<PAGE>
SCHWABFUNDS-R-
SCHWAB MARKETMANAGER
PORTFOLIOS-TM-
(formerly the
Schwab OneSource Portfolios)
/ / GROWTH
/ / BALANCED
/ / SMALL CAP
/ / INTERNATIONAL
Semiannual Report
April 30, 1998
<PAGE>
SCHWAB MARKETMANAGER PORTFOLIOS-TM-
We are pleased to bring you this semiannual report for the Schwab MarketManager
Portfolios (the Portfolios) for the six-month period ended April 30, 1998. Note
that these Funds were formerly known as the Schwab OneSource-TM- Portfolios. 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
- ------------------------------------------------
Schwab MarketManager Growth Portfolio 8
- ------------------------------------------------
Schwab MarketManager Balanced
Portfolio 8
- ------------------------------------------------
Schwab MarketManager Small Cap
Portfolio 15
- ------------------------------------------------
Schwab MarketManager International
Portfolio 19
- ------------------------------------------------
Statement of Net Assets 23
- ------------------------------------------------
Financial Statements 27
- ------------------------------------------------
Notes to Financial Statements 32
- ------------------------------------------------
</TABLE>
WHY THE NAME CHANGE?
If you've been invested in any of these Portfolios
for a while, you used to know them as the Schwab OneSource Portfolios. We
recently changed their names to better reflect the active management of these
Funds. In fact, the change was a result of feedback we received from you, our
investors. We wanted to clearly communicate active portfolio management and
eliminate any confusion regarding the Portfolios' relationship to Schwab's
Mutual Fund OneSource-Registered Trademark- service.
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Dear Shareholder,
The U.S. stock market rallied strongly over most of the six-month period ended
April 30, 1998. So did many European markets. Despite investors' concerns about
Asia's financial crisis last autumn, economic conditions continued to provide a
solid underpinning for U.S. business activity. Once again, blue chips led the
rally, though many smaller-cap stocks posted very solid gains in absolute terms.
You'll find more insight about the overall market beginning on page 4.
[PHOTO]
As pleased as we are with the performance of our Funds during
this period, we want to be realistic. Over most of this
century, for example, the U.S. stock market has returned an
average of 11% to 12% PER YEAR, not per quarter. We encourage
investors to keep that in mind should the market revert to its historical
pattern of more-moderate performance.
Our philosophy has always been that REGULAR INVESTING, regardless of short-term
market trends, is the best strategy over the long term. 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 ensure that you reach those goals by
establishing--or maintaining--an ongoing investment program.
NEW INVESTMENT OPPORTUNITIES TO CONSIDER
We are proud to introduce a new addition to our family of Funds: THE SCHWAB
MARKETTRACK ALL EQUITY PORTFOLIO. (SCHWAB MARKETTRACK PORTFOLIOS-TM- is the new
name of Schwab's Asset Director-Registered Trademark- Funds.) This Portfolio,
which targets 100% equity investing, can provide you with diversified exposure
to three different areas of the stock market: U.S. large-company, U.S.
small-company and international stocks. We also offer three other MarketTrack
Portfolios: Growth, Balanced and Conservative. Each invests a different
proportion of its assets in bonds and cash in addition to stocks.
For additional information and a free prospectus on the Schwab MarketTrack
Portfolios or any of our SchwabFunds, please call us toll free at
1-800-435-4000. Each prospectus contains more-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 $63 billion in assets on
behalf of more than 3.3 million SchwabFunds shareholders. We offer a full
spectrum of 34 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
April 30, 1998
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 helps reduce the risk that you might otherwise encounter by
owning just a few stocks or bonds.
Don't forget, however, that diversification across your portfolio can be just as
important as diversification within one of the mutual funds you own. As you
probably know, stocks have historically 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 equity exposure across different market segments--such as
U.S. large-cap, U.S. small-cap and international, 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.
THE SCHWAB APPROACH
TO INVESTING
- START WITH THE BASICS FOR
LONG-TERM INVESTING.
- GET STARTED NOW!
- KNOW YOURSELF.
- INVEST IN THE STOCK MARKET
FOR GROWTH.
- TAKE A LONG-TERM VIEW.
- BUILD A DIVERSIFIED PORTFOLIO.
- CONSIDER BONDS AND CASH FOR
DIVERSIFICATION AND INCOME.
- MINIMIZE YOUR EXPENSES.
- STAY ON TRACK.
- BECOME A LIFELONG INVESTOR.
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 call us at 1-800-435-4000, access our Web
site at WWW.SCHWAB.COM/SCHWABFUNDS 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 in the illustration
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.)
In addition to reducing your per-share costs over time, dollar-cost averaging
provides you another benefit: the discipline of investing regularly. You're more
likely to maintain a regular investment plan if it's automatic: not only do you
not have to even think about it, but 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 MONEYLINK TRANSFER SERVICE-Registered Trademark-, you can arrange to
regularly and automatically transfer $50 or more from your bank account, payroll
or government check into your Schwab account. It's a great way to build your
investment over time.(2)
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. Over the long term, however, dollar-cost averaging
may help to smooth out volatility caused by short-term market trends. For more
information about these programs, 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 in person at any of our nationwide branches, through our Web site at
WWW.SCHWAB.COM and through our automated touch-tone telephone service,
TELEBROKER,-Registered Trademark- by calling 1-800-272-4922.
(1)Includes uninvested cash and margin cash available. If sufficient cash is not
available, your automatic purchases will not be made.
(2)The terms of your specific Schwab account will dictate when your Schwab
MoneyLink transfers are swept into a money market fund and begin earning
money market dividend income.
KEEPING YOU INFORMED
One of our top priorities at Charles Schwab is to keep
you informed about your investments and potential
opportunities in the marketplace. A wealth of
information about our investment philosophy and
Funds, as well as the market and economic
environment, can be found at our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS.
In addition, market commentaries and monthly
Portfolio updates are available by calling our
toll-free Shareholder Information Line at
1-888-9 NO-LOAD.
3
<PAGE>
MARKET OVERVIEW
U.S. GROWTH RATE
U.S. GROSS DOMESTIC PRODUCT (GDP) grew at a strong real rate of 3.8% in 1997 and
4.2% in the first quarter of 1998--well in excess of the Federal Reserve's
estimated noninflationary growth rate of 2.0% to 2.75%.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE (ANNUALIZED
RATE)
<S> <C>
Q1 1990 3.90%
Q2 1990 1.20%
Q3 1990 -1.90%
Q4 1990 -4.00%
Q1 1991 -2.10%
Q2 1991 1.80%
Q3 1991 1.00%
Q4 1991 1.00%
Q1 1992 4.70%
Q2 1992 2.50%
Q3 1992 3.00%
Q4 1992 4.30%
Q1 1993 0.10%
Q2 1993 2.00%
Q3 1993 2.10%
Q4 1993 5.30%
Q1 1994 3.00%
Q2 1994 4.70%
Q3 1994 1.80%
Q4 1994 3.60%
Q1 1995 0.90%
Q2 1995 0.30%
Q3 1995 3.00%
Q4 1995 2.20%
Q1 1996 1.80%
Q2 1996 6.00%
Q3 1996 1.00%
Q4 1996 4.30%
Q1 1997 4.90%
Q2 1997 3.30%
Q3 1997 3.10%
Q4 1997 3.70%
Q1 1998 4.20%
SOURCE: BLOOMBERG L.P.
