and most local newspapers as follows under the
heading SCHWABFUNDS:-Registered Trademark-
<TABLE>
<CAPTION>
NEWSPAPER LISTING* SYMBOL
<S> <C>
MM Gro SWOGX
MM Bal SWOBX
MM Intl SWOIX
MM SCp SWOSX
</TABLE>
*Note that newspaper listings will indicate the previous day's quotation.
CONTENTS
<TABLE>
<S> <C>
- ----------------------------------------------------
A Message from the Chairman 1
- ----------------------------------------------------
What Every Investor Should Know 2
- ----------------------------------------------------
Market Overview 4
- ----------------------------------------------------
Portfolio Management 8
- ----------------------------------------------------
Schwab MarketManager Growth Portfolio 9
- ----------------------------------------------------
Schwab MarketManager Balanced Portfolio 11
- ----------------------------------------------------
Schwab MarketManager Small Cap Portfolio 17
- ----------------------------------------------------
Schwab MarketManager International
Portfolio 21
- ----------------------------------------------------
Financial Statements and Notes 25
- ----------------------------------------------------
</TABLE>
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder:
[PHOTO]
No doubt you've experienced the extreme volatility in the stock market over the
past year. The 12-month reporting period ended October 31, 1998, has served as a
clear example of how the performance of different asset classes can vary
substantially over a given time frame. For example, large-cap stocks made an
impressive rebound in September and October to provide the highest asset-class
returns for the period, even more spectacular when viewed against the lackluster
performance of small-caps. Similarly, the divergence between the returns of
value versus growth styles, Europe versus Asia, and emerging versus developed
markets reflects the volatility that's been inherent in the overall market for
the past year.
Given this divergent performance, we think the message is clear: Expect
volatility, and understand that it's extremely difficult to predict which asset
classes will be strong performers and which will suffer. One way to cushion the
volatility is to be sure that you're adequately diversified in your investments
and that you've properly allocated your assets based on your investing needs and
goals. By investing in one of our SchwabFunds,-Registered Trademark- you've
already taken an important step in building a portfolio that can help you meet
your future goals. On the following pages, we outline several ways to help you
reach those goals by establishing-- or maintaining--an ongoing investment
program.
NEW INVESTMENT OPPORTUNITIES TO CONSIDER
As we mentioned briefly in our previous shareholder report, we recently
introduced the SCHWAB MARKETTRACK ALL EQUITY PORTFOLIO, which targets 100%
equity investing. It can provide you with diversified exposure to three
different areas of the stock market: U.S. large-cap, U.S. small-cap and
international stocks. For even greater diversification, our three other Schwab
MarketTrack Portfolios-TM---Growth, Balanced and Conservative--may help you
achieve your desired asset allocation in stocks, bonds and cash in a single
investment. For additional information and a prospectus on the Schwab
MarketTrack Portfolios or any of our SchwabFunds, please call us toll-free at
1-800-435-4000. Each prospectus contains complete information on our Funds,
including their fees and expenses; please read the prospectus carefully before
you invest.
The support of investors like you has helped Charles Schwab Investment
Management, Inc. (CSIM) become one of the largest and fastest-growing mutual
fund families in the nation. CSIM now manages more than $77 billion in assets on
behalf of more than 3.2 million SchwabFunds shareholders. We offer a broad
spectrum of 38 mutual funds for investors with varying financial situations and
goals.
Once again, thank you for your investment in SchwabFunds. We continue to do
everything we can to warrant the trust you have placed in us.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
October 31, 1998
THE YEAR 2000 AND EURO CONVERSION ISSUES
Two issues with the potential to disrupt portfolio operations and affect
performance are the inability of some computers to recognize the year 2000
and the conversion of certain European currencies to the euro beginning on
January 1, 1999. The investment adviser will continue to take steps to enable
its systems to handle these changes. With regard to the year 2000 problem,
the investment adviser is also seeking assurances that its service providers
and business partners are taking similar steps as well. However, it is
impossible to know in advance exactly how either of these issues will affect
portfolio administration, portfolio performance (particularly for portfolios
with European exposure) or securities markets in general.
1
<PAGE>
WHAT EVERY INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a fund can help reduce the risk that you might otherwise encounter
by owning just a few stocks or bonds.
But remember that diversification across asset classes can be just as important
as diversification within one of the mutual funds you own. As you probably know,
stocks historically have offered much higher returns over the long term than
bonds, cash or other asset classes, but those returns have come at the price of
higher volatility. To help mitigate some of that risk, many investors often
include at least some bonds and cash in their portfolios. They also diversify
their exposure across different stock market segments--such as large-cap and
small-cap U.S. stocks and international stocks, which have tended to move with
less-than-perfect correlation over time. In short, allocating assets across
market segments may help reduce your overall portfolio risk.
Asset allocation can sound simple in theory, but most individual investors find
it difficult to put into practice. Few of us have the time or resources to keep
track of the market and maintain balanced exposure across asset classes. For
example, if stocks perform especially well during a certain period, your equity
exposure may grow to take up a bigger share of your portfolio than you're
comfortable with.
That's why it makes a lot of sense to "automate" your asset allocation
decisions. Schwab has developed a broad spectrum of portfolio solutions that
make it convenient for you to apply this time-tested investment strategy.
If you'd like more information, please access our Web site
at WWW.SCHWAB.COM/SCHWABFUNDS, call us at 1-800-435-4000 or visit the Schwab
branch nearest you.
REGULAR-INVESTING STRATEGIES
Another way to help dampen the effects of short-term market volatility is to
invest the same amount of money on a regular basis. With this investment
strategy, known as DOLLAR-COST AVERAGING, you automatically buy more shares when
stock or bond prices are low and fewer when they're high.
A hypothetical example can help illustrate this concept. Let's say you invest
$400 on a monthly basis in a single mutual fund, as shown below. Because of
fluctuating prices, your per-share purchase price varies monthly. A simple
average of your five purchase prices would yield $8.20 per share; however, your
AVERAGE COST BASIS (your total investment divided by the number of shares
actually purchased) would be significantly lower--by more than $0.50 per share.
The net result in this example is that your average cost per share is reduced
and you'd have purchased more shares than you would have had you paid the
average share price over the five-month period.
<TABLE>
<CAPTION>
No. of
Fixed Shares
Investment Share Price Purchased
<S> <C> <C> <C>
- -------------------------------------------------------------
Month 1 $400 $10 40
- -------------------------------------------------------------
Month 2 $400 $8 50
- -------------------------------------------------------------
Month 3 $400 $5 80
- -------------------------------------------------------------
Month 4 $400 $8 50
- -------------------------------------------------------------
Month 5 $400 $10 40
- -------------------------------------------------------------
Totals $2,000 $41 260
- -------------------------------------------------------------
AVERAGE SHARE PRICE ($41 DIVIDED BY 5 periods): $8.20
YOUR AVERAGE COST BASIS
($2,000 DIVIDED BY 260 shares): $7.69
PER-SHARE ADVANTAGE: $0.51
</TABLE>
This example is for illustrative purposes only and is not intended to predict or
guarantee the performance of any particular fund available through Schwab.
2
<PAGE>
(Of course, in this example, hindsight shows you that your best move would have
been to invest your entire $2,000 in Month 3, when the share price was at a low
of $5--but it's unlikely that you would have been able to predict that.)
SCHWAB'S 10 INVESTING PRINCIPLES
1 START WITH THE BASICS FOR LONG-TERM INVESTING.
2 GET STARTED NOW!
3 KNOW YOURSELF.
4 INVEST IN THE STOCK MARKET FOR GROWTH.
5 TAKE A LONG-TERM VIEW.
6 BUILD A DIVERSIFIED PORTFOLIO.
7 CONSIDER BONDS AND CASH FOR DIVERSIFICATION AND INCOME.
8 MINIMIZE YOUR EXPENSES.
9 STAY ON TRACK.
10 BECOME A LIFELONG INVESTOR.
In addition to reducing your per-share costs over time, dollar-cost averaging
provides another benefit: the discipline of investing regularly. You're more
likely to maintain a regular investment plan if it's automatic: You don't have
to think about it, and you minimize any propensity to skip an investment in
favor of some other expenditure. To encourage this discipline, Schwab offers you
two convenient, no-cost ways to begin or maintain a program of regular
investing:
Schwab's AUTOMATIC INVESTMENT PLAN (AIP) allows you to automatically
purchase--on a regular basis--additional shares in mutual funds that you already
own. For amounts as little as $100 per month, you can use the cash or sweep
shares of your existing Schwab Money Fund,(1) or you can enroll in Schwab's free
MoneyLink Transfer Service to automatically transfer money to your Schwab
account.
With Schwab MONEYLINK,-TM- our electronic funds transfer service, you can
arrange to regularly and automatically transfer money between your bank account
and your Schwab account. It's a convenient way to build your investment over
time.
(1)Includes uninvested cash and margin cash available. If sufficient cash is not
available, your automatic purchases will not be made.
Please be aware that these programs--and dollar-cost averaging in general--do
not ensure a profit or protect against a loss, and investors should know that
markets fall as well as rise. Because dollar-cost averaging involves continuous
investment in securities regardless of fluctuating prices, you should consider
your financial ability to purchase in both up and down markets. Over the long
term, however, dollar-cost averaging may help smooth out volatility caused by
short-term market trends. For more information, please call us at
1-800-435-4000.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in our
SchwabFunds.-Registered Trademark- In addition to our automated methods, you can
also invest through our Web site at WWW.SCHWAB.COM, through our automated
touchtone telephone service, TeleBroker,-Registered Trademark- by calling
1-800-272-4922, or in person at any of our nationwide branches.
KEEPING YOU INFORMED
You can find a wealth of information about our investment philosophy and
Funds, as well as the market and economic environment, at our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS. In addition, monthly Portfolio commentaries are
available by calling our toll-free Shareholder Information Line at
1-888-9 NO-LOAD.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued to grow
at a strong real rate of 3.5% during the first three quarters of 1998--well in
excess of the Federal Reserve's estimated noninflationary growth rate of 2.0% to
2.75%. Hurt by the Asian economic crisis and declining exports, the growth rate
slowed from 5.5% in the first quarter to 1.8% in the second quarter. Strong
consumer spending--which represents about two-thirds of economic activity--
helped the growth rate rebound to 3.3% during the third quarter.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED
RATE)
<S> <C>
Q1 1990 3.9%
Q2 1990 1.2%
Q3 1990 -1.9%
Q4 1990 -4.0%
Q1 1991 -2.1%
Q2 1991 1.8%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 0.1%
Q2 1993 2.0%
Q3 1993 2.1%
Q4 1993 5.3%
Q1 1994 3.0%
Q2 1994 4.7%
Q3 1994 1.8%
Q4 1994 3.6%
Q1 1995 1.7%
Q2 1995 0.4%
Q3 1995 3.3%
Q4 1995 2.8%
Q1 1996 3.3%
Q2 1996 6.1%
Q3 1996 2.1%
Q4 1996 4.2%
Q1 1997 4.2%
Q2 1997 4.0%
Q3 1997 4.2%
Q4 1997 3.0%
Q1 1998 5.5%
Q2 1998 1.8%
Q3 1998 3.9%
Source: BLOOMBERG L.P.
</TABLE>
At the time of this writing, the consensus of most economists is that the U.S.
economy appears poised for growth--but at a more moderate rate than over the
previous nine months. High levels of consumer confidence, low interest rates,
rising real wages and strong gains in stock prices have been the principal
factors continuing this lengthy expansion. Uncertainties persist, however, as to
the ultimate effect that international economic problems may have on the U.S.
economy, particularly on corporate earnings. Going forward, the behavior of
domestic consumers in response to recent stock market volatility also may be a
key determinant of whether the economy continues on its current course or
softens in 1999.
UNEMPLOYMENT
After declining to 4.3% in April and May--its lowest level in 28 years--the U.S.
unemployment rate stood at 4.6% in October. Labor markets have become extremely
tight, growth in the labor force has slowed and wage increases are beginning to
put more pressure on labor costs (see Employment Cost Index on the following
page).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
SOURCE: BLOOMBERG L.P.
<S> <C>
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.6%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.1%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.4%
Apr-95 5.7%
May-95 5.6%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.7%
Sep-95 5.7%
Oct-95 5.6%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.7%
Feb-96 5.5%
Mar-96 5.5%
Apr-96 5.5%
May-96 5.5%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.2%
Sep-96 5.2%
Oct-96 5.3%
Nov-96 5.4%
Dec-96 5.3%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.2%
Apr-97 5.0%
May-97 4.8%
Jun-97 5.0%
Jul-97 4.9%
Aug-97 4.9%
Sep-97 4.9%
Oct-97 4.8%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.7%
Feb-98 4.6%
Mar-98 4.7%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Sep-98 4.6%
Oct-98 4.6%
</TABLE>
INFLATION
Price inflation remained remarkably well contained. The Consumer Price Index
(CPI) rose just 1.5% for the year ended October 1998, reaching levels during the
reporting period that were the lowest since January 1987. Its core rate (which
excludes the more volatile
4
<PAGE>
food and energy components) rose 2.3%--also very low.
The Employment Cost Index (ECI), which measures inflation in wages, salaries and
benefits, increased 3.7% for the year ended September 30, 1998--its largest
increase in more than six years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
MONTHLY CONSUMER PRICE INDEX QUARTERLY EMPLOYMENT COST INDEX
<S> <C> <C> <C>
Jan-90 5.2% Jan-90 5.46%
Feb-90 5.3% Feb-90 5.46%
Mar-90 5.2% Mar-90 5.46%
Apr-90 4.7% Apr-90 5.40%
May-90 4.4% May-90 5.40%
Jun-90 4.7% Jun-90 5.40%
Jul-90 4.8% Jul-90 5.22%
Aug-90 5.6% Aug-90 5.22%
Sep-90 6.2% Sep-90 5.22%
Oct-90 6.3% Oct-90 4.87%
Nov-90 6.3% Nov-90 4.87%
Dec-90 6.1% Dec-90 4.87%
Jan-91 5.7% Jan-91 4.60%
Feb-91 5.3% Feb-91 4.60%
Mar-91 4.9% Mar-91 4.60%
Apr-91 4.9% Apr-91 4.55%
May-91 5.0% May-91 4.55%
Jun-91 4.7% Jun-91 4.55%
Jul-91 4.4% Jul-91 4.30%
Aug-91 3.8% Aug-91 4.30%
Sep-91 3.4% Sep-91 4.30%
Oct-91 2.9% Oct-91 4.28%
Nov-91 3.0% Nov-91 4.28%
Dec-91 3.1% Dec-91 4.28%
Jan-92 2.6% Jan-92 4.03%
Feb-92 2.8% Feb-92 4.03%
Mar-92 3.2% Mar-92 4.03%
Apr-92 3.2% Apr-92 3.63%
May-92 3.0% May-92 3.63%
Jun-92 3.1% Jun-92 3.63%
Jul-92 3.2% Jul-92 3.50%
Aug-92 3.1% Aug-92 3.50%
Sep-92 3.0% Sep-92 3.50%
Oct-92 3.2% Oct-92 3.48%
Nov-92 3.0% Nov-92 3.48%
Dec-92 2.9% Dec-92 3.48%
Jan-93 3.3% Jan-93 3.52%
Feb-93 3.2% Feb-93 3.52%
Mar-93 3.1% Mar-93 3.52%
Apr-93 3.2% Apr-93 3.59%
May-93 3.2% May-93 3.59%
Jun-93 3.0% Jun-93 3.59%
Jul-93 2.8% Jul-93 3.55%
Aug-93 2.8% Aug-93 3.55%
Sep-93 2.7% Sep-93 3.55%
Oct-93 2.8% Oct-93 3.53%
Nov-93 2.7% Nov-93 3.53%
Dec-93 2.7% Dec-93 3.53%
Jan-94 2.5% Jan-94 3.23%
Feb-94 2.5% Feb-94 3.23%
Mar-94 2.5% Mar-94 3.23%
Apr-94 2.4% Apr-94 3.21%
May-94 2.3% May-94 3.21%
Jun-94 2.5% Jun-94 3.21%
Jul-94 2.8% Jul-94 3.18%
Aug-94 2.9% Aug-94 3.18%
Sep-94 3.0% Sep-94 3.18%
Oct-94 2.6% Oct-94 2.99%
Nov-94 2.7% Nov-94 2.99%
Dec-94 2.7% Dec-94 2.99%
Jan-95 2.8% Jan-95 2.88%
Feb-95 2.9% Feb-95 2.88%
Mar-95 2.9% Mar-95 2.88%
Apr-95 3.1% Apr-95 2.87%
May-95 3.2% May-95 2.87%
Jun-95 3.0% Jun-95 2.87%
Jul-95 2.8% Jul-95 2.68%
Aug-95 2.6% Aug-95 2.68%
Sep-95 2.5% Sep-95 2.68%
Oct-95 2.8% Oct-95 2.75%
Nov-95 2.6% Nov-95 2.75%
Dec-95 2.5% Dec-95 2.75%
Jan-96 2.7% Jan-96 2.80%
Feb-96 2.7% Feb-96 2.80%
Mar-96 2.8% Mar-96 2.80%
Apr-96 2.9% Apr-96 2.87%
May-96 2.9% May-96 2.87%
Jun-96 2.8% Jun-96 2.87%
Jul-96 3.0% Jul-96 2.84%
Aug-96 2.9% Aug-96 2.84%
Sep-96 3.0% Sep-96 2.84%
Oct-96 3.0% Oct-96 2.91%
Nov-96 3.3% Nov-96 2.91%
Dec-96 3.3% Dec-96 2.91%
Jan-97 3.0% Jan-97 2.88%
Feb-97 3.0% Feb-97 2.88%
Mar-97 2.8% Mar-97 2.88%
Apr-97 2.5% Apr-97 2.79%
May-97 2.2% May-97 2.79%
Jun-97 2.3% Jun-97 2.79%
Jul-97 2.2% Jul-97 2.99%
Aug-97 2.2% Aug-97 2.99%
Sep-97 2.2% Sep-97 2.99%
Oct-97 2.1% Oct-97 3.29%
Nov-97 1.8% Nov-97 3.29%
Dec-97 1.7% Dec-97 3.29%
Jan-98 1.6% Jan-98 3.26%
Feb-98 1.4% Feb-98 3.26%
Mar-98 1.4% Mar-98 3.26%
Apr-98 1.4% Apr-98 3.50%
May-98 1.7% May-98 3.50%
Jun-98 1.7% Jun-98 3.50%
Jul-98 1.7% Jul-98 3.70%
Aug-98 1.6% Aug-98 3.70%
Sep-98 1.5% Sep-98 3.70%
Oct-98 1.5% Oct-98
Source: BLOOMBERG L.P.
</TABLE>
Although inflation has been well contained, the combination of a tight labor
market (as evidenced by low unemployment rates) and strong economic growth
typically leads to inflationary pressures on wages and, ultimately, prices. In
this environment, productivity growth becomes particularly important. Strong
productivity gains allow companies to pay higher wages without raising prices.
Through the third quarter of 1998, year-to-date nonfarm productivity grew at an
annualized rate of 2.3%, continuing a healthy trend that began in 1996.
ASSET CLASS PERFORMANCE
The 12-month reporting period served as a textbook example of the benefits of
asset allocation, demonstrating that various segments of the equity market can
exhibit markedly divergent returns as well as the relative stability of bond and
cash asset classes.
The equity markets experienced significant volatility throughout the period;
however, what was truly remarkable was the difference between the returns of
large- and small-cap stocks. Large-cap stocks, as represented by the S&P
500-Registered Trademark- Index, achieved a total return of 22.0% for the
12-month period, while small-cap stocks, as represented by the Russell
2000-Registered Trademark- Index, experienced a total decline of 11.9%,
resulting in a difference of 33.9% between the 12-month total returns for the
two asset classes.
International stock returns were characterized by the markedly divergent
performance of Asian countries, which experienced significant declines, and
European countries, which experienced healthy gains for the period.
International stock returns, as represented by the
MSCI-EAFE-Registered Trademark- Index, experienced a positive total return of
9.7% for the 12-month reporting period.
Reflecting the decline in interest rates, fixed income returns were generally
strong for the period. Bond returns, as represented by the Lehman Brothers
Aggregate Bond Index, were 9.3% for the 12-month reporting period.
5
<PAGE>
MARKET OVERVIEW (continued)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL-RETURN PERFORMANCE
VALUE OF A HYPOTHETICAL $1 INVESTMENT
RUSSELL
S&P 500-REGISTERED 2000-REGISTERED MSCE-EAFE-REGISTERED
TRADEMARK- TRADEMARK- TRADEMARK- LEHMAN AGGREGATE
INDEX INDEX INDEX BOND INDEX
<S> <C> <C> <C> <C>
Inception 1.000 1.000 1.000 1.000
Nov-97 1.046 0.994 0.990 1.005
Dec-97 1.064 1.011 0.998 1.015
Jan-98 1.076 0.995 1.044 1.028
Feb-98 1.154 1.068 1.111 1.027
Mar-98 1.213 1.112 1.145 1.030
Apr-98 1.225 1.118 1.154 1.036
May-98 1.204 1.058 1.149 1.046
Jun-98 1.253 1.060 1.157 1.054
Jul-98 1.240 0.975 1.169 1.057
Aug-98 1.061 0.785 1.024 1.074
Sep-98 1.129 0.847 0.993 1.099
Oct-98 1.220 0.881 1.096 1.093
Compiled by Charles Schwab & Co.,
Inc.
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
represent returns of specific market sectors during the reporting period and do
not reflect the performance of any fund. Indices are unmanaged and, unlike a
fund, do not reflect the payment of advisory fees and other expenses associated
with an investment in a fund. Investors cannot invest in an index directly.
(1)The MSCI-EAFE Index, also referred to as the MSCI-EAFE (ND) Index, represents
total return net of foreign income taxes withheld on dividends.
U.S. EQUITY VALUATION
The price/earnings (P/E) ratio for the S&P 500 Index demonstrated the volatility
of U.S. equities during the reporting period. (The price/earnings ratio, also
known as a multiple, is the price of a stock divided by its earnings per share,
and generally indicates how much investors are willing to pay for a company's
earning potential.) At the end of October 1997, the P/E ratio of the S&P 500
Index was 22.8. It reached a high for the decade of 28.3 in April, then declined
precipitously to 22.8 at the end of August before rising once again to 27.6 at
the end of October 1998. In addition to the P/E ratio's volatility, current
valuation levels remain well above the S&P 500's 30-year average of 15.0.
Based on other traditional market valuation measures such as the price-to-book
value ratio or dividend yield, the U.S. stock market continues to remain at high
valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
Mar-97 19.87
Apr-97 20.24
May-97 21.43
Jun-97 22.45
Jul-97 23.92
Aug-97 22.64
Sep-97 24.00
Oct-97 22.84
Nov-97 24.02
Dec-97 24.51
Jan-98 24.99
Feb-98 26.44
Mar-98 27.76
Apr-98 26.51
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
Sep-98 24.23
Oct-98 27.58
30-Year Average
Source: BLOOMBERG L.P.
</TABLE>
TREASURY YIELDS
Treasury yields fell significantly during the 12-month reporting period--by
0.99% to 5.16% for 30-year bonds and by 1.48% to 4.23% for five-year notes.
International economic problems were a major factor contributing to the decline
in yields. Investors seeking a safe haven increased demand for U.S. Treasury
securities and bid up prices, thereby decreasing Treasury bond yields. The
Federal Reserve's decision to leave rates unchanged throughout most of the
reporting period--in part due to international market turbulence as well as
acceptable domestic economic statistics showing strong growth coupled with con-
6
<PAGE>
tained inflation--also led to favorable fixed income market conditions.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS
30-YEAR FIVE-YEAR
TREASURY TREASURY
BOND YIELD NOTE YIELD
<S> <C> <C>
10/31/97 6.15% 5.71%
11/7/97 6.16% 5.81%
11/14/97 6.11% 5.80%
11/21/97 6.03% 5.75%
11/28/97 6.05% 5.84%
12/5/97 6.08% 5.88%
12/12/97 5.93% 5.69%
12/19/97 5.92% 5.71%
12/26/97 5.90% 5.71%
1/2/98 5.84% 5.61%
1/9/98 5.73% 5.25%
1/16/98 5.81% 5.40%
1/23/98 5.97% 5.52%
1/30/98 5.80% 5.38%
2/6/98 5.92% 5.47%
2/13/98 5.85% 5.42%
2/20/98 5.87% 5.49%
2/27/98 5.92% 5.59%
3/6/98 6.02% 5.65%
3/13/98 5.89% 5.53%
3/20/98 5.89% 5.55%
3/27/98 5.96% 5.68%
4/3/98 5.79% 5.49%
4/10/98 5.88% 5.56%
4/17/98 5.88% 5.56%
4/24/98 5.95% 5.63%
5/1/98 5.93% 5.62%
5/8/98 5.98% 5.65%
5/15/98 5.97% 5.67%
5/22/98 5.90% 5.64%
5/29/98 5.80% 5.55%
6/5/98 5.79% 5.59%
6/12/98 5.66% 5.45%
6/19/98 5.67% 5.51%
6/26/98 5.63% 5.49%
7/3/98 5.60% 5.41%
7/10/98 5.63% 5.40%
7/17/98 5.75% 5.49%
7/24/98 5.69% 5.48%
7/31/98 5.71% 5.50%
8/7/98 5.63% 5.38%
8/14/98 5.54% 5.33%
8/21/98 5.43% 5.19%
8/28/98 5.34% 4.90%
9/4/98 5.29% 4.89%
9/11/98 5.23% 4.65%
9/18/98 5.15% 4.52%
9/25/98 5.11% 4.37%
10/2/98 4.84% 4.08%
10/9/98 5.12% 4.46%
10/16/98 4.98% 4.04%
10/23/98 5.18% 4.30%
10/30/98 5.16% 4.23%
Source: BLOOMBERG L.P.
</TABLE>
In an effort to provide liquidity to financial markets and shelter the U.S.
economy from the impact of increasing weakness in foreign economies, the Federal
Reserve cut short-term interest rates three times since the end of September. At
the time of this writing, the federal funds rate stood at 4.75%.