</TABLE>
At the time of this writing, THE U.S. ECONOMY APPEARS POISED FOR CONTINUED
GROWTH, further extending the current economic expansion that began in 1991.
Many economists expect Asia's economic problems to reduce 1998 U.S. GDP growth
by only a relatively minor 0.25 to 1.0 percentage point.
PRIOR TO THE FOURTH-QUARTER ONSET OF THE "ASIAN FLU," the U.S. economy's
strength and tight labor markets led investors to speculate about whether wage
and price inflation were accelerating. Some investors also believed that the
Federal Reserve was on the verge of raising interest rates to head off a
potential acceleration in both wage and price inflation. As Federal Reserve
Chairman Alan Greenspan said in his February congressional testimony, "The key
question going forward is whether the restraint building from the turmoil in
Asia will be sufficient to check inflationary tendencies that might otherwise
result from the strength of domestic spending and tightening labor markets." At
the moment, many economists believe that Federal Reserve policy-makers are now
more inclined to raise interest rates than they have been in the past, but are
refraining from doing so because inflation remains tame and Asia's continuing
problems may dampen both global and domestic growth.
UNEMPLOYMENT
JOB GROWTH IN THE UNITED STATES HAS REMAINED ROBUST. In fact, the U.S.
unemployment rate reached 4.3% in April--the lowest level in 28 years.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.40%
Feb-90 5.30%
Mar-90 5.20%
Apr-90 5.40%
May-90 5.40%
Jun-90 5.20%
Jul-90 5.50%
Aug-90 5.70%
Sep-90 5.90%
Oct-90 5.90%
Nov-90 6.20%
Dec-90 6.30%
Jan-91 6.40%
Feb-91 6.60%
Mar-91 6.80%
Apr-91 6.70%
May-91 6.90%
Jun-91 6.90%
Jul-91 6.80%
Aug-91 6.90%
Sep-91 6.90%
Oct-91 7.00%
Nov-91 7.00%
Dec-91 7.30%
Jan-92 7.30%
Feb-92 7.40%
Mar-92 7.40%
Apr-92 7.40%
May-92 7.60%
Jun-92 7.80%
Jul-92 7.70%
Aug-92 7.60%
Sep-92 7.60%
Oct-92 7.30%
Nov-92 7.40%
Dec-92 7.40%
Jan-93 7.30%
Feb-93 7.10%
Mar-93 7.00%
Apr-93 7.10%
May-93 7.10%
Jun-93 7.00%
Jul-93 6.90%
Aug-93 6.80%
Sep-93 6.70%
Oct-93 6.80%
Nov-93 6.60%
Dec-93 6.50%
Jan-94 6.60%
Feb-94 6.60%
Mar-94 6.50%
Apr-94 6.40%
May-94 6.00%
Jun-94 6.10%
Jul-94 6.10%
Aug-94 6.10%
Sep-94 5.90%
Oct-94 5.80%
Nov-94 5.60%
Dec-94 5.40%
Jan-95 5.60%
Feb-95 5.40%
Mar-95 5.40%
Apr-95 5.70%
May-95 5.60%
Jun-95 5.60%
Jul-95 5.70%
Aug-95 5.70%
Sep-95 5.70%
Oct-95 5.60%
Nov-95 5.60%
Dec-95 5.60%
Jan-96 5.70%
Feb-96 5.50%
Mar-96 5.50%
Apr-96 5.50%
May-96 5.50%
Jun-96 5.30%
Jul-96 5.50%
Aug-96 5.20%
Sep-96 5.20%
Oct-96 5.30%
Nov-96 5.40%
Dec-96 5.30%
Jan-97 5.30%
Feb-97 5.30%
Mar-97 5.20%
Apr-97 5.00%
May-97 4.80%
Jun-97 5.00%
Jul-97 4.90%
Aug-97 4.90%
Sep-97 4.90%
Oct-97 4.80%
Nov-97 4.60%
Dec-97 4.70%
Jan-98 4.70%
Feb-98 4.60%
Mar-98 4.70%
Apr-98 4.30%
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.
4
<PAGE>
Strong productivity gains, such as those achieved in 1997, allow manufacturers
and other businesses to limit price increases in the face of rising wages,
without sacrificing profit margins.
INFLATION
BOTH THE EMPLOYMENT COST INDEX (ECI) AND CONSUMER PRICE INDEX (CPI) REMAINED IN
CHECK throughout 1997 and the first quarter of 1998, reflecting continued low
inflation.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
MONTHLY CONSUMER QUARTERLY EMPLOYMENT
PRICE INDEX COST INDEX
<S> <C> <C>
Jan-90 5.2% 5.3%
Feb-90 5.3% 5.3%
Mar-90 5.2% 5.3%
Apr-90 4.7% 5.4%
May-90 4.4% 5.4%
Jun-90 4.7% 5.4%
Jul-90 4.8% 5.1%
Aug-90 5.6% 5.1%
Sep-90 6.2% 5.1%
Oct-90 6.3% 4.8%
Nov-90 6.3% 4.8%
Dec-90 6.1% 4.8%
Jan-91 5.7% 4.6%
Feb-91 5.3% 4.6%
Mar-91 4.9% 4.6%
Apr-91 4.9% 4.5%
May-91 5.0% 4.5%
Jun-91 4.7% 4.5%
Jul-91 4.4% 4.3%
Aug-91 3.8% 4.3%
Sep-91 3.4% 4.3%
Oct-91 2.9% 4.2%
Nov-91 3.0% 4.2%
Dec-91 3.1% 4.2%
Jan-92 2.6% 4.1%
Feb-92 2.8% 4.1%
Mar-92 3.2% 4.1%
Apr-92 3.2% 3.5%
May-92 3.0% 3.5%
Jun-92 3.1% 3.5%
Jul-92 3.2% 3.4%
Aug-92 3.1% 3.4%
Sep-92 3.0% 3.4%
Oct-92 3.2% 3.5%
Nov-92 3.0% 3.5%
Dec-92 2.9% 3.5%
Jan-93 3.3% 3.4%
Feb-93 3.2% 3.4%
Mar-93 3.1% 3.4%
Apr-93 3.2% 3.6%
May-93 3.2% 3.6%
Jun-93 3.0% 3.6%
Jul-93 2.8% 3.6%
Aug-93 2.8% 3.6%
Sep-93 2.7% 3.6%
Oct-93 2.8% 3.4%
Nov-93 2.7% 3.4%
Dec-93 2.7% 3.4%
Jan-94 2.5% 3.2%
Feb-94 2.5% 3.2%
Mar-94 2.5% 3.2%
Apr-94 2.4% 3.1%
May-94 2.3% 3.1%
Jun-94 2.5% 3.1%
Jul-94 2.8% 3.1%
Aug-94 2.9% 3.1%
Sep-94 3.0% 3.1%
Oct-94 2.6% 3.0%
Nov-94 2.7% 3.0%
Dec-94 2.7% 3.0%
Jan-95 2.8% 3.0%
Feb-95 2.9% 3.0%
Mar-95 2.9% 3.0%
Apr-95 3.1% 3.0%
May-95 3.2% 3.0%
Jun-95 3.0% 3.0%
Jul-95 2.8% 2.8%
Aug-95 2.6% 2.8%
Sep-95 2.5% 2.8%
Oct-95 2.8% 2.8%
Nov-95 2.6% 2.8%
Dec-95 2.5% 2.8%
Jan-96 2.7% 2.9%
Feb-96 2.7% 2.9%
Mar-96 2.8% 2.9%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.8% 2.9%
Jul-96 3.0% 2.9%
Aug-96 2.9% 2.9%
Sep-96 3.0% 2.9%
Oct-96 3.0% 3.0%
Nov-96 3.3% 3.0%
Dec-96 3.3% 3.0%
Jan-97 3.0% 2.8%
Feb-97 3.0% 2.8%
Mar-97 2.8% 2.8%
Apr-97 2.5% 2.8%
May-97 2.2% 2.8%
Jun-97 2.3% 2.8%
Jul-97 2.2% 3.0%
Aug-97 2.2% 3.0%
Sep-97 2.2% 3.0%
Oct-97 2.1% 3.2%
Nov-97 1.8% 3.2%
Dec-97 1.7% 3.2%
Jan-98 1.6% 3.3%
Feb-98 1.4% 3.3%
Mar-98 1.4% 3.3%
Apr-98 1.4%
SOURCE: BLOOMBERG L.P.
</TABLE>
THE CPI ROSE just 1.4% over the year ended April 1998--the lowest rate of
increase since 1986. Its core rate (which excludes the more volatile food and
energy components) rose 2.1%--the lowest rate of increase since 1965. Investors
were somewhat more concerned about the ECI, and its wages and salaries component
in particular. That segment of the ECI increased 3.7% during the year ended
April 1998.
EVEN THOUGH CURRENT LEVELS OF INFLATION ARE VERY LOW, Federal Reserve
policy-makers have indicated that they believe the risk of inflation is
increasing, and they are poised to act preemptively by raising interest rates if
they believe that is necessary. The Federal Reserve did raise interest rates in
March 1997, increasing the federal funds rate by 0.25 percentage point to 5.5%.
By the end of April, many economists believed that Federal Reserve policy-makers
were once again inclined to raise interest rates, but there was a lack of
consensus about when the Federal Reserve would raise interest rates, if in fact
it would, and by how much.
TOTAL-RETURN PERFORMANCE
MOST U.S. STOCKS posted strong total returns from November 1, 1997, through
April 30, 1998. Large-caps continued to outperform small-caps, as reflected in
the 22.5% return of the S&P 500-Registered Trademark- Index versus the 13.4%
return of the Schwab Small-Cap Index-Registered Trademark- over the period.
Amazingly, the S&P 500 Index posted its thirteenth consecutive quarterly gain
during the first quarter of 1998 and posted an incredible return of 41% for the
12-month period ended April 1998.
INTERNATIONAL STOCKS, as represented by the Schwab International
Index-Registered Trademark-, gained 15.2% over the six-month period, primarily
on the strength of European markets.
FIXED-INCOME RETURNS were more in line with long-term expectations during the
reporting period. Bond returns, as represented by the Lehman Brothers Aggregate
Bond Index, were 3.6% over the six-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
SCHWAB SCHWAB LEHMAN BROTHERS
S&P 500 SMALL CAP INTERNATIONAL AGGREGATE
INDEX-R- INDEX-R- INDEX-R- BOND INDEX
<S> <C> <C> <C> <C>
Oct-97 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Nov-97 $ 1.046 $ 0.991 $ 0.996 $ 1.005
Dec-97 $ 1.064 $ 1.012 $ 1.010 $ 1.015
Jan-98 $ 1.076 $ 0.996 $ 1.051 $ 1.028
Feb-98 $ 1.154 $ 1.078 $ 1.115 $ 1.027
Mar-98 $ 1.213 $ 1.127 $ 1.144 $ 1.030
Apr-98 $ 1.225 $ 1.134 $ 1.151 $ 1.036
</TABLE>
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. The indices
are intended to represent the returns of specific market sectors during the
funds' six-month 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.
S&P 500 PRICE/EARNINGS RATIO
THE PRICE/EARNINGS RATIO for the S&P 500 Index reached its highest value ever
during the reporting period: It stood at 26.5 at the close of the reporting
period, well above its 30-year average of 14.8. The price/earnings ratio, also
known as a multiple, is the price of a stock divided by its earnings per share
and generally indicates how much investors are willing to pay for a company's
earning potential.
Based on other traditional market valuation measures such as the price-to-book
value ratio or dividend yield, the U.S. stock market, as measured by the S&P 500
Index, also reached historic highs during the reporting period.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 INDEX 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 14.9
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 25.5
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.2
Feb-93 24.25
Mar-93 24.22
Apr-93 23.2
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 20.1
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.9
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.2
Mar-95 16.5
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 19.3
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.6
Nov-96 21.05
Dec-96 20.7
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
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
SOURCE: BLOOMBERG L.P.
</TABLE>
THE PRIMARY FACTORS DRIVING THESE HISTORIC EQUITY VALUATIONS have been low
inflation, low interest rates, healthy corporate earnings expectations, a
decline in the amount of equities outstanding (due to merger activity and share
buybacks) and high levels of consumer optimism. Changes in any of these factors
could have a negative impact on these lofty market valuations.
INTERNATIONAL PERFORMANCE
MOST EUROPEAN EQUITY MARKETS were strong during the six months ended April 30,
1998, with the highest returns in Spain, Italy, Finland and Ireland. In
contrast, many Asian markets declined sharply over the period; the weakest were
Malaysia, New Zealand, Hong Kong and Japan.
6
<PAGE>
THE MSCI-EAFE-REGISTERED TRADEMARK- INDEX gained 15.4% in U.S. dollar terms
(excluding reinvested dividends) during the six-month reporting period. In
local-currency terms, it gained 20.3%, reflecting the relative strength of the
U.S. dollar versus most foreign currencies during the period.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MSCI-EAFE COUNTRY $US RETURN
FOR THE SIX-MONTH PERIOD ENDED
4/30/98
<S> <C>
Spain 53.43%
Italy 45.80%
Finland 41.53%
Ireland 36.58%
France 35.45%
Germany 30.00%
Belgium 28.67%
Switzerland 25.35%
Austria 25.29%
Sweden 23.87%
United Kingdom 21.78%
Denmark 20.19%
Netherlands 19.67%
Australia 6.71%
Norway -1.53%
Singapore -4.02%
Japan -10.39%
Hong Kong -11.63%
New Zealand -11.93%
Malaysia -15.19%
SOURCE: DATASTREAM
</TABLE>
NOTE: This market overview has been provided by the Portfolio Management team.