INTERNATIONAL PERFORMANCE
The Morgan Stanley Capital International Europe, Australasia and Far
East-Registered Trademark-(MSCI-EAFE) Index gained 9.7% in U.S. dollar terms
(excluding reinvested dividends) during the 12-month reporting period. In
local-currency terms, it gained 7.89%, reflecting the relative strength of most
foreign currencies during the period.
Most European equity markets had strong returns over the 12 months ended October
31, 1998, with Finland, Belgium, Spain and Italy posting the strongest returns.
In contrast, other markets-- principally non-European ones--declined sharply
over the period. The worst-performing markets were New Zealand, Norway,
Singapore and Japan. Malaysia, which would have had the lowest return, was
dropped from the index in September.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI-EAFE COUNTRY $US RETURNS
FOR THE ONE-YEAR PERIOD ENDED
10/31/98
SOURCE: DATASTREAM
<S> <C>
Finland 55.62%
Belgium 47.96%
Spain 45.32%
Italy 39.08%
France 33.71%
Germany 28.11%
Switzerland 23.24%
Ireland 17.76%
Denmark 12.97%
United Kingdom 11.06%
Netherlands 7.75%
Sweden 3.24%
Austria 2.61%
Australia -0.89%
Hong Kong -5.81%
Japan -15.05%
Singapore -23.90%
Norway -28.64%
New Zealand -35.03%
</TABLE>
NOTE: Malaysian country total return data are not shown because Malaysia was
dropped from the MSCI-EAFE Index in September 1998 due to the imposition of
capital controls. Malaysian returns for the period were -63.91%.
This market overview has been provided by the portfolio management team.
7
<PAGE>
PORTFOLIO MANAGEMENT
THE PORTFOLIO MANAGEMENT TEAM
CYNTHIA LIU, senior vice president and senior portfolio manager, is the
portfolio manager of the MarketManager International and Small Cap Portfolios
and co-portfolio manager of the Growth and Balanced Portfolios. Prior to joining
CSIM in 1996, Cynthia was director of investment strategy at Jardine Fleming
Unit Trust in Hong Kong. She was honored with the Alfred Dunhill Award of
Excellence in the 1995 Fund Manager of the Year awards, sponsored by the SOUTH
CHINA MORNING POST, for her management of trusts. Cynthia holds a B.A. in
economics from National Cheng-chi University in Taiwan and is a Chartered
Financial Analyst (CFA).
JEFFREY MORTIMER, director and portfolio manager, is co-portfolio manager of the
MarketManager Growth and Balanced Portfolios. Jeff joined CSIM in November 1997.
Prior to that, Jeff was chief investment officer of Higgins Associates, managing
and advising close to $1 billion in assets. Prior to joining Higgins, Jeff was
employed by Gannett Welsh & Kotler, a money management firm. He holds an M.B.A.
from the University of Chicago and a B.S. in finance from Babson College and is
a Chartered Financial Analyst (CFA).
8
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE YEAR (11/18/96)
<S> <C> <C>
- -----------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER GROWTH PORTFOLIO(1) 3.87% 10.79%
- -----------------------------------------------------------------------------------------
Growth Composite Index(2),(3) 4.80% n/a
- -----------------------------------------------------------------------------------------
S&P 500-Registered Trademark- Index 21.99% 24.70%
- -----------------------------------------------------------------------------------------
Lehman Aggregate Bond Index 9.34% 8.79%
- -----------------------------------------------------------------------------------------
</TABLE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
This graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager Growth Portfolio, made at its inception, with similar
investments in the Growth Composite Index, S&P 500-Registered Trademark- Index
and the Lehman Brothers Aggregate Bond Index.(4) A detailed analysis of the
respective performance of the Portfolios and the indices is provided in the
PORTFOLIO DISCUSSION section later in this report.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
SCHWAB LEHMAN
MARKETMANAGER AGGREGATE GROWTH
GROWTH PORTFOLIO S&P 500 BOND INDEX COMPOSITE
INDEX
<S> <C> <C> <C> <C>
11/18/96 $10,000 $10,000 $10,000 $10,000
11/30/96 $10,120 $10,271 $10,071 $10,120
12/31/96 $10,077 $10,068 $9,977 $10,097
1/31/97 $10,371 $10,696 $10,008 $10,341
2/28/97 $10,310 $10,780 $10,033 $10,312
3/31/97 $10,016 $10,338 $9,922 $10,050
4/30/97 $10,229 $10,955 $10,071 $10,211
5/31/97 $10,848 $11,621 $10,166 $10,840
6/30/97 $11,274 $12,141 $10,287 $11,250
7/31/97 $11,841 $13,106 $10,565 $11,829
8/31/97 $11,547 $12,372 $10,475 $11,496
9/30/97 $12,145 $13,049 $10,630 $12,078
10/31/97 $11,760 $12,613 $10,784 $11,628
11/30/97 $11,750 $13,197 $10,834 $11,680
12/31/97 $11,927 $13,424 $10,943 $11,792
1/31/98 $11,959 $13,573 $11,084 $11,872
2/28/98 $12,622 $14,552 $11,075 $12,544
3/31/98 $13,146 $15,297 $11,112 $13,033
4/30/98 $13,242 $15,452 $11,170 $13,164
5/31/98 $13,135 $15,186 $11,276 $12,946
6/30/98 $13,306 $15,802 $11,372 $13,078
7/31/98 $13,135 $15,635 $11,396 $12,855
8/31/98 $11,639 $13,377 $11,582 $11,233
9/30/98 $11,745 $14,235 $11,853 $11,524
10/31/98 $12,216 $15,392 $11,790 $12,102
</TABLE>
(1)The Investment Adviser and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least 2/28/99 that total
operating expenses will not exceed 0.50%. Without fee waivers and guarantees,
the one-year and since-inception average annual total returns would have been
3.13% and 9.98%, respectively, as of 10/31/98. Underlying funds also charge
fees and incur expenses.
(2)The Growth Composite Index is composed of Morningstar category averages and
cash equivalents as represented by the 90-day T-bill and is calculated using
the portfolio allocations: 35% large-cap, 20% small-cap, 25% foreign, 15%
bonds and 5% cash.
(3)As of 10/31/98 there were 1,576 large-cap funds, 764 small-cap funds, 580
foreign funds and 528 intermediate-term bond funds tracked by Morningstar.
Performance includes changes in price and reinvestment of dividends and
capital gains.
(4)The hypothetical $10,000 investments assume investment on the first day of
the month following Fund inception and include changes in share prices and
reinvestment of dividends and capital gains.
THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. TOTAL
RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. Indices are
unmanaged and do not reflect advisory fees and other expenses associated with an
investment in the Portfolios. Investors cannot invest in an index directly.
9
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
PORTFOLIO SUMMARY
The Schwab MarketManager Growth Portfolio seeks capital growth with less
volatility than a portfolio composed entirely of stock funds. The Schwab
MarketManager Balanced Portfolio seeks capital growth and income with less
volatility than the Growth Portfolio. The allocations in the Portfolios will
vary as the portfolio managers adjust their respective asset mixes based on
changing market conditions. Of the two Portfolios, the Growth Portfolio offers
the greatest potential for return and volatility due to its larger target
allocation to stock funds.
SCHWAB MARKETMANAGER GROWTH PORTFOLIO:
ASSET MIX(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Large-Cap 52.9%
International 18.0%
Small-Cap 13.8%
Bonds 10.0%
Cash 5.3%
</TABLE>
<TABLE>
<CAPTION>
TARGET MIX
MIX AS OF IN NEUTRAL
10/31/98 MARKETS
<S> <C> <C>
- ------------------------------------------------------------
Stock Funds 84.7% 80.0%
- ------------------------------------------------------------
Bond Funds 10.0% 15.0%
- ------------------------------------------------------------
Cash Equivalents 5.3% 5.0%
- ------------------------------------------------------------
Total 100.0% 100.0%
- ------------------------------------------------------------
</TABLE>
(1)This information is as of 10/31/98 and may not be indicative of current or
future investments. These percentages do not take into account other assets
and liabilities. A complete list of the Portfolio's investments as of
10/31/98 can be found in the Schedule of Investments later in this report.
SCHWAB MARKETMANAGER GROWTH PORTFOLIO:
TOP 10 HOLDINGS
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ----------------------------------------------------
T. Rowe Price Equity Income 10.0%
- ----------------------------------------------------
American Century Income and Growth 9.5%
- ----------------------------------------------------
Janus Twenty 8.8%
- ----------------------------------------------------
American Century Twentieth Century Ultra 7.1%
- ----------------------------------------------------
Hotchkis & Wiley International 6.5%
- ----------------------------------------------------
Rydex U.S. Government Money Market 5.0%
- ----------------------------------------------------
Federated U.S. Government Securities 2-5
Years 4.4%
- ----------------------------------------------------
Excelsior Value and Restructuring 4.1%
- ----------------------------------------------------
Morgan Stanley International Equity 3.6%
- ----------------------------------------------------
Longleaf Partners Realty Fund 3.6%
- ----------------------------------------------------
Total 62.6%
- ----------------------------------------------------
</TABLE>
10
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE YEAR (11/18/96)
<S> <C> <C>
- -----------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER BALANCED PORTFOLIO(1) 4.89% 10.21%
- -----------------------------------------------------------------------------------------
Balanced Composite Index(2),(3) 5.58% n/a
- -----------------------------------------------------------------------------------------
S&P 500-Registered Trademark- Index 21.99% 24.70%
- -----------------------------------------------------------------------------------------
Lehman Aggregate Bond Index 9.34% 8.79%
- -----------------------------------------------------------------------------------------
</TABLE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
This graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager Balanced Portfolio, made at its inception, with similar
investments in the Balanced Composite Index, S&P 500-Registered Trademark- Index
and the Lehman Brothers Aggregate Bond Index.(4) A detailed analysis of the
respective performance of the Portfolios and the indices is provided in the
PORTFOLIO DISCUSSION section later in this report.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
SCHWAB LEHMAN BALANCED
MARKETMANAGER S&P 500 AGGREGATE COMPOSITE
BALANCED PORTFOLIO INDEX BOND INDEX INDEX
<S> <C> <C> <C> <C>
11/18/96 $10,000 $10,000 $10,000
11/30/96 $10,100 $10,271 $10,071 $10,000
12/31/96 $10,059 $10,068 $9,977 $9,955
1/31/97 $10,322 $10,696 $10,008 $10,161
2/28/97 $10,271 $10,780 $10,033 $10,142
3/31/97 $10,018 $10,338 $9,922 $9,906
4/30/97 $10,200 $10,955 $10,071 $10,073
5/31/97 $10,676 $11,621 $10,166 $10,562
6/30/97 $11,041 $12,141 $10,287 $10,889
7/31/97 $11,517 $13,106 $10,565 $11,402
8/31/97 $11,284 $12,372 $10,475 $11,148
9/30/97 $11,770 $13,049 $10,630 $11,606
10/31/97 $11,527 $12,613 $10,784 $11,330
11/30/97 $11,558 $13,197 $10,834 $11,396
12/31/97 $11,719 $13,424 $10,943 $11,506
1/31/98 $11,762 $13,573 $11,084 $11,592
2/28/98 $12,251 $14,552 $11,075 $12,084
3/31/98 $12,634 $15,297 $11,112 $12,445
4/30/98 $12,688 $15,452 $11,170 $12,549
5/31/98 $12,613 $15,186 $11,276 $12,409
6/30/98 $12,783 $15,802 $11,372 $12,546
7/31/98 $12,677 $15,635 $11,396 $12,375
8/31/98 $11,581 $13,377 $11,582 $11,233
9/30/98 $11,740 $14,235 $11,853 $11,548
10/31/98 $12,092 $15,392 $11,790 $11,962
</TABLE>
(1)The Investment Adviser and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least 2/28/99 that total
operating expenses will not exceed 0.50%. Without fee waivers and guarantees,
the one-year and since-inception average annual total returns would have been
4.12% and 9.30%, respectively, as of 10/31/98. Underlying funds also charge
fees and incur expenses.
(2)The Balanced Composite Index is composed of Morningstar category averages and
cash equivalents as represented by the 90-day T-bill and is calculated using
the portfolio allocations: 30% large-cap, 15% small-cap, 15% foreign, 35%
bonds and 5% cash.
(3)As of 10/31/98 there were 1,576 large-cap funds, 764 small-cap funds, 580
foreign funds and 528 intermediate-term bond funds tracked by Morningstar.
Performance includes changes in price and reinvestment of dividends and
capital gains.
(4)The hypothetical $10,000 investments assume investment on the first day of
the month following Fund inception and include changes in share prices and
reinvestment of dividends and capital gains.
THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. TOTAL
RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. Indices are
unmanaged and do not reflect advisory fees and other expenses associated with an
investment in the Portfolios. Investors cannot invest in an index directly.
11
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
PORTFOLIO SUMMARY
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
ASSET MIX(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Large-Cap 41.4%
Bonds 29.1%
Small-Cap 13.5%
International 10.2%
Cash 5.8%
</TABLE>
<TABLE>
<CAPTION>
TARGET MIX
MIX AS OF IN NEUTRAL
10/31/98 MARKETS
<S> <C> <C>
- ------------------------------------------------------------
Stock Funds 65.1% 60.0%
- ------------------------------------------------------------
Bond Funds 29.1% 35.0%
- ------------------------------------------------------------
Cash Equivalents 5.8% 5.0%
- ------------------------------------------------------------
Total 100.0% 100.0%
- ------------------------------------------------------------
</TABLE>
(1)This information is as of 10/31/98 and may not be indicative of current or
future investments. These percentages do not take into account other assets
and liabilities. A complete list of the Portfolio's investments as of
10/31/98 can be found in the Schedule of Investments later in this report.