7
<PAGE>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
PORTFOLIO PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 4/30/98
<TABLE>
<CAPTION>
Since Inception
Six Months One Year (11/18/96)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
SCHWAB MARKETMANAGER GROWTH PORTFOLIO(1) 12.60% 29.45% 21.38%
- ---------------------------------------------------------------------------------
SCHWAB MARKETMANAGER BALANCED
PORTFOLIO(1) 10.07% 24.38% 17.85%
- ---------------------------------------------------------------------------------
S&P 500-Registered Trademark- Index 22.47% 41.04% 35.02%
- ---------------------------------------------------------------------------------
Lehman Aggregate Bond Index 3.58% 10.92% 7.93%
- ---------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 3/31/98
<TABLE>
<CAPTION>
Since Inception
Six Months One Year (11/18/96)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
SCHWAB MARKETMANAGER GROWTH PORTFOLIO(1) 8.23% 31.24% 22.15%
- ---------------------------------------------------------------------------------
SCHWAB MARKETMANAGER BALANCED
PORTFOLIO(1) 7.34% 26.12% 18.65%
- ---------------------------------------------------------------------------------
</TABLE>
(1)The Investment Manager 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,
as of 4/30/98, the six-month, one-year and average annual since-inception
total returns would have been 12.18%, 28.43% and 20.45%, respectively, for
the Growth Portfolio and 9.63%, 23.27% and 16.79%, respectively, for the
Balanced Portfolio. As of 3/31/98, the six-month, one-year and average annual
since-inception total returns would have been 7.82%, 30.20% and 21.21%,
respectively, for the Growth Portfolio and 6.88%, 24.95% and 17.57%,
respectively, for the Balanced Portfolio.
This graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager Growth and Balanced Portfolios, made at their inception,
with similar investments in the S&P 500-Registered Trademark- Index and the
Lehman Brothers Aggregate Bond Index. A detailed analysis of the respective
performance of the Portfolios and the indices is provided in the QUESTIONS TO
THE PORTFOLIO MANAGEMENT TEAM section later in this report.
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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
MARKETMANAGER MARKETMANAGER LEHMAN
GROWTH BALANCED S&P 500 AGGREGATE
PORTFOLIO PORTFOLIO INDEX BOND INDEX
<S> <C> <C> <C> <C>
11/18/96 $10,000 $10,000 $10,000 $10,000
11/30/96 $10,120 $10,100 $10,271 $10,071
12/31/96 $10,077 $10,059 $10,068 $9,977
1/31/97 $10,371 $10,322 $10,696 $10,008
2/28/97 $10,310 $10,271 $10,780 $10,033
3/31/97 $10,016 $10,018 $10,338 $9,922
4/30/97 $10,229 $10,200 $10,955 $10,071
5/31/97 $10,848 $10,676 $11,621 $10,166
6/30/97 $11,274 $11,041 $12,141 $10,287
7/31/97 $11,841 $11,517 $13,106 $10,565
8/31/97 $11,547 $11,284 $12,372 $10,475
9/30/97 $12,145 $11,770 $13,049 $10,630
10/31/97 $11,760 $11,527 $12,613 $10,784
11/30/97 $11,750 $11,558 $13,197 $10,834
12/31/97 $11,927 $11,719 $13,424 $10,943
1/31/98 $11,959 $11,762 $13,573 $11,084
2/28/98 $12,622 $12,251 $14,552 $11,075
3/31/98 $13,146 $12,634 $15,297 $11,112
4/30/98 $13,242 $12,688 $15,452 $11,170
</TABLE>
8
<PAGE>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
PORTFOLIO SUMMARY
Schwab MarketManager Growth Portfolio seeks capital growth with less volatility
than a portfolio composed entirely of stock funds. The Balanced Portfolio seeks
capital growth and income with less volatility than the Growth Portfolio. The
allocations of the Funds' portfolios will vary as the Portfolio Manager adjusts
their respective asset mixes based on changing market conditions. Of the two
Portfolios, the Growth Portfolio offers the greatest potential for return and
risk due to its larger target allocation to equity funds.
SCHWAB MARKETMANAGER GROWTH PORTFOLIO:
ASSET MIX(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Large-Cap 34%
International 24%
Small-Cap 18%
Fixed Income 13%
Cash 6%
Sector 5%
</TABLE>
<TABLE>
<CAPTION>
Mix as of Mix as of Target Mix in
4/30/98 4/30/97 Neutral Markets
<S> <C> <C> <C>
- -----------------------------------------------------------------------
Equity Funds 81% 87% 80%
- -----------------------------------------------------------------------
Bond Funds 13% 10% 15%
- -----------------------------------------------------------------------
Cash Equivalents 6% 3% 5%
- -----------------------------------------------------------------------
Total 100% 100% 100%
- -----------------------------------------------------------------------
</TABLE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO:
TOP 10 HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS(1)
<TABLE>
<S> <C>
- -------------------------------------------------
American Century Income and Growth Fund 14.08%
- -------------------------------------------------
Janus Worldwide Fund 6.43%
- -------------------------------------------------
Brinson U.S. Equity Fund 5.97%
- -------------------------------------------------
BT Investment International Equity Fund 5.96%
- -------------------------------------------------
American Century--Twentieth Century
International Growth Fund 5.91%
- -------------------------------------------------
Barr Rosenberg U.S. Small Capital Fund 5.66%
- -------------------------------------------------
Rydex Nova Fund 5.62%
- -------------------------------------------------
Excelsior Value and Restructuring Fund 5.40%
- -------------------------------------------------
Delaware Group Delchester Fund 5.33%
- -------------------------------------------------
Neuberger & Berman Genesis Fund 4.85%
- -------------------------------------------------
Total 65.21%
- -------------------------------------------------
</TABLE>
(1)This information is as of 4/30/98 and may not be indicative of current or
future investments. A complete list of the Portfolio's investments as of
4/30/98 can be found in the Schedule of Investments later in this report.