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
TOP 10 HOLDINGS
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ----------------------------------------------------
PIMCO Total Return 11.3%
- ----------------------------------------------------
T. Rowe Price Equity Income 8.0%
- ----------------------------------------------------
Federated U.S. Government Securities 2-5
Years 7.3%
- ----------------------------------------------------
American Century Income and Growth 6.6%
- ----------------------------------------------------
American Century Twentieth Century Ultra 6.1%
- ----------------------------------------------------
American Century Benham
Intermediate Treasury 5.8%
- ----------------------------------------------------
Janus Twenty 5.2%
- ----------------------------------------------------
Marsico Growth & Income 4.6%
- ----------------------------------------------------
Hotchkis & Wiley International 4.6%
- ----------------------------------------------------
Rydex U.S. Government Money Market 4.4%
- ----------------------------------------------------
Total 63.9%
- ----------------------------------------------------
</TABLE>
12
<PAGE>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
PORTFOLIO DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE PORTFOLIOS PERFORM DURING THE REPORTING PERIOD?
A. The Growth and Balanced Portfolios produced total returns of 3.87% and 4.89%,
respectively, for the one-year period ended October 31, 1998. The Portfolios
performed in line with, but marginally below, their composite indices for the
period but continued to outperform the composite indices on an inception-to-date
basis (refer to discussion below). However, their performance lagged some of the
constituent market indices, such as the S&P 500-Registered Trademark-Index and
the Lehman Aggregate Bond Index. At the end of the reporting period, the
small-cap benchmark--the Russell 2000-Registered Trademark---had hit yearly
lows, the S&P 500 Index traded near its January lows and bonds performed
strongly; given this high volatility, most fund managers had difficulty
surpassing their benchmarks. The MarketManager Growth and Balanced Portfolios
attempted to cushion this volatility by including more fixed-income and
cash-equivalent funds to weather the period.
You may have noted an addition to the GROWTH OF A HYPOTHETICAL $10,000
INVESTMENT graphs on pages 9 and 11. Each graph now includes an additional
benchmark: the GROWTH COMPOSITE INDEX and the BALANCED COMPOSITE INDEX. These
benchmarks were developed to compare the performance of each Portfolio with a
more appropriately weighted benchmark based on data provided by Morningstar. The
table below summarizes how each index is constructed.
<TABLE>
<CAPTION>
GROWTH BALANCED
MORNINGSTAR CATEGORY(1) PORTFOLIO PORTFOLIO
<S> <C> <C>
- -----------------------------------------------------------------
Large-Cap Funds 35% 30%
- -----------------------------------------------------------------
Small-Cap Funds 20% 15%
- -----------------------------------------------------------------
Foreign Funds 25% 15%
- -----------------------------------------------------------------
Intermediate-Term Bond Funds 15% 35%
- -----------------------------------------------------------------
90-Day T-Bills(2) 5% 5%
- -----------------------------------------------------------------
Total: 100% 100%
- -----------------------------------------------------------------
</TABLE>
(1)As of 10/31/98 there were 1,756 large-cap funds, 764 small-cap funds, 580
foreign funds and 528 intermediate-term bond funds tracked by Morningstar.
Performance includes changes in price and reinvestment of dividends and
capital gains.
(2)Not a Morningstar category.
13
<PAGE>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
PORTFOLIO DISCUSSION (continued)
Q. WHICH ASSET CLASSES PERFORMED WELL FOR THE PORTFOLIOS?
A. As shown in the table below, U.S. large-cap stocks represented the
strongest-performing major asset class during the reporting period--extending
its dominance to the third consecutive year. U.S. small-cap stocks continued to
show weak relative performance (for the fifth consecutive year), as well as weak
absolute performance for the period. International returns were volatile and
heavily impacted by the regions selected. In addition to serving as a safe haven
in a volatile market environment, bonds turned in strong returns for the period
thanks to the declining interest rate environment.
<TABLE>
<CAPTION>
AS OF
ASSET CLASS INDEX(1) 10/31/98
<S> <C> <C>
- -----------------------------------------------------------
Large-Cap Stocks S&P 500 Index 21.99%
- -----------------------------------------------------------
Small-Cap Stocks Russell 2000 Index -11.87%
- -----------------------------------------------------------
MSCI-EAFE-Registered
International Stocks Trademark- Index 9.65%
- -----------------------------------------------------------
Bonds Lehman Aggregate
Bond Index 9.34%
- -----------------------------------------------------------
Cash Three-Month
Treasury Bill 5.15%
- -----------------------------------------------------------
</TABLE>
(1)The S&P 500 Index is composed of 500 large-company common stocks representing
key industries, including many of the most recognizable companies in the
United States. The Russell 2000 Index includes the second-largest 1,000
publicly traded companies in the United States. The MSCI-EAFE Index includes
the stocks of 350 of the largest publicly traded non-U.S. companies from
countries with developed securities markets. The Lehman Aggregate Bond Index
includes fixed-rate debt issues rated investment grade or higher.
Once again, actively managed stock funds had a difficult time outperforming the
various benchmark indices, such as the S&P 500 Index. Funds with greater
allocations to stocks, particularly to U.S. large-cap stocks, produced the best
performance for the one-year period.
Q. WHICH UNDERLYING FUNDS PERFORMED PARTICULARLY WELL FOR THE PORTFOLIOS?
A. The best-performing funds in the MarketManager Growth and Balanced Portfolios
were focusing on large-cap stocks and bonds. In the large-cap stock category,
the Janus Twenty Fund and the Marsico Growth and Income Fund beat their
benchmarks by concentrating in the large-cap technology and financial services
sectors. (At the end of the reporting period, the Janus Twenty Fund represented
8.8% of the Growth Portfolio and 5.2% of the Balanced Portfolio; the Marsico
Growth and Income Fund represented 2.7% of the Growth Portfolio and 4.6% of the
Balanced Portfolio.) For the bond fund holdings, both Portfolios held the
Federated U.S. Government Securities 2-5 Year Fund and PIMCO Total Return Fund
(at the end of the reporting period, the Federated U.S. Government Securities
Fund represented 4.4% of the Growth Portfolio and 7.3% of the Balanced
Portfolio; the PIMCO Total Return Fund represented 1.4% of the Growth Portfolio
and 11.3% of the Balanced Portfolio); these and other bond funds helped cushion
the recent market volatility and added to the performance of the Portfolios.
14
<PAGE>
Q. HOW DID THE PORTFOLIOS' STRATEGIES CHANGE DURING THE REPORTING PERIOD?
RELATIVE TO THEIR NEUTRAL TARGETS, HOW WERE THE PORTFOLIOS POSITIONED AT THE
CLOSE OF THE REPORTING PERIOD?
A. The overall Portfolio strategy changed during the period, as it intended to
take advantage of the volatile market conditions that existed. At the start of
the reporting period, both Portfolios were near their neutral allocations. As
the correction began, the Portfolios took a more defensive posture, raising bond
exposure and reducing equity mutual fund exposure. As the recovery began, we
used the opportunity to increase exposure to equity mutual funds while reducing
cash and bond mutual fund exposure.
The Portfolios ended the reporting period slightly above the neutral equity
allocation positions. Within the equity categories, however, the Portfolios
varied slightly from neutral. Specifically, they were overweighted in large-cap
growth funds, underweighted in small-cap funds and underweighted
internationally. In fixed income, the Portfolios were underweighted in
intermediate-term bond funds, while cash was slightly above a neutral weighting.
The charts at right show the two Portfolios' actual asset mixes during the
reporting period. The cash holdings shown include both the actual cash holdings
of the Portfolios as well as the cash holdings of the underlying funds.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
ACTUAL MONTH-END ASSET MIX: 10/31/97 - 10/31/98
CASH BONDS INTERNATIONAL STOCK SMALL-CAP STOCK LARGE-CAP STOCK
<S> <C> <C> <C> <C> <C>
10/31/97 13.85% 14.29% 20.43% 18.18% 33.25%
11/30/97 10.09% 11.30% 17.82% 17.14% 43.65%
12/31/97 7.90% 11.56% 20.22% 19.66% 40.66%
01/31/98 14.32% 10.37% 20.45% 18.98% 35.88%
02/28/98 5.82% 8.95% 20.61% 17.81% 46.81%
03/31/98 6.87% 10.00% 22.54% 18.71% 41.88%
04/30/98 5.55% 13.12% 23.83% 17.99% 39.51%
05/31/98 13.73% 13.18% 24.23% 17.69% 31.17%
06/30/98 6.45% 13.61% 25.62% 19.44% 34.88%
07/31/98 11.92% 14.67% 24.60% 13.20% 35.61%
08/31/98 12.48% 20.70% 22.16% 17.80% 26.86%
09/30/98 4.38% 14.92% 23.37% 21.87% 35.46%
10/31/98 6.19% 9.92% 17.84% 13.71% 52.34%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
ACTUAL MONTH-END ASSET MIX: 10/31/97-10/31/98
CASH BONDS INTERNATIONAL STOCK SMALL-CAP STOCK LARGE-CAP STOCK
<S> <C> <C> <C> <C> <C>
10/31/97 19.80% 24.94% 15.93% 12.89% 26.44%
11/30/97 15.33% 25.34% 12.79% 12.71% 33.83%
12/31/97 15.96% 24.61% 14.94% 14.98% 29.51%
01/31/98 22.59% 22.85% 14.97% 14.30% 25.29%
02/28/98 22.72% 17.09% 14.49% 13.13% 32.57%
03/31/98 21.54% 16.98% 15.60% 14.06% 31.82%
04/30/98 10.83% 27.54% 16.34% 13.42% 31.87%
05/31/98 16.73% 27.65% 16.46% 14.35% 24.81%
06/30/98 14.07% 24.44% 17.61% 15.71% 28.17%
07/31/98 19.59% 25.46% 14.78% 9.73% 30.44%
08/31/98 8.15% 40.30% 13.27% 14.58% 23.70%
09/30/98 4.10% 32.39% 14.84% 17.50% 31.17%
10/31/98 7.15% 28.70% 10.10% 13.28% 40.77%
</TABLE>
15
<PAGE>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
PORTFOLIO DISCUSSION (continued)
Q. CAN YOU SHARE A COUPLE EXAMPLES OF ANY NEW FUNDS THE PORTFOLIOS PURCHASED
DURING THE PERIOD, AND WHY?
A. In response to the significant market volatility, we selectively increased
our exposure to several equity funds, such as the Marsico Growth and Income,
American Century Income and Growth, and Janus Twenty Fund. (At the end of the
reporting period, the Marsico Growth and Income Fund represented 2.7% of the
Growth Portfolio and 4.6% of the Balanced Portfolio; the American Century Income
and Growth Fund represented 9.5% of the Growth Portfolio and 6.6% of the
Balanced Portfolio; the Janus Twenty Fund represented 8.8% of the Growth
Portfolio and 5.2% of the Balanced Portfolio.) These mutual funds allowed us to
participate in the large-cap growth sector-- the strongest area of the market
during the reporting period.
Q. WHAT ARE THE BENEFITS OF INCLUDING BONDS AND CASH IN AN INVESTMENT PORTFOLIO?
A. Adding bonds and cash equivalents to a stock portfolio can help reduce its
overall volatility. The following chart displays the high, low and average
annual returns from 1970 to 1997 for five hypothetical portfolios representing
the returns of stocks and bonds measured by indices.(1) As the chart
demonstrates, adding bonds to a stock-heavy portfolio would have reduced
volatility while still producing competitive returns.
(1)The hypothetical returns are all weighted averages and assume reinvestment of
dividends. Stocks are represented by the S&P 500-Registered Trademark- Index,
and bonds are represented by the Ibbotson Intermediate U.S. Government Bond
Index. Indices are unmanaged, do not incur costs and expenses and cannot be
invested in directly. Portfolios were rebalanced annually. Returns represent
historical performance of these indices and not performance of any specific
investments.