9
<PAGE>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
PORTFOLIO SUMMARY (continued)
SCHWAB MARKETMANAGER BALANCED PORTFOLIO:
ASSET MIX(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Fixed Income 33%
Large-Cap 26%
International 16%
Small-Cap 13%
Cash 6%
Sector 6%
</TABLE>
<TABLE>
<CAPTION>
Mix as of Mix as of Target Mix in
4/30/98 4/30/97 Neutral Markets
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
Equity Funds 61% 66% 60%
- ---------------------------------------------------------------------------------
Bond Funds 28% 18% 35%
- ---------------------------------------------------------------------------------
Cash Equivalents 11% 16% 5%
- ---------------------------------------------------------------------------------
Total 100% 100% 100%
- ---------------------------------------------------------------------------------
</TABLE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO:
TOP 10 HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS(1)
<TABLE>
<S> <C>
- -----------------------------------------------------------
American Century Income and Growth Fund 11.59%
- -----------------------------------------------------------
PIMCO Total Return Fund--Institutional 9.66%
- -----------------------------------------------------------
Delaware Group Delchester Fund 7.77%
- -----------------------------------------------------------
American Century Benham Intermediate Treasury Bond
Fund 5.84%
- -----------------------------------------------------------
Excelsior Value and Restructuring Fund 5.49%
- -----------------------------------------------------------
Strong Advantage Fund 5.21%
- -----------------------------------------------------------
Janus Worldwide Fund 5.13%
- -----------------------------------------------------------
Rydex Nova Fund 4.48%
- -----------------------------------------------------------
Barr Rosenberg U.S. Small Capital Fund 4.04%
- -----------------------------------------------------------
Brinson U.S. Equity Fund 3.96%
- -----------------------------------------------------------
Total 63.17%
- -----------------------------------------------------------
</TABLE>
(1)This information is as of 4/30/98 and may not be indicative of current or
future investments. A complete list of the Portfolio's investments as of
4/30/98 can be found in the Schedule of Investments later in this report.
10
<PAGE>
PORTFOLIO MANAGEMENT
THE PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD, Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of the Portfolios. Steve joined CSIM
as Vice President and Portfolio Manager in April 1991 and was promoted to his
current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors.
CYNTHIA LIU, 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).
11
<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 12.60% and
10.07%, respectively, for the six-month period ended April 30, 1998. Bear in
mind that the target equity allocations are 80% for the Growth Portfolio and 60%
for the Balanced Portfolio. Given that equities generally outperformed bonds
during the reporting period, the relative performances of the two Portfolios and
the indices remain consistent with our long-term expectations. There may be
future short-term periods, however, in which the results may be reversed.
Q. WHICH ASSET CLASSES PERFORMED WELL FOR THE PORTFOLIOS?
A. During the six-month period ended April 30, 1998, U.S. large-cap mutual funds
outperformed U.S. small-cap funds. International mutual funds, especially those
heavily invested in Europe, also did well during the period.
Q. WHICH UNDERLYING FUNDS PERFORMED PARTICULARLY WELL FOR THE PORTFOLIOS?
A. American Century--Twentieth Century International Discovery, an international
small-company fund, delivered extremely strong performance over the reporting
period due to the manager's investment style, which captured the strong returns
of the European stock market. (The fund constituted 1.05% of the Balanced
Portfolio and 1.50% of the Growth Portfolio as of the end of the reporting
period.) Domestically, the strong performance of the White Oak Growth Stock Fund
(representing 1.97% of the Balanced Portfolio and 3.12% of the Growth Portfolio
at the end of the period) was the result of its exposure to technology and drug
companies. Even the relative underperformance of small-cap stocks did not hold
back RIMCo Monument SmallCap Equity Fund (representing 0.63% of the Balanced
Portfolio and 0.75% of the Growth Portfolio), which has performed very well
since the Portfolios purchased it.
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 Portfolios' overall asset allocation strategies did not change
significantly; they remained close to their targets throughout the period.
Within the U.S. equity category, we continued to favor large-cap funds over
small-cap funds, due to the relatively strong performance of large-cap stocks
and the continuation of favorable macroeconomic conditions. Internationally, the
Portfolios remained focused on Europe, a strategy we had put in place before the
Asian crisis transpired last fall.
The Portfolios ended the reporting period near a neutral allocation (see the
actual vs. target mixes in neutral markets in the table on page 9 for the Growth
Portfolio and page 10 for the Balanced Portfolio). Within the U.S. equity
categories, however, the Portfolios remained slightly underweighted in small-cap
funds in favor of large-cap funds. In fixed income, the Portfolios were slightly
underweighted in intermediate-term bond funds, whereas cash was near a neutral
weighting.
12
<PAGE>
The following charts show the two Portfolios' actual asset mixes during the
reporting period. The table includes 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 ASSET MIX: 10/31/97 THROUGH
4/30/98
10/31/97 11/30/97 12/31/97 1/31/98 2/28/98 3/31/98 4/30/98
<S> <C> <C> <C> <C> <C> <C> <C>
Cash 13.85% 10.09% 7.90% 14.32% 5.82% 6.87% 5.55%
Bonds 14.29% 11.30% 11.56% 10.37% 8.95% 10.00% 13.12%
International Equity 20.43% 17.82% 20.22% 20.45% 20.61% 22.54% 23.83%
Small-Cap Equity 18.18% 17.14% 19.66% 18.98% 17.81% 18.71% 17.99%
Large-Cap Equity 33.25% 43.65% 40.66% 35.88% 46.81% 41.88% 39.51%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
ACTUAL ASSET MIX: 10/31/97 THROUGH
4/30/98
10/31/97 11/30/97 12/31/97 1/31/98 2/28/98 3/31/98 4/30/98
<S> <C> <C> <C> <C> <C> <C> <C>
Cash 19.80% 15.33% 15.96% 22.59% 22.72% 21.54% 10.83%
Bonds 24.94% 25.34% 24.61% 22.85% 17.09% 16.98% 27.54%
International Equity 15.93% 12.79% 14.94% 14.97% 14.49% 15.60% 16.34%
Small-Cap Equity 12.89% 12.71% 14.98% 14.30% 13.13% 14.06% 13.42%
Large-Cap Equity 26.44% 33.83% 29.51% 25.29% 32.57% 31.82% 31.87%
</TABLE>
Q. CAN YOU DISCUSS A COUPLE OF NEW FUNDS THAT WERE PURCHASED DURING THE PERIOD?
A. Two funds we recently purchased for both Portfolios were the RIMCo Monument
SmallCap Equity Fund and the Excelsior Value and Restructuring Fund.
We purchased the RIMCo fund as part of our small-cap allocation (it represented
0.63% of the Balanced Portfolio and 0.75% of the Growth Portfolio at the end of
the reporting period). This fund has an excellent performance record. Its
manager, Philip Tasho, has also demonstrated an ability to capture upside return
while still protecting shareholders on a relative basis in down markets. Tasho
uses both valuation and price momentum screens to select stocks. RIMCo and Tasho
also manage money for large institutions and have a very good long-term
performance record.
The Excelsior Value and Restructuring Fund is a large-cap, value-oriented mutual
fund (it represented 5.49% of the Balanced Portfolio and 5.40% of the Growth
Portfolio at the end of the reporting period). The fund's manager, David
Williams, looks for companies that are undergoing structural change and
therefore have the potential for appreciation if the company's management can
redirect the firm's assets and expertise to more-productive ends. The fund's
long-term performance has been excellent, and we believe its potential ability
to capture returns even in growth-oriented markets can enable it to perform well
in a variety of environments.
13
<PAGE>
SCHWAB MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS:
PORTFOLIO DISCUSSION (continued)
Q. WHAT ARE THE BENEFITS OF INCLUDING BONDS AND CASH IN AN INVESTMENT PORTFOLIO?
A. Adding bonds and cash equivalents to a stock-oriented portfolio can help
reduce its overall risk. The chart at the right 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
its risk while still producing competitive returns.
A hypothetical portfolio with 60% of its assets in stocks and the remaining 40%
in bonds, for example, would have achieved an average annual return of
11.65%--roughly 1.3 percentage points less than the 12.97% return of the
all-stock portfolio--and with significantly less volatility. The lowest annual
return-- a loss of 13.61%--of the portfolio that had 40% in bonds and 60% in
stocks would have been about half 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.
(1)The hypothetical returns are all weighted averages and assume reinvestment of
dividends. Stocks are represented by the S&P 500 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.
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
AVERAGE ANNUAL RETURN HIGHEST ANNUAL RETURN LOWEST ANNUAL RETURN
<S> <C> <C> <C>
100% Stocks 12.97% 37.43% -26.47%
90% Stocks / 10% Bonds 12.68% 35.37% -23.25%
80% Stocks / 20% Bonds 12.36% 33.30% -20.04%
70% Stocks / 30% Bonds 12.02% 31.24% -16.82%
60% Stocks / 40% Bonds 11.65% 29.18% -13.61%
</TABLE>
14
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO PERFORMANCE
CUMULATIVE TOTAL RETURNS FOR THE PERIODS ENDED 4/30/98
<TABLE>
<CAPTION>
Since Inception
Six Months (9/16/97)
<S> <C> <C>
- --------------------------------------------------------------------------------
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO(1) 9.09% 8.32%
- --------------------------------------------------------------------------------
Russell 2000-Registered Trademark- Index 11.85% 9.09%
- --------------------------------------------------------------------------------
Average Small-Cap Fund(2) 8.94% n/a
- --------------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURNS FOR THE PERIODS ENDED 3/31/98
<TABLE>
<CAPTION>
Since Inception
Six Months (9/16/97)
<S> <C> <C>
- --------------------------------------------------------------------------------
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO(1) 5.08% 7.81%
- --------------------------------------------------------------------------------
</TABLE>
(1)The Investment Manager 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,
as of 4/30/98, the six-month and cumulative since-inception total returns
would have been 8.69% and 7.83%, respectively. As of 3/31/98, the six-month
and cumulative since-inception total returns would have been 4.69% and 7.38%,
respectively.
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-Registered Trademark- 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.
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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
GROWTH OF A HYPOTHETICAL $10,000
INVESTMENT
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO RUSSELL 2000 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
</TABLE>
(2)Source: Morningstar, Inc. Returns are load-adjusted. The Small-Fund category
contains 393 funds with track records for the six-month period ended 4/30/98.
Also, although many mutual funds have multiple classes of shares, the
category average includes only those funds that were classified by
Morningstar as a distinct portfolio. This typically means that a fund's
oldest class of shares was used.
15
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO SUMMARY
The Schwab MarketManager Small Cap Portfolio seeks long-term capital
appreciation. It invests primarily in small-company equity funds.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Small-Cap 76%
Mid-Cap 10%
Micro-Cap 7%
Sector 4%
Cash 3%
</TABLE>
TOP 10 HOLDINGS
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ------------------------------------------------
Longleaf Partners Small Cap Fund 13.24%
- ------------------------------------------------
State Street Research Aurora Fund 7.78%
- ------------------------------------------------
Blackrock Small Cap Value Equity Fund 7.67%
- ------------------------------------------------
Baron Asset Fund 6.84%
- ------------------------------------------------
Blackrock Small Cap Growth Fund 6.37%
- ------------------------------------------------
Munder Small Company Growth Fund--
Class Y 5.25%
- ------------------------------------------------
Managers Funds--Special Equity Fund 5.24%
- ------------------------------------------------
Neuberger & Berman Genesis Fund 5.20%
- ------------------------------------------------
Heritage Small Cap Stock Fund 5.10%
- ------------------------------------------------
Oakmark Small Cap Fund 4.12%
- ------------------------------------------------
Total 66.81%
- ------------------------------------------------
</TABLE>
(1)This information is as of 4/30/98 and may not be indicative of current or
future investments. A complete list of the Portfolio's investments as of
4/30/98 can be found in the Schedule of Investments later in this report.
16
<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. The Portfolio achieved a 9.09% total return for the six-month reporting
period. Although this performance was certainly respectable, U.S. small-cap
equity returns continued to lag those of the U.S. large-cap equity sector. The
Portfolio also underperformed its benchmark, the Russell 2000-Registered
Trademark- Index. However, the Portfolio slightly outperformed the average
small-cap fund, which returned 8.94% for the period.(1)
Q. HOW DID THE PORTFOLIO'S STRATEGY CHANGE DURING THE REPORTING PERIOD, AND HOW
WAS IT POSITIONED AT THE CLOSE OF THE PERIOD?
A. While keeping the Portfolio's bias toward the small-cap value discipline, we
have slightly increased its exposure to small-cap growth funds. This tactical
move was based on our belief that there were attractive small-cap growth
companies whose share prices declined sharply in 1997 as investors favored
small-cap value stocks. As a result, the performance gap between the Russell
2000 Value Index and the Russell 2000 Growth Index was the widest we had seen in
many years. Strategically, however, we continue to position the Portfolio with a
value bias, which we believe to be the prudent policy in the current market
cycle.
Q. CAN YOU SHARE A COUPLE OF EXAMPLES OF NEW HOLDINGS PURCHASED DURING THE
PERIOD, AND WHY?
A. We recently added the Accessor Small to Mid Cap Fund to the Portfolio (the
fund represented 2.99% of the Portfolio at the end of the reporting period).
This fund still has a relatively small asset base and is unfamiliar to most
investors, even though it has compiled a very strong record since its inception
in 1992. The fund's portfolio managers employ several quantitative screens to
find potentially attractive investments among mid- to small-cap U.S. stocks; in
addition to a company's earnings growth and stock valuations, they also consider
whether the firm's top executives have recently bought or sold a significant
number of shares in the company. That additional screen, which can indicate
whether the firm's management has a positive or negative outlook for the
company, is one of the things that sets the Accessor Small to Mid Cap Fund apart
from other quantitative funds. We are very comfortable with the fund's
subadvisor, Symphony Asset Management, and we strongly believe that its
investment model will help the fund outperform in the mid- to small-cap arena.
Another relatively new fund we purchased was the PBHG Small Cap Value Fund (the
fund represented 1.92% of the Portfolio at the end of the reporting period). Its
manager, Gary Haubold (who previously managed the MAS Small Cap Value Fund), has
adopted a thematic approach that identifies major secular growth trends and the
companies positioned to benefit, and then performs fundamental analysis. Haubold
overlays this strategy with a strong valuation discipline, paying particular
attention to a company's free cash flow and price/earnings multiples.