A portfolio comprising 40% bonds and 60% stocks, for example, achieved an
average annual return of 11.65%--roughly 1.3% less than the 12.97% return of the
all-stock portfolio--and with significantly less volatility. The lowest annual
return--actually a loss of 13.61%--of the portfolio invested 40% in bonds and
60% in stocks was about half of the 26.47% loss in the all-stock portfolio. This
hypothetical example is for illustrative purposes only, and, of course, past
performance does not guarantee future results.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE EFFECTS OF ADDING BONDS TO AN ALL-STOCK PORTFOLIO
HYPOTHETICAL PORTFOLIOS: 1970-1997
HIGH, LOW AND AVERAGE ANNUAL RETURNS FOR FIVE PORTFOLIO
COMPOSITIONS
AVERAGE ANNUAL RETURN HIGHEST ANNUAL RETURN
<S> <C> <C>
100% Stocks 12.97% 37.43%
90% Stocks /10% Bonds 12.68% 35.37%
80% Stocks/20% Bonds 12.36% 33.30%
70% Stocks/30% Bonds 12.02% 31.24%
60% Stocks/40% Bonds 11.65% 29.18%
<CAPTION>
THE EFFECTS OF ADDING BONDS TO AN ALL-STOCK PORTFOLIO
HYPOTHETICAL PORTFOLIOS: 1970-1997
HIGH, LOW AND AVERAGE ANNUAL RETURNS FOR FIVE PORTFOLIO
COMPOSITIONS
LOWEST ANNUAL RETURN
<S> <C>
100% Stocks -26.47%
90% Stocks /10% Bonds -23.25%
80% Stocks/20% Bonds -20.04%
70% Stocks/30% Bonds -16.82%
60% Stocks/40% Bonds -13.61%
</TABLE>
16
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO PERFORMANCE
CUMULATIVE TOTAL RETURNS FOR THE PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE YEAR (9/16/97)
<S> <C> <C>
- ------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO(1) -11.84% -11.14%
- ------------------------------------------------------------------------------------------
Russell 2000-Registered Trademark- Index -11.87% -12.76%
- ------------------------------------------------------------------------------------------
Average Small-Cap Fund(2) -14.40% n/a
- ------------------------------------------------------------------------------------------
</TABLE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
This graph compares the growth of a hypothetical $10,000 investment in the
MarketManager Small Cap Portfolio, made at its inception, with a similar
investment in the Russell 2000 Index. A detailed analysis of the performance of
the Portfolio and its index is provided in the QUESTIONS TO THE PORTFOLIO
MANAGEMENT TEAM section later in this report.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER SMALL-CAP PORTFOLIO
SCHWAB MARKETMANAGER RUSSELL
SMALL CAP 2000
PORTFOLIO INDEX
<S> <C> <C>
9/16/97 $10,000 $10,000
9/30/97 $10,260 $10,201
10/31/97 $9,930 $9,753
11/30/97 $9,770 $9,690
12/31/97 $9,886 $9,859
1/31/98 $9,701 $9,704
2/28/98 $10,277 $10,420
3/31/98 $10,781 $10,849
4/30/98 $10,832 $10,909
5/31/98 $10,359 $10,321
6/30/98 $10,411 $10,342
7/31/98 $9,896 $9,505
8/31/98 $8,271 $7,659
9/30/98 $8,435 $8,259
10/31/98 $8,754 $8,595
</TABLE>
(1)The Investment Adviser and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least 2/28/99 that total
operating expenses will not exceed 0.50%. Without fee waivers and guarantees,
the one-year and since-inception average annual total returns would have been
-12.56% and -11.89%, respectively, as of 10/31/98. The underlying funds also
charge fees and incur expenses.
(2)Source: Morningstar, Inc. Returns are load-adjusted. The Small-Fund
category contains 685 funds with track records for the one-year period ended
10/31/98.
THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. TOTAL
RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. Indices are
unmanaged and do not reflect advisory fees and other expenses associated with an
investment in the Portfolio. Investors cannot invest in an index directly.
17
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO HOLDINGS
The Schwab MarketManager Small Cap Portfolio seeks long-term capital
appreciation. It invests primarily in small-company stock funds.
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO:
ASSET MIX(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Mid-Cap 29.7%
Small-Cap Growth 11.3%
Small-Cap Value 23.1%
Small-Cap Blend 7.0%
Micro-Cap 14.6%
Others 14.1%
Cash 0.2%
</TABLE>
(1)This information is as of 10/31/98 and is not indicative of current or future
investments. A complete list of the Portfolio's investments as of 10/31/98
can be found in the Schedule of Investments later in this report.
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO:
TOP 10 HOLDINGS
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ----------------------------------------------------
Melody 4500 Fund, LP(2) 20.1%
- ----------------------------------------------------
Longleaf Partners Small Cap Fund 18.5%
- ----------------------------------------------------
Longleaf Partners Realty Fund 9.4%
- ----------------------------------------------------
SteinRoe Capital Opportunities 5.6%
- ----------------------------------------------------
Ariel Appreciation Fund 5.5%
- ----------------------------------------------------
Weitz Hickory 5.0%
- ----------------------------------------------------
Oakmark Small Cap 4.5%
- ----------------------------------------------------
Ariel Growth 4.1%
- ----------------------------------------------------
State Street Global Resources 3.6%
- ----------------------------------------------------
Tip Turner Small Cap 3.4%
- ----------------------------------------------------
Total 79.7%
- ----------------------------------------------------
</TABLE>
(2)See Note 3 in the financial statements.
18
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE PORTFOLIO PERFORM DURING THE REPORTING PERIOD?
A. As discussed in the MARKET OVERVIEW section (pages 4-7), small-cap stocks
were the worst performing of the major asset classes, and the Portfolio's
returns reflected this trend with a return almost identical to that of the
Russell 2000-Registered Trademark- Index. The Portfolio did, however, outperform
the average small-cap fund by 2.26% for the one-year reporting period.(1)
Factors that helped the Portfolio's performance were its value-bias and
allocation in mid-cap funds, as well as some stellar performance of underlying
funds in which it had major positions.
Q. HOW DID THE PORTFOLIO'S STRATEGY CHANGE DURING THE REPORTING PERIOD, AND HOW
WAS IT POSITIONED AT THE CLOSE OF THE PERIOD?
A. As compared to its benchmark, the Russell 2000 Index, the Portfolio invested
more in small-cap value funds and had a higher average market capitalization for
most of the reporting period. We have, however, recently increased our growth
weighting and lowered our average market capitalization in the Portfolio to
attempt to take advantage of what we believe are some very oversold and
undervalued opportunities in these segments.
(1)Source: Morningstar, Inc. Returns are load-adjusted. The Small-Fund category
contains 685 funds with the track records for the one-year period ended
10/31/98.
Q. CAN YOU SHARE A COUPLE OF EXAMPLES OF NEW HOLDINGS PURCHASED DURING THE
PERIOD, AND WHY?
A. We added the LongLeaf Partners Realty Fund-- a fund that invests primarily in
real estate-oriented companies or companies that have substantial real estate
holdings. (At the end of the reporting period, LongLeaf Partners Realty Fund
represented 9.4% of the Portfolio.) Although the real estate sector (REITs or
real estate companies) has fallen out of favor with investors in the past year,
the selling had been indiscriminate, and good companies have fallen as much as
fundamentally weak ones, leaving what we believe are some very undervalued
situations. It is also a relatively inefficient sector, and a strong fundamental
stock picker can have a substantial competitive advantage over the long term.
Q. GIVEN THE RECENT UNDERPERFORMANCE OF SMALL-CAP STOCKS, IS THERE STILL A
REASON TO INVEST IN THEM?
A. If history is any guide, yes. As the first of the graphs on the following
page illustrates, the total returns of U.S. large-cap and small-cap stocks have
been fairly comparable over extended periods of time--such as from 1970 to 1997.
As the second graph illustrates, over the past 28 years, small-caps have
outperformed large-caps 14 times, for varying lengths of time. In the remaining
14 years, large-caps outperformed small-caps. There appears to be little, if
any, predictability to this seesaw effect. That's why it's wise for an investor
to consider diversifying his or her portfolio by holding both small-and
large-cap stocks. For example, small-cap stocks generally outperformed large-cap
stocks
19
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO DISCUSSION (continued)
from 1991 to 1993. Large-cap stocks were the winners from 1994 through 1997.
Although not readily apparent from viewing these graphs, small-cap stocks have
also exhibited a higher level of volatility over the period shown. In addition,
there is less publicly available information about small-cap stocks.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LARGE-CAP AND SMALL-CAP CUMULATIVE RETURNS: 1970-1997
GROWTH OF A HYPOTHETICAL $1 INVESTMENT
LARGE-CAP SMALL-CAP
CUMULATIVE CUMULATIVE
RETURN RETURN
<S> <C> <C>
1970 $1.04 $0.88
1971 $1.19 $1.05
1972 $1.41 $1.09
1973 $1.21 $0.69
1974 $0.89 $0.50
1975 $1.22 $0.82
1976 $1.51 $1.24
1977 $1.40 $1.47
1978 $1.49 $1.73
1979 $1.77 $2.50
1980 $2.34 $3.34
1981 $2.22 $3.47
1982 $2.70 $4.45
1983 $3.31 $5.79
1984 $3.52 $5.49
1985 $4.65 $7.22
1986 $5.51 $7.73
1987 $5.79 $7.03
1988 $6.77 $8.71
1989 $8.90 $10.12
1990 $8.62 $8.08
1991 $11.25 $12.06
1992 $12.11 $14.41
1993 $13.32 $17.08
1994 $13.50 $16.76
1995 $18.55 $21.93
1996 $22.83 $25.93
1997 $30.44 $32.81
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
LARGE-CAP AND SMALL-CAP RELATIVE PERFORMANCE: 1970-1997
LARGE-CAP STRONG SMALL-CAP STRONG
RELATIVE PERFORMANCE RELATIVE PERFORMANCE
<S> <C> <C>
1970 16.3%
1971 -5.8%
1972 15.4%
1973 22.0%
1974 1.5%
1975 -27.1%
1976 -27.3%
1977 -26.0%
1978 -11.5%
1979 -25.8%
1980 -1.0%
1981 -8.9%
1982 -6.9%
1983 -7.5%
1984 11.5%
1985 0.6%
1986 11.3%
1987 14.3%
1988 -7.1%
1989 15.3%
1990 17.0%
1991 -18.7%
1992 -11.8%
1993 -8.5%
1994 3.2%
1995 6.6%
1996 4.8%
1997 6.8%
</TABLE>
Source: Schwab's Center for Investment Research. Large-cap stocks are
represented by the S&P 500-Registered Trademark- Index; small-cap stocks are
represented by the Russell 2000 Index. This chart is for illustration purposes
only. Index returns include reinvestment of dividends and capital gain
distributions. An index cannot be invested in directly. Indices are unmanaged
and do not charge fees and expenses.
20
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
ONE YEAR (10/16/96)
<S> <C> <C>
- ------------------------------------------------------------------------
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO(1) 3.55% 6.79%
- ------------------------------------------------------------------------
MSCI-EAFE-Registered Trademark- Index 9.65% 6.07%
- ------------------------------------------------------------------------
Average Foreign Fund(2) 3.10% n/a
- ------------------------------------------------------------------------
</TABLE>
(1)The Investment Adviser and Schwab waived a portion of their fees during the
reporting period and have guaranteed through at least 2/28/99 that total
operating expenses will not exceed 0.50%. Without fee waivers and guarantees,
the one-year and since-inception average annual total returns would have been
2.79% and 5.99%, respectively, as of 10/31/98.
(2)Based on data provided by Morningstar, Inc. Average annual returns for 520
foreign funds for the one-year period (load-adjusted).
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
This graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager International Portfolio, made at its inception, with a
similar investment in the Morgan Stanley Capital International Europe,
Australasia, Far East-Registered Trademark- (MSCI-EAFE) Index. A detailed
analysis of the performance of the Portfolio and the index is provided in the
Portfolio Discussion section later in this report.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
SCHWAB MARKETMANAGER MSCI-
INTERNATIONAL EAFE INDEX
PORTFOLIO
<S> <C> <C>
10/16/96 $10,000 $10,000
10/31/96 $9,910 $9,836
11/30/96 $10,220 $10,228
12/31/96 $10,313 $10,096
1/31/97 $10,426 $9,742
2/28/97 $10,599 $9,902
3/31/97 $10,558 $9,938
4/30/97 $10,609 $9,991
5/31/97 $11,209 $10,641
6/30/97 $11,697 $11,227
7/31/97 $11,962 $11,409
8/31/97 $11,199 $10,557
9/30/97 $11,830 $11,148
10/31/97 $11,046 $10,291
11/30/97 $10,894 $10,186
12/31/97 $11,016 $10,274
1/31/98 $11,146 $10,744
2/28/98 $11,925 $11,434
3/31/98 $12,670 $11,786
4/30/98 $12,952 $11,879
5/31/98 $13,265 $11,821
6/30/98 $13,157 $11,911
7/31/98 $13,525 $12,031
8/31/98 $11,654 $10,540
9/30/98 $11,006 $10,217
10/31/98 $11,438 $11,281
</TABLE>
THIS INFORMATION IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS. TOTAL
RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN INVESTOR'S SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. Indices are
unmanaged and do not reflect advisory fees and other expenses associated with an
investment in the Portfolios. Investors cannot invest in an index directly.
21
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO HOLDINGS
The Schwab MarketManager International Portfolio offers broad international
diversification with the convenience of a single investment. The Portfolio can
be used to fulfill all or part of the international equity component of your
asset allocation plan.
ASSET MIX
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- --------------------------------------
International Mutual Funds 81.03%
- --------------------------------------
European Region Mutual
Funds 2.69%
- --------------------------------------
Asian Region Funds 2.97%
- --------------------------------------
Single-Country Mutual Funds 13.04%
- --------------------------------------
Cash Equivalents 0.27%
- --------------------------------------
Total 100.00%
- --------------------------------------
</TABLE>
REGIONAL DIVERSIFICATION
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- -----------------------------------------------
Developed Europe(2) 60.55%
- -----------------------------------------------
Developed Pacific(3) 24.68%
- -----------------------------------------------
Emerging Markets 4.77%
- -----------------------------------------------
Cash Equivalents 6.28%
- -----------------------------------------------
Canada 0.91%
- -----------------------------------------------
United States 2.35%
- -----------------------------------------------
Other Investments 0.46%
- -----------------------------------------------
Total 100.00%
- -----------------------------------------------
</TABLE>
(1)This information is as of 10/31/98 and may not be indicative of current or
future investments. A complete list of the Portfolio's investments as of
10/31/98 can be found in the Schedule of Investments later in this report.