(1)Source: Morningstar, Inc. The Small-Fund category contains 393 funds with
track records for the six-month period ended 4/30/98. These funds may or may
not follow a tax-efficient strategy similar to that followed by the Schwab
MarketManager Small Cap Portfolio. Also, although many mutual funds have
multiple classes of shares, the category average includes only those funds
that were classified by Morningstar as a distinct portfolio. This typically
means that a fund's oldest class of shares was used.
17
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO:
PORTFOLIO DISCUSSION (continued)
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 at the right
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-cap stocks have
outperformed large-caps 14 times, over 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. Small-cap stocks generally outperformed large-cap stocks from
1991 to 1993. Large-cap stocks were the clear 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.
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
<S> <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%
Large-Caps Outperformed
Small-Caps Outperformed
</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-Registered Trademark- Index.
18
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 4/30/98
<TABLE>
<CAPTION>
Since Inception
Six Months One Year (10/16/96)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO(1) 17.25% 22.08% 18.29%
- ---------------------------------------------------------------------------------------------
MSCI-EAFE-Registered Trademark- Index 15.44% 18.91% 11.83%
- ---------------------------------------------------------------------------------------------
Average Foreign Fund(2) 14.12% 18.47% n/a
- ---------------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED 3/31/98
<TABLE>
<CAPTION>
Since Inception
Six Months One Year (10/16/96)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO(1) 7.11% 20.01% 17.63%
- ---------------------------------------------------------------------------------------------
</TABLE>
(1)The Investment Manager 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,
as of 4/30/98, the six-month, one-year and average annual since-inception
total returns would have been 16.78%, 21.07% and 17.36%, respectively. As of
3/31/98, the six-month, one-year and average annual since-inception total
returns would have been 6.66%, 19.00% and 16.70%, respectively.
(2)Based on data provided by Morningstar, Inc. Average annual returns for 271
and 259 foreign funds, respectively, for the six-month and one-year periods
(load-adjusted). Also, although many mutual funds have multiple classes of
shares, the category average includes only those funds that were classified
by Morningstar as a distinct portfolio. This typically means that a fund's
oldest class of shares was used.
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
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM section later in this report.
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.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
MarketManager International
Portfolio MSCI-EAFE Index
<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
</TABLE>
19
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO SUMMARY
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 89.22%
- -----------------------------------------------
European Region Mutual Funds 6.06%
- -----------------------------------------------
Asian Region Funds 0.72%
- -----------------------------------------------
Single-Country Mutual Funds 1.32%
- -----------------------------------------------
Cash Equivalents 2.68%
- -----------------------------------------------
Total 100.00%
- -----------------------------------------------
</TABLE>
REGIONAL DIVERSIFICATION
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- -----------------------------------------------
Developed Europe(2) 67.14%
- -----------------------------------------------
Developed Pacific(3) 10.10%
- -----------------------------------------------
Emerging Markets 9.51%
- -----------------------------------------------
Cash Equivalents 7.61%
- -----------------------------------------------
Canada 3.35%
- -----------------------------------------------
United States 1.25%
- -----------------------------------------------
Other Investments 1.04%
- -----------------------------------------------
Total 100.00%
- -----------------------------------------------
</TABLE>
TOP 10 HOLDINGS
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ------------------------------------------------
Oppenheimer International Growth Fund 11.51%
- ------------------------------------------------
Morgan Stanley Institutional
International Equity Fund 11.26%
- ------------------------------------------------
American Century--20th Century
International Discovery Investors 10.44%
- ------------------------------------------------
Federated International Small
Company-- Class A 10.09%
- ------------------------------------------------
American Century--20th Century
International Growth Fund 10.08%
- ------------------------------------------------
Janus Overseas Fund 10.06%
- ------------------------------------------------
BT International Equity Fund 9.97%
- ------------------------------------------------
SoGen Overseas Fund 7.11%
- ------------------------------------------------
Excelsior Pan European Fund 6.07%
- ------------------------------------------------
Ivy International Fund--Class A 4.98%
- ------------------------------------------------
Total 91.57%
- ------------------------------------------------
</TABLE>
TOP FIVE COUNTRIES
AS A PERCENTAGE OF FUND INVESTMENTS(1)
<TABLE>
<S> <C>
- ------------------------------------------------
United Kingdom 14.51%
- ------------------------------------------------
France 11.17%
- ------------------------------------------------
Switzerland 7.84%
- ------------------------------------------------
Netherlands 7.37%
- ------------------------------------------------
Germany 6.26%
- ------------------------------------------------
Total 47.15%
- ------------------------------------------------
</TABLE>
(1)This information is as of 4/30/98 and may not be indicative of current or
future investments. A complete list of the Portfolio's investments as of
4/30/98 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, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland and the United Kingdom.
(3)Developed Pacific includes the following countries: Australia, Hong Kong,
Indonesia, Japan, Malaysia, New Zealand, Singapore and Thailand.
20
<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 achieved a 17.25% total return for the six-month reporting
period. As shown in the FUND PERFORMANCE section, the Portfolio's performance
was very favorable when compared with the average foreign fund and the
MSCI-EAFE-Registered Trademark- Index, outperforming the average foreign fund by
approximately 3% for both the six-month and one-year periods, and outperforming
the MSCI-EAFE Index by more than 6% on an inception-to-date basis.(1) The
Portfolio's performance was primarily a result of its ability to avoid the
landmines of the emerging markets, its underweighting in Japan and strong
performance by its top fund selections. As discussed in the MARKET OVERVIEW
section, however, international equity returns lagged those of the domestic
large-cap equity sector during the reporting period.
Q. WHAT IMPACT DID THE TURMOIL IN ASIA'S EMERGING MARKETS HAVE ON THE PORTFOLIO?
A. Even prior to the start of the reporting period, we had been concerned about
the deteriorating macro-economic environment in some of the emerging Asian
economies and had made a strategic allocation decision not to invest in the
region. In a several cases, we substantially reduced our investments, as we
believed the impact on the portfolio would be prolonged. As a result of this
strategic decision, the Fund was largely spared the unpleasant sharp falls in
these markets. There was, however, some minor exposure (approximately 3% in
aggregate) to the affected markets in a few of the underlying funds. We decided
to keep invested in most of these funds in spite of their exposure after
considering their overall performance and style.
Q. WHAT WAS THE PORTFOLIO'S EMERGING MARKETS EXPOSURE DURING THE REPORTING
PERIOD?
A. In the summer of 1997, prior to the onset of turmoil in Asia, the Portfolio
had emerging markets exposures to Latin America and eastern Europe totaling some
7% through two regional funds. Since that time, we made a tactical decision to
sell these funds as we felt the turmoil in Asia had the potential to spread to
other emerging markets. Although the Portfolio maintained a small, indirect
exposure to emerging markets as a result of holdings in underlying funds, it had
no direct emerging markets exposure during the reporting period.
Q. WHICH SECTORS OR REGIONS PERFORMED WELL FOR THE PORTFOLIO?
A. During the reporting period, developed European markets continued to be the
most consistent performers. Small-cap stocks in the core European countries and
investments in the peripheral European markets such as Turkey, Greece and
Portugal, as well as increased exposure to Latin America, also contributed to
the Portfolio's performance during the period.