(2)Developed Europe includes the following countries: Austria, Belgium, Denmark,
Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland and the United Kingdom.
(3)Developed Pacific includes the following countries: Australia, China/Hong
Kong, Indonesia, Japan, Malaysia, New Zealand, Singapore and Thailand.
TOP 10 HOLDINGS
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ----------------------------------------------------
Ivy International Short Ben Int A 13.2%
- ----------------------------------------------------
Janus Overseas 12.8%
- ----------------------------------------------------
Scudder Japan 12.5%
- ----------------------------------------------------
BT International Equity 10.2%
- ----------------------------------------------------
American Century Twentieth Century
International Growth 10.1%
- ----------------------------------------------------
Phoenix International 7.2%
- ----------------------------------------------------
SoGen Overseas Institutional 4.8%
- ----------------------------------------------------
Oppenheimer International Growth, A 4.2%
- ----------------------------------------------------
Federated International Small Company 4.1%
- ----------------------------------------------------
GAM International 4.0%
- ----------------------------------------------------
Total 83.1%
- ----------------------------------------------------
</TABLE>
TOP FIVE COUNTRIES
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ------------------------------------------------
Japan 19.72%
- ------------------------------------------------
United Kingdom 14.75%
- ------------------------------------------------
France 10.21%
- ------------------------------------------------
Germany 6.79%
- ------------------------------------------------
Switzerland 6.76%
- ------------------------------------------------
Total 58.23%
- ------------------------------------------------
</TABLE>
22
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
Q. HOW DID THE PORTFOLIO PERFORM DURING THE REPORTING PERIOD?
A. The Portfolio underperformed its benchmark, the
MSCI-EAFE-Registered Trademark- Index, by 6.10% for the year ended October 31,
1998. On an inception-to-date basis, the Portfolio outperformed the MSCI-EAFE
Index by 0.72%. Most of this underperformance during the reporting period came
in the last three months, which were characterized by tremendous volatility in
the global stock markets. Precipitous market declines caused by fears of global
recession were followed by sharp rises that virtually erased all the losses.
Although our strategic shift into more value-oriented funds cost us some
performance during market rebounds, we continue to believe that it is a more
prudent strategy going forward as markets are likely to be vulnerable to news of
economic slowdown and earnings disappointments. Although the Fund's return
lagged the MSCI-EAFE Index, it outperformed the average foreign fund return by
0.45% for the one-year reporting period ended 10/31/98.(1)
Q. WHAT IMPACT DID THE TURMOIL IN RUSSIA AND IN ASIA'S EMERGING MARKETS HAVE ON
THE PORTFOLIO?
A. There was very little impact, because the Portfolio had no direct exposure to
Russia or to Asian emerging markets during the one-year reporting period.
(1)Source: Morningstar, Inc. The Foreign Fund category contained 520 funds with
one-year track records as of 10/31/98.
Some of the international funds in which we invested had insignificant holdings
in these countries and therefore resulted in only a minor impact on the
Portfolio.
Q. WHAT WAS THE FUND'S EMERGING MARKETS EXPOSURE?
A. The Portfolio had no direct exposure to emerging markets throughout the
period. It did, however, have some indirect exposure to emerging market
countries through some of its underlying international funds. Based on our
analysis of data provided by the underlying funds, this exposure reached
approximately 10% in April but dropped to less than 5% by the end of the
reporting period.
Q. WHICH SECTORS OR REGIONS PERFORMED WELL
FOR THE PORTFOLIO?
A. Europe, which was overweighted in the Portfolio throughout the reporting
period, performed very well. Peripheral continental European countries (Turkey,
Greece and Portugal) and smaller-cap stocks did particularly well in the first
half of the reporting period.
Q. WHAT IMPACT DID CURRENCY EXCHANGE RATES
HAVE ON THE PERFORMANCE OF INTERNATIONAL STOCKS
AND THE PORTFOLIO?
A. Although there was a fair amount of volatility, currency exchange rates did
not have a major impact when viewed over the entire reporting period. To the
extent that currency hedging has a cost and therefore reduces potential returns
when the hedged currency gains strength, some of the underlying fund's returns
were negatively impacted by their currency hedges. The Portfolio itself,
however, does not hedge currency.
23
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO DISCUSSION (continued)
Q. HOW DID THE PORTFOLIO'S STRATEGY CHANGE DURING THE REPORTING PERIOD, AND HOW
WAS IT POSITIONED VERSUS ITS BENCHMARK AT THE CLOSE OF THE PERIOD?
A. Relative to the benchmark MSCI-EAFE Index, the Portfolio was overweighted in
Europe and smaller-cap stocks for most of the reporting period. As of the end of
the period, we had increased our exposure to Japan to 19.72%, close to the
neutral weighting of the benchmark MSCI-EAFE Index.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
ACTUAL ASSET MIX: 10/31/97-10/31/98
CASH OTHER COUNTRIES EMERGING MARKETS DEVELOPED PACIFIC
<S> <C> <C> <C> <C>
10/31/97 11.55% 1.15% 7.39% 17.94%
11/30/97 6.80% 1.25% 7.69% 15.93%
12/31/97 8.66% 0.37% 7.12% 15.45%
1/31/98 5.64% 0.95% 6.98% 14.48%
2/28/98 5.58% 1.19% 7.58% 14.85%
3/31/98 6.14% 1.11% 8.83% 12.69%
4/30/98 7.61% 1.04% 9.51% 10.10%
5/31/98 6.67% 1.08% 8.52% 8.93%
6/30/98 3.89% 0.83% 6.93% 6.70%
7/31/98 7.03% 0.93% 7.42% 5.80%
8/31/98 12.10% 1.17% 5.18% 15.81%
9/30/98 9.64% 0.65% 3.27% 19.78%
<CAPTION>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
ACTUAL ASSET MIX: 10/31/97-10/31/98
DEVELOPED EUROPE NORTH AMERICA
<S> <C> <C>
10/31/97 56.63% 5.34%
11/30/97 63.15% 5.18%
12/31/97 61.16% 7.24%
1/31/98 67.86% 4.09%
2/28/98 66.93% 3.87%
3/31/98 67.29% 3.94%
4/30/98 67.14% 4.60%
5/31/98 70.40% 4.40%
6/30/98 77.77% 3.88%
7/31/98 75.65% 3.17%
8/31/98 63.49% 2.25%
9/30/98 64.10% 2.56%
</TABLE>
Q. WHAT IMPACT WILL THE EURO CONVERSION HAVE ON THE PORTFOLIO?
A. Certain European countries plan to convert to a common euro currency
beginning on January 1, 1999. Fluctuations in the exchange rate that would
normally occur between the U.S. dollar and a local currency will affect the U.S.
dollar-denominated returns for investors in the Portfolio. These fluctuations
may be more volatile for the currencies of countries converting to a common euro
currency as January 1 approaches. The value of securities of issuers in those
countries may be adversely affected by the conversion as well as by investor
expectations leading up to the conversion. Because many of the underlying funds
in which the Portfolio invests use hedging strategies to varying degrees, the
impact of the euro conversion, if any, may be less for investors in the
Portfolio. Additionally, the investment manager is taking steps to minimize the
risk that the Portfolio's operations will be affected by the upcoming euro
conversion.
24
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO(TM)
Schedule of Investments
October 31, 1998
Number Value
of Shares (000s)
--------- ---------
INVESTMENT FUNDS -- 99.8%
American Century: Twentieth Century,
International Discovery Fund 169,119 $ 1,468
American Century: Twentieth Century,
International Growth Fund 848,756 7,486
Berger International Core Fund 259,342 2,977
BT Investments Institutional
International Fund+ 13,836 177
BT Investment International
Equity Fund 343,731 7,562
Colonial Newport Japan Fund 39,446 364
Colonial Newport Tiger Fund,
Class A 290,541 2,196
Federated International Small
Company Fund+ 180,935 3,049
GAM Europe Fund 61,272 780
GAM International Fund 105,703 2,978
Icon North Europe Region 99,324 1,207
Ivy International Fund, Class A 247,191 9,784
Janus Overseas Fund 528,623 9,489
Oppenheimer International
Growth Fund, Class A 213,487 3,070
Phoenix International Fund 347,604 5,325
Scudder Japan Fund 1,252,489 9,268
SoGen Overseas Fund 325,445 3,577
Vontobel International Equity 151,477 2,911
-------
Total Investment Funds
(Cost $69,084) $73,668
-------
Number Value
of Shares (000s)
--------- ---------
SHORT-TERM INVESTMENTS -- 0.3%
MSTC Cash Reserve Liquid
Asset Fund, 5.26%* 202,000 $ 202
-------
Total Short-Term Investments
(Cost $202) 202
-------
TOTAL INVESTMENTS -- 100.1%
(Cost $69,286) 73,870
-------
OTHER ASSETS AND LIABILITIES -- (0.1%)
Other assets 1,770
Liabilities (1,836)
-------
(66)
-------
TOTAL NET ASSETS -- 100.0% $73,804
=======
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO
FINANCIAL STATEMENTS.
25
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO(TM)
SCHEDULE OF INVESTMENTS
October 31, 1998
Number Value
of Shares (000s)
--------- ---------
INVESTMENT FUNDS -- 98.8%
Accessor Value & Income Portfolio 86,962 $ 1,847
American Century: Benham
Intermediate Term Treasury Fund 306,326 3,376
American Century: Benham
Long Term Treasury Fund 201,009 2,265
American Century: Income & Growth
Institutional Fund 525,308 14,231
American Century: Twentieth Century
International Growth Fund 527,543 4,653
American Century: Twentieth Century
Ultra Fund, Institutional Class 342,987 10,674
Brinson U.S. Equity Fund, Class A 118,226 2,271
BT Investments International
Equity Fund 223,017 4,906
BT Investments Small-Cap Fund 155,759 2,385
Excelsior Value &
Restructuring Fund 298,782 6,244
Federated U.S. Government
Securities Fund, 1-3 Years
Institutional Shares 71,504 756
Federated U.S. Government
Securities Fund, 2-5 Years
Institutional Shares 595,421 6,556
Gabelli Westwood Mighty
Mites Fund 10,288 103
Heritage Capital Appreciation Fund 40,469 943
Hotchkis & Wiley Equity
Income Fund 141,256 2,915
Hotchkis & Wiley
International Fund 435,148 9,839
Janus Twenty Fund 308,380 13,254
Janus Worldwide Fund 55,421 2,301
Longleaf Partners Realty Fund 373,583 5,380
Marsico Growth & Income Fund+ 336,238 4,048
Number Value
of Shares (000s)
--------- ---------
Melody 4500 Fund,
Limited Partnership+** 419,712 $ 3,576
Morgan Stanley Institutional
International Equity Portfolio 279,820 5,420
PIMCO Total Return
Institutional Fund 193,657 2,122
Rydex Series Trust Nova Fund 109,409 3,129
Rydex Series Trust OTC Fund 48,450 1,549
Rydex U.S. Government
Money Market Fund 7,485,254 7,485
Steinroe Capital Opportunity Fund+ 183,584 4,599
T Rowe Price Equity Fund 565,298 15,043
Thornburg Value Fund, Class A 214,281 4,571
Weitz Series Hickory Fund 7,785 211
White Oak Growth Stock Fund 100,357 3,416
--------
Total Investment Funds
(Cost $143,162) 150,068
--------
SHORT-TERM INVESTMENTS -- 0.4%
MSTC Cash Reserve Liquid
Asset Fund, 5.26%* 518,000 518
--------
Total Short-Term Investments
(Cost $518) 518
--------
TOTAL INVESTMENTS -- 99.2%
(Cost $143,680) 150,586
--------
OTHER ASSETS AND LIABILITIES -- 0.8%
Other assets 4,595
Liabilities (3,327)
--------
1,268
--------
TOTAL NET ASSETS -- 100.0% $151,854
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO
FINANCIAL STATEMENTS.
26
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO(TM)
SCHEDULE OF INVESTMENTS
October 31, 1998
Number Value
of Shares (000s)
--------- ---------
INVESTMENT FUNDS -- 97.3%
Accessor Value & Income Portfolio 36,922 $ 784
American Century: Benham
Intermediate Term Treasury Fund 481,195 5,303
American Century: Benham
Long Term Treasury Fund 199,271 2,246
American Century: Income &
Growth Fund, Institutional Class 221,686 6,005
American Century: Twentieth Century
International Growth Fund 164,760 1,453
American Century: Twentieth Century
Ultra Fund, Institutional Class 179,151 5,575
Brinson U.S. Equity Fund, Class A 51,125 982
BT Investment
International Equity 83,551 1,838
BT Investment Small-Cap Fund 62,511 957
Excelsior Value &
Restructuring Fund 137,101 2,865
Federated U.S. Government
Securities Fund, 1-3 Years
Institutional Shares 192,903 2,041
Federated U.S. Government
Securities Fund, 2-5 Years
Institutional Shares 610,328 6,720
Heritage Capital Appreciation
Fund, Class A+ 40,469 943
Hotchkis & Wiley Equity
Income Fund 46,158 953
Hotchkis & Wiley
International Fund 186,464 4,216
Janus Twenty Fund 110,300 4,741
Janus Worldwide Fund 45,218 1,877
Longleaf Partners Realty Fund 264,394 3,807
Marsico Growth & Income Fund+ 352,808 4,248
Number Value
of Shares (000s)
--------- ---------
Melody 4500 Fund,
Limited Partnership+** 400,000 $ 3,408
PIMCO Total Return
Institutional Fund 942,576 10,331
Rydex Series Nova Fund 54,705 1,565
Rydex U.S. Government
Money Market 4,042,220 4,042
Steinroe Capital
Opportunity Fund+ 93,245 2,336
T Rowe Price Equity Fund 275,624 7,334
Thornburg Value Fund, Class A 76,657 1,635
Weitz Series Hickory Fund 6,887 186
White Oak Growth Stock Fund 54,933 1,870
--------
Total Investment Funds
(Cost $86,926) 90,261
========
SHORT-TERM INVESTMENTS -- 1.4%
MSTC Cash Reserve Liquid
Asset Fund, 5.26%* 1,308,000 1,308
--------
Total Short-Term Investments
(Cost $1,308) 1,308
--------
TOTAL INVESTMENTS -- 98.7%
(Cost $88,234) 91,569
--------
OTHER ASSETS AND LIABILITIES -- 1.3%
Other assets 1,356
Liabilities (131)
--------
1,225
--------
TOTAL NET ASSETS -- 100.0% $ 92,794
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND
NOTES TO FINANCIAL STATEMENTS. 27
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO(TM)
SCHEDULE OF INVESTMENTS
October 31, 1998
Number Value
of Shares (000s)
--------- ---------
INVESTMENT FUNDS -- 99.7%
Ariel Appreciation Fund 197,315 $ 7,078
Ariel Growth Fund 128,216 5,232
Bjurman Micro Cap Growth Fund+ 13,173 209
Brazos Micro Cap Growth Fund+ 92,507 998
Eclipse Equity Fund 195,930 2,610
Excelsior Energy & Natural
Resources Fund 120,589 1,316
Fremont: US Micro Cap Fund 216,164 3,532
Jurika & Voyles Mini Cap Fund 91,260 1,403
Longleaf Partners Realty Fund 839,814 12,093
Longleaf Partners Small Cap Fund 1,019,221 23,789
Melody 4500 Fund,
Limited Partnership+** 3,030,998 25,824
Nicholas-Applegate Mini Cap
Growth Fund+ 89,030 1,642
Oakmark Small Cap Fund 423,131 5,839
Oberweis Micro Cap Portfolio+ 46,253 504
PBHG Small Cap Value Fund 8,368 102
Robertson Stephens
Emerging Growth 171,516 2,995
Robertson Stephens Microcap
Growth Fund+ 231,198 2,934
Schroders Micro Cap Fund+ 11,690 175
Scudder Micro Cap Fund 226,574 3,331
State Street Research Global
Resources Fund 354,391 4,618
Number Value
of Shares (000s)
--------- ---------
Steinroe Capital Opportunity
Fund+ 286,410 $ 7,174
Turner Small Cap Fund 202,783 4,396
Wasatch Micro Cap Fund 1,072,521 3,668
Wasatch Micro Cap Value Fund+ 208,333 402
Weitz Series Hickory Fund 235,250 6,366
--------
Total Investment Funds
(Cost $135,784) 128,230
--------
SHORT-TERM INVESTMENTS -- 0.2%
MSTC Cash Reserve Liquid
Asset Fund, 5.26%* 215,000 215
--------
Total Short-Term Investments
(Cost $215) 215
--------
TOTAL INVESTMENTS -- 99.9%
(Cost $135,999) 128,445
--------
OTHER ASSETS AND LIABILITIES -- 0.1%
Other assets 3,815
Liabilities (3,713)
--------
102
--------
TOTAL NET ASSETS -- 100.0% $128,547
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND
NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
NOTES TO SCHEDULES OF INVESTMENTS
October 31, 1998
+ Non-Income Producing Security.
* Interest rate represents the yield on report date.
** See Note 3 of Notes to Financial Statements.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
October 31, 1998
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(TM)
---------------------------------------------------
International Growth Balanced Small Cap
------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (Cost $69,286, $143,680, $88,234
and $135,999, respectively) $ 73,870 $ 150,586 $ 91,569 $ 128,445
Cash -- 10 -- --
Receivables:
Investments sold 1,582 4,478 1,216 3,753
Fund shares sold 184 93 124 56
Dividends 3 13 14 4
Miscellaneous assets 1 1 2 2
--------- --------- --------- ---------
Total assets 75,640 155,181 92,925 132,260
--------- --------- --------- ---------
LIABILITIES
Payables:
Investments purchased 1,638 3,000 -- 3,600
Fund shares redeemed 78 144 29 70
Investment advisory and administration fees -- 5 3 2
Custodian fees 34 11 4 13
Accrued expenses 86 167 95 28
--------- --------- --------- ---------
Total liabilities 1,836 3,327 131 3,713
--------- --------- --------- ---------
Net assets applicable to outstanding shares $ 73,804 $ 151,854 $ 92,794 $ 128,547
========= ========= ========= =========
NET ASSETS CONSIST OF:
Paid-in-capital $ 70,182 $ 140,486 $ 87,772 $ 152,355
Undistributed (distributions in excess of)
net investment income (12) 1,428 1,515 22
Accumulated net realized gain (loss) on investments sold (950) 3,034 172 (16,276)
Net unrealized appreciation (depreciation) on investments 4,584 6,906 3,335 (7,554)
--------- --------- --------- ---------
$ 73,804 $ 151,854 $ 92,794 $ 128,547
========= ========= ========= =========
PRICING OF SHARES:
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 6,974 13,283 8,168 15,105
Net asset value, offering and redemption price per share $ 10.58 $ 11.43 $ 11.36 $ 8.51
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended October 31, 1998
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(TM)
--------------------------------------------------
International Growth Balanced Small Cap
------------- -------- -------- ---------
<S> <C> <C> <C> <C>
Investment income:
Dividend $ 2,706 $ 4,468 $ 2,928 $ 5,454
Interest 74 150 122 111
-------- -------- -------- --------
Total investment income 2,780 4,618 3,050 5,565
-------- -------- -------- --------
Expenses:
Investment advisory and administration fees 595 1,083 607 1,308
Transfer agency and shareholder service fees 201 366 205 442
Custodian fees 19 16 15 25
Portfolio accounting fees 28 50 29 64
Registration fees 28 55 35 120
Professional fees 33 38 32 51
Shareholder reports 34 71 37 68
Trustees' fees 8 11 7 10
Insurance and other expenses 19 20 10 12
-------- -------- -------- --------
965 1,710 977 2,100
Less:expenses reduced (see Note 5) (563) (978) (566) (1,216)
-------- -------- -------- --------
Net expenses incurred by fund 402 732 411 884
-------- -------- -------- --------
Net investment income 2,378 3,886 2,639 4,681
-------- -------- -------- --------
Net realized gain (loss) on investments:
Net realized gain (loss) on investments sold (3,210) 1,116 (624) (23,840)
Net realized gain received from underlying funds 2,360 1,940 804 7,711
-------- -------- -------- --------
Net realized gain (loss) on investments (850) 3,056 180 (16,129)
-------- -------- -------- --------
Change in net unrealized appreciation (depreciation)
on investments:
Net unrealized appreciation (depreciation)
on investments 1,021 (3,418) (812) (4,764)
-------- -------- -------- --------
Net gain (loss) on investments 171 (362) (632) (20,893)
-------- -------- -------- --------
Increase (decrease) in net assets resulting from operations $ 2,549 $ 3,524 $ 2,007 $(16,212)
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
For the periods ended October 31,
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(TM)
-------------------------------------------------------------------------------
International Growth Balanced
----------------------- -------------------- -----------------------
1998 1997 1998 1997+ 1998 1997+
-------- -------- -------- -------- --------- --------
Operations:
<S> <C> <C> <C> <C> <C> <C>
Net investment income $ 2,378 $ 1,078 $ 3,886 $ 1,988 $ 2,639 $ 1,409
Net realized gain (loss) on investments (3,210) 1,075 1,116 2,349 (624) 804
Net realized gain received from
underlying funds 2,360 977 1,940 1,090 804 453
Change in net unrealized appreciation
(depreciation) on investments sold 1,021 4,087 (3,418) 10,324 (812) 4,147
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets resulting
from operations 2,549 7,217 3,524 15,751 2,007 6,813
--------- --------- --------- --------- --------- ---------
Dividends to shareholders from net
investment income (2,348) (1,090) (3,302) (1,148) 2,017 (520)
Dividends in excess of net investment income (37) (43) -- -- -- --
Distributions to shareholders from
net capital gains (2,152) -- (3,461) -- (1,265) --
--------- --------- --------- --------- --------- ---------
Total dividends and distributions
to shareholders (4,537) (1,133) (6,763) (1,148) (3,282) (520)
--------- --------- --------- --------- --------- ---------
Capital share transactions:
Proceeds from shares sold 28,116 46,429 68,937 140,642 56,699 69,114
Net asset value of shares issued in
reinvestment of dividends 4,313 1,062 6,623 1,078 3,111 488
Less payments for shares redeemed (37,723) (31,669) (44,344) (32,446) (26,874) (14,762)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets from
capital share transactions (5,294) 15,822 31,216 109,274 32,936 54,840
--------- --------- --------- --------- --------- ---------
Total increase (decrease) in net assets (7,282) 21,906 27,977 123,877 31,661 61,133
Net assets:
Beginning of period 81,086 59,180 123,877 -- 61,133 --
--------- --------- --------- --------- --------- ---------
End of period (including undistributed/
(distributions in excess of) net
investment income of $(12), $(43),
$1,428, $840, $1,515, $889, $22,
and $316, respectively) $ 73,804 $ 81,086 $ 151,854 $ 123,877 $ 92,794 $ 61,133
========= ========= ========= ========= ========= =========
Number of fund shares:
Sold 2,484 4,299 5,804 13,607 4,875 6,715
Reinvested 424 105 596 112 284 49
Redeemed (3,399) (2,909) (3,798) (3,038) (2,362) (1,393)
--------- --------- --------- --------- --------- ---------
Net increase in shares outstanding (491) 1,495 2,602 10,681 2,797 5,371
Shares outstanding:
Beginning of period 7,465 5,970 10,681 -- 5,371 --
--------- --------- --------- --------- --------- ---------
End of period 6,974 7,465 13,283 10,681 8,168 5,371
========= ========= ========= ========= ========= =========
<CAPTION>
Small Cap
--------------------------
1998 1997++
-------- --------
Operations:
Net investment income $ 4,681 $ 316
Net realized gain (loss) on investments (23,840) (159)
Net realized gain received from
underlying funds 7,711 12
Change in net unrealized appreciation
(depreciation) on investments sold (4,764) (2,790)
--------- ---------
Increase (decrease) in net assets resulting
from operations (16,212) (2,621)
--------- ---------
Dividends to shareholders from net
investment income (4,998) --
Dividends in excess of net investment income (678) --
Distributions to shareholders from
net capital gains -- --
--------- ---------
Total dividends and distributions
to shareholders (5,676) --
--------- ---------
Capital share transactions:
Proceeds from shares sold 27,954 218,803
Net asset value of shares issued in
reinvestment of dividends 5,420 --
Less payments for shares redeemed (89,989) (9,132)
--------- ---------
Increase (decrease) in net assets from
capital share transactions (56,615) 209,671
--------- ---------
Total increase (decrease) in net assets (78,503) 207,050
Net assets:
Beginning of period 207,050 --
--------- ---------
End of period (including undistributed/
(distributions in excess of) net
investment income of $(12), $(43),
$1,428, $840, $1,515, $889, $22,
and $316, respectively) $ 128,547 $ 207,050
========= =========
Number of fund shares:
Sold 2,919 21,761
Reinvested 569 --
Redeemed (9,240) (904)
--------- ---------
Net increase in shares outstanding (5,752) 20,857
Shares outstanding:
Beginning of period 20,857 --
--------- ---------
End of period 15,105 20,857
========= =========
</TABLE>
+ For the period from November 18, 1996 (commencement of operations) to
October 31, 1997.
++ For the period from September 16, 1997 (commencement of operations) to
October 31, 1997.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab MarketManager International Portfolio(TM)
------------------------------------------------
1998 1997 1996(1)
------- ------- -------
<S> <C> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Net asset value at beginning of period $ 10.86 $ 9.91 $ 10.00
------- ------- -------
Income from investment operations:
Net investment income 0.34 0.17 --
Net realized and unrealized gains (losses) on investments 0.02 $ 0.95 (0.09)
------- ------- -------
Total income from investment operations 0.36 1.12 (0.09)
Less distributions:
Dividends from net investment income (0.34) (0.17) --
Dividends from capital gains (0.30) -- --
------- ------- -------
Total distributions (0.64) (0.17) --
------- ------- -------
NET ASSET VALUE AT END OF PERIOD $ 10.58 $ 10.86 $ 9.91
======= ======= =======
Total return (%) 3.55 11.47 (0.90)*
RATIOS/SUPPLEMENTAL DATA (%)
- ----------------------------
Ratio of net operating expenses to average net assets 0.50 0.50 0.50**
Reductions reflected in above expense ratio 0.70 0.80 2.91**
Ratio of net investment income to average net assets 2.96 1.40 0.52**
Portfolio turnover rate 236 179 --
Net assets, end of period (000s) $73,804 $81,086 $59,180
</TABLE>
(1) For the period from October 16, 1996 (commencement of operations) to
October 31, 1996.
* Not Annualized.
** Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab MarketManager Growth Portfolio(TM)
-----------------------------------------
1998 1997(1)
-------- --------
<S> <C> <C>
For a share outstanding throughout each period:
Net asset valueat beginning of period $ 11.60 $ 10.00
-------- --------
Income from investment operations:
Net investment income 0.32 0.08
Net realized and unrealized gains on investments 0.11 1.66
-------- --------
Total income from investment operations 0.43 1.74
Less distributions:
Dividends from net investment income (0.29) (0.14)
Dividends from capital gains (0.31) --
-------- --------
Total distributions (0.60) (0.14)
-------- --------
NET ASSET VALUE AT END OF PERIOD $ 11.43 $ 11.60
======== ========
Total return (%) 3.87 17.60*
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 0.50**
Reductions reflected in above expense ratio 0.67 0.77**
Ratio of net investment income to average net assets 2.66 2.07**
Portfolio turnover rate 384 192
Net assets, end of period (000s) $151,854 $123,877
</TABLE>
(1) For the period from November 18, 1996 (commencement of operations) to
October 31, 1997.
* Not Annualized.
** Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
<TABLE>
<CAPTION>
Schwab MarketManager Balanced Portfolio(TM)
-------------------------------------------
1998 1997(1)
-------- --------
<S> <C> <C>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
Net asset value at beginning of period $ 11.38 $ 10.00
-------- --------
Income from investment operations:
Net investment income 0.36 0.17
Net realized and unrealized gains on investments 0.18 1.34
-------- --------
Total income from investment operations 0.54 1.51
Less distributions:
Dividends from net investment income (0.34) (0.13)
Dividends from capital gains (0.22) --
-------- --------
Total distributions (0.56) (0.13)
-------- --------
NET ASSET VALUE AT END OF PERIOD $ 11.36 $ 11.38
======== ========
Total return (%) 4.89 15.27*
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 0.50**
Reductions reflected in above expense ratio 0.69 0.95**
Ratio of net investment income to average net assets 3.21 3.03**
Portfolio turnover rate 353 171
Net assets, end of period (000s) $ 92,794 $ 61,133
</TABLE>
(1) For the period from November 18, 1996 (commencement of operations) to
October 31, 1997.
* Not Annualized.
** Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Schwab MarketManager Small Cap Portfolio(TM)
--------------------------------------------
1998 1997(1)
-------- --------
<S> <C> <C>
For a share outstanding throughout each period:
Net asset valueat beginning of period $ 9.93 $ 10.00
-------- --------
Income from investment operations:
Net investment income 0.21 0.02
Net realized and unrealized losses on investments (1.36) (0.09)
-------- --------
Total income from investment operations (1.15) (0.07)
Less distributions:
Dividends from net investment income (0.24) --
Dividends in excess of net investment income (0.03) --
-------- --------
Total distributions (0.27) --
-------- --------
NET ASSET VALUE AT END OF PERIOD $ 8.51 $ 9.93
======== ========
Total return (%) (11.84) (0.70)*
RATIOS/SUPPLEMENTAL DATA (%)
- -----------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 0.50**
Reductions reflected in above expense ratio 0.69 0.75**
Ratio of net investment income to average net assets 2.65 1.29**
Portfolio turnover rate 166 10
Net assets, end of period (000s) $128,547 $207,050
</TABLE>
(1) For the period from September 16, 1997 (commencement of operations) to
October 31, 1997.
* Not Annualized.
** Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1998
(All currency amounts are in thousands unless otherwise noted.)
1. DESCRIPTION OF THE FUNDS
The Schwab MarketManager Growth Portfolio(TM) (formerly Schwab One Source
Portfolios Growth Allocation Fund), Schwab MarketManager Balanced Portfolio(TM)
(formerly Schwab One Source Portfolios Balanced Allocation Fund), Schwab
MarketManager Small Cap Portfolio(TM) (formerly Schwab One Source Portfolios
Small Company Fund) and Schwab MarketManager International Portfolio(TM)
(formerly Schwab One Source Portfolios International Fund) (the "Funds") are
series of Schwab Capital Trust (the "Trust"), a no-load, open-end, investment
management company organized as a Massachusetts business trust on May 7, 1993
and registered under the Investment Company Act of 1940, as amended (the "1940
Act").
In addition to the Funds, the Trust also offers the Schwab S&P 500 Fund, Schwab
International Index Fund(R), Schwab Small-Cap Index Fund(R), Schwab MarketTrack
All Equity Portfolio(TM), Schwab MarketTrack Growth Portfolio(TM) (formerly
Schwab Asset Director(R) High Growth Fund), Schwab MarketTrack Balanced
Portfolio(TM) (formerly Schwab Asset Director(R) Balanced Growth Fund), Schwab
MarketTrack Conservative Portfolio(TM) (formerly Schwab Asset Director(R)
Conservative Growth Fund) and Schwab Analytics Fund(R). The assets of each
series are segregated and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles. The preparation of financial
statements in accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
SECURITY VALUATION--Investments in underlying funds are valued at their
respective net asset values as determined by those funds, in accordance with the
1940 Act, for a given day. Investments in securities traded on an exchange or in
the over-the-counter market value 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. Other investments, for which no
quotations are readily available, are valued at fair value as determined by the
Funds' investment adviser pursuant to guidelines adopted in good faith by the
Board of Trustees.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND REALIZED GAINS (LOSSES)--Security
transactions 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, including accretion of
discount, is recorded on the accrual basis. Realized gains and losses from
security transactions are determined on an identified cost basis.
EXPENSES--Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
FEDERAL INCOME TAXES--It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all net investment income and realized net capital gains, if any, to
shareholders. Therefore, no federal income tax provision is required. Each Fund
is considered a separate entity for tax purposes.
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
The aggregate gross unrealized appreciation and depreciation for securities held
by the Funds at October 31, 1998 (for financial reporting and federal income tax
purposes) is as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation Appreciated Depreciated
Portfolio (Depreciation) Securities Securities
--------- ------------ ---------- ----------
<S> <C> <C> <C>
Schwab MarketManager International Portfolio(TM)$ 4,584 $4,845 $ 261
Schwab MarketManager Growth Portfolio(TM) 6,906 7,753 847
Schwab MarketManager Balanced Portfolio(TM) 3,335 4,073 738
Schwab MarketManager Small Cap Portfolio(TM) (7,554) 3,212 10,766
</TABLE>
At October 31, 1998, the unused capital loss carryforwards, for federal income
tax purposes with expiration dates, are as follows:
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(TM)
-----------------------------------------------
Capital Loss Expirations International Balanced Small Cap
------------------------ ------------- -------- ----------
<S> <C> <C> <C>
10/31/06 $651 $24 $17,034
---- --- -------
Total capital loss carryforward $651 $24 $17,034
==== === =======
</TABLE>
RECLASSIFICATION--Generally accepted accounting principles require that
certain components of net assets be reclassified between financial and tax
reporting. These reclassifications have no effect on net assets or net asset
values per share.
On the Statements of Assets and Liabilities, the following adjustments were
made:
<TABLE>
<CAPTION>
Accumulated Undistributed
Net Realized Net Investment
Portfolio Gain (Loss) Income Paid-In-Capital
--------- ------------ -------------- ---------------
<S> <C> <C> <C>
Schwab MarketManager International Portfolio(TM) -- $ 38 $ (38)
Schwab MarketManager Growth Portfolio(TM) -- 4 (4)
Schwab MarketManager Balanced Portfolio(TM) -- 4 (4)
Schwab MarketManager Small Cap Portfolio(TM) -- 701 (701)
</TABLE>
3. TRANSACTIONS WITH LIMITED PARTNERSHIPS
As of October 31, 1998, The MarketManager Growth Portfolio(TM), the
MarketManager Balanced Portfolio(TM), and the MarketManager Small Cap
Portfolio(TM) owned 10.9%, 10.4%, and 78.6% limited partnership ownership
interests in the Melody 4500 Fund, L.P. ("Melody"), respectively. Melody invests
in publicly traded securities of small to medium capitalization issuers located
in the United States and will attempt to equal or exceed the total return
performance of the Wilshire 4500 Index over a market cycle of 5 years. As stated
in the partnership agreement, under normal market conditions, each Fund can
generally redeem up to 50% of its interest upon 3 business days notice to the
general partner, and the remainder of the capital account as of the last
business day of any calendar month on at least 30 days prior notice to the
general partner.
4. 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 Adviser").
38
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
For advisory services and facilities furnished, each Fund pays an annual fee,
payable monthly, of 0.74% of the first $1 billion of average daily net assets,
0.69% of the next $1 billion and 0.64% of such assets over $2 billion. The
Investment Adviser has reduced a portion of its fee for the year ended October
31, 1998 (see Note 5).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS--The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced a portion of its fees For the year ended October 31, 1998,
Schwab has voluntarily waived all of its transfer agency and shareholder service
fees (see Note 5).
OFFICERS AND TRUSTEES--Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Adviser and/or Schwab. During the
year ended October 31, 1998, the Trust made no direct payments to its officers
or trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The Funds incurred fees aggregating $36 related
to the Trust's unaffiliated trustees.
5. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The Investment Adviser and Schwab guarantee that through at least February 28,
1999, each Fund's total operating expenses will not exceed 0.50% of the Fund's
average daily net assets, after waivers and reimbursements. For the purpose of
this guarantee, operating expenses do not include interest expenses,
extraordinary expenses, taxes, foreign taxes and capital items. Schwab has
agreed to waive its transfer agency and shareholder service fees through at
least December 31, 2001.
For the year ended October 31, 1998, the total of such fees and expenses reduced
by the Investment Adviser was $362, $612, $361 and $774 for the MarketManager
International, Growth, Balanced and Small Cap Portfolios, respectively, and the
total of such fees reduced by Schwab was $201, $366, $205 and $442 for the
MarketManager International, Growth, Balanced and Small Cap Portfolios,
respectively.
6. BORROWING AGREEMENT
The Trust has a line of credit arrangement with The Bank of New York whereby the
Trust may borrow on behalf of the Funds an aggregate amount of up to $150
million on a temporary basis to fund shareholder redemptions. Amounts borrowed
under this arrangement bear interest at periodically negotiated rates and may be
collateralized by the assets of the Funds. During the year ended October 31,
1998, no borrowings were made under this arrangement on behalf of the Funds.
7. INVESTMENT TRANSACTIONS
Aggregate purchases and sales of investment securities, other than short-term
obligations, for the year ended October 31, 1998, were as follows:
<TABLE>
<CAPTION>
Proceeds of
sales and
Portfolio Purchases maturities
--------- ----------- ----------
<S> <C> <C>
Schwab MarketManager International Portfolio(TM) $185,670 $185,904
Schwab MarketManager Growth Portfolio(TM) 574,431 536,392
Schwab MarketManager Balanced Portfolio(TM) 311,259 276,016
Schwab MarketManager Small Cap Portfolio(TM) 288,547 326,956
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Schwab MarketManager International Portfolio(TM),
Schwab MarketManager Growth Portfolio(TM),
Schwab MarketManager Balanced Portfolio(TM), and
Schwab MarketManager Small Cap Portfolio(TM):
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab MarketManager International
Portfolio(TM) (formerly Schwab OneSource Portfolios -- International), Schwab
MarketManager Growth Portfolio(TM) (formerly Schwab OneSource Portfolios --
Growth Allocation), Schwab MarketManager Balanced Portfolio(TM) (formerly Schwab
OneSource Portfolios -- Balanced Allocation), and Schwab MarketManager Small Cap
Portfolio(TM) (formerly Schwab OneSource Portfolios -- Small Company) (four
series constituting part of Schwab Capital Trust, hereafter referred to as the
"Funds") at October 31, 1998, the results of each of their operations for the
year then ended, and the changes in each of their net assets and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit 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, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, CA
December 8, 1998
40
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please call 1-800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
SCHWAB STOCK FUNDS
Schwab S&P 500 Fund
Schwab 1000 Fund-Registered Trademark-
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small-Cap Portfolio
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio
SCHWAB BOND FUNDS
Schwab Total Bond Market Index Fund
Schwab Short-Term Bond Market Index Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(1) that seek high current income
with safety and liquidity. Choose from taxable or tax-advantaged alternatives.
Many can be linked to your Schwab account to "sweep" cash balances automatically
when you're between investments. Or, for your larger cash reserves, choose one
of our Value Advantage Investments.-Registered Trademark-
(1)Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
<PAGE>
SCHWABFUNDS
FAMILY-Registered Trademark-
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
- -C- 1998 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. CRS 20415 (1298-4860) MKT3810(12/98)