(1)Source: Morningstar, Inc. The Foreign Fund category contains 271 funds with
six-month track records and 259 funds with one-year track records, both as of
4/30/98. Also, although many mutual funds have multiple classes of shares,
the category average includes only those funds that were classified by
Morningstar as a distinct portfolio. This typically means that a fund's
oldest class of shares was used.
21
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO:
PORTFOLIO DISCUSSION (continued)
Q. WHAT IMPACT DID CURRENCY EXCHANGE RATES HAVE ON THE PERFORMANCE OF
INTERNATIONAL EQUITIES AND THE PORTFOLIO?
A. In retrospect, complete currency hedging, which would protect against
changing values of foreign currencies relative to the U.S. dollar, would have
been the right strategy for the reporting period. This strategy carries with it
associated costs, however, and was not employed by the Portfolio during the
reporting period. During this time, the U.S. dollar gained an average 4% against
the European currencies and close to 10% against the Japanese yen and emerging
market currencies. Most of the funds we invest in are adopting dynamic currency
hedging strategies designed to frequently evaluate their hedged portfolios, and
as a result the hedge ratios have been gradually reduced over the past six
months. Because of these hedging strategies, overall, the Portfolio has been
fairly well protected from the volatility in exchange rates.
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. After reducing our positions in Latin America and eastern Europe in the
aftermath of the turmoil in Asia, we began rebuilding them by the close of the
period. In addition to further increasing our exposure to Europe, we also
broadened the country mix and capitalization style of our investments in Europe
by including the peripheral countries, such as Turkey, Greece and Portugal,
along with smaller-cap stocks.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
ACTUAL ASSET MIX: 10/31/97 THROUGH 4/30/98
10/31/97 11/30/97 12/31/97 1/31/98 2/28/98 3/31/98 4/30/98
<S> <C> <C> <C> <C> <C> <C> <C>
Cash 11.55% 6.80% 8.66% 5.64% 5.58% 6.14% 7.61%
Other Countries 1.15% 1.25% 0.37% 0.95% 1.19% 1.11% 1.04%
Emerging Markets 7.39% 7.69% 7.12% 6.98% 7.58% 8.83% 9.51%
Developed Pacific 17.94% 15.93% 15.45% 14.48% 14.85% 12.69% 10.10%
Developed Europe 56.63% 63.15% 61.16% 67.86% 66.93% 67.29% 67.14%
North America 5.34% 5.18% 7.24% 4.09% 3.87% 3.94% 4.60%
</TABLE>
22
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO-TM-
STATEMENT OF NET ASSETS
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number of Value
Shares (000s)
---------- ----------
<S> <C> <C>
MUTUAL FUNDS--97.5%
American Century--Twentieth Century International Discovery
Fund 859,587 $ 8,794
American Century--Twentieth Century International Growth
Fund 861,438 8,502
BT International Equity Fund 341,576 8,413
Colonial Newport Tiger Fund, Class A 73,757 608
Excelsior Pan European Fund 351,270 5,118
Federated International Small Company Fund+ 454,968 8,508
Ivy International Fund, Class A 94,131 4,200
Janus Overseas Fund 416,275 8,484
Morgan Stanley Institutional International Equity Portfolio 469,087 9,494
Oakmark International Fund+ 227,873 3,268
Oppenheimer International Growth Fund, Class A+ 577,085 9,706
SoGen Overseas Fund 438,306 5,996
Swiss Helvetia Fund 36,000 1,103
----------
TOTAL MUTUAL FUNDS
(Cost $69,563) 82,194
----------
</TABLE>
<TABLE>
<CAPTION>
Value
Par (000s)
---------- ----------
<S> <C> <C>
CASH EQUIVALENTS--2.5%
MSTC Cash Reserve Liquid Asset Fund
5.31%*, 05/07/98 $ 2,143 $ 2,143
----------
TOTAL CASH EQUIVALENTS
(Cost $2,143) 2,143
----------
TOTAL INVESTMENTS--100.0%
(Cost $71,706) 84,337
----------
OTHER ASSETS AND LIABILITIES--0.0%
Other Assets 173
Liabilities (141)
----------
32
----------
NET ASSETS--100.0% $ 84,369
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO STATEMENTS OF NET ASSETS AND NOTES TO FINANCIAL
STATEMENTS.
23
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO-TM-
STATEMENT OF NET ASSETS
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number of Value
Shares (000s)
---------- ----------
<S> <C> <C>
MUTUAL FUNDS--97.7%
Accessor Value & Income Portfolio 85,611 $ 2,030
American Century--Benham Intermediate Term Treasury Fund 374,975 3,956
American Century--Benham Long Term Treasury Fund 195,432 2,062
American Century--Income & Growth Institutional Fund 780,664 21,696
American Century--Twentieth Century International Discovery
Fund 225,495 2,307
American Century--Twentieth Century International Growth
Fund 922,307 9,103
Baron Asset Fund 91,811 4,830
Barr Rosenberg U.S. Small Capitalizaton Fund 879,064 8,720
Brinson US Equity Fund, Class A 456,532 9,199
BT International Equity Fund 372,476 9,174
Delaware Group Income Fund 1,215,356 8,204
Excelsior Value & Restructuring Fund 345,787 8,313
Franklin California Growth Fund 10 0
Janus Worldwide Fund 220,415 9,910
Morgan Stanley Institutional International Equity Portfolio 308,077 6,235
Neuberger & Berman Fund+ 440,189 7,474
Oakmark Small Capital Fund+ 128,267 2,649
PIMCO Total Return Institutional Fund 568,894 6,036
RIMCO Monument Small Cap Equity Fund+ 61,762 1,161
<CAPTION>
Number of Value
Shares (000s)
---------- ----------
<S> <C> <C>
Rydex Series Nova Fund+ 286,613 $ 8,659
Rydex Series U.S. Government Money Market Fund 4,892,493 4,892
Sound Shore Fund 47,964 1,527
Thornburg Value Fund, Class A 128,956 2,895
Vontobel U.S. Value Fund 258,223 4,645
White Oak Growth Stock Fund 134,270 4,808
----------
TOTAL MUTUAL FUNDS
(Cost $135,238) 150,485
----------
</TABLE>
<TABLE>
<CAPTION>
Par
----------
<S> <C> <C>
CASH EQUIVALENTS--2.3%
MSTC Cash Reserve Liquid Asset Fund
5.31%*, 05/07/98 $ 3,556 3,556
----------
TOTAL CASH EQUIVALENTS
(Cost $3,556) 3,556
----------
TOTAL INVESTMENTS--100.0%
(Cost $138,794) 154,041
----------
OTHER ASSETS AND LIABILITIES--0.0%
Other Assets 4,341
Liabilities (4,394)
----------
(53)
----------
NET ASSETS--100.0% $ 153,988
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO STATEMENTS OF NET ASSETS AND NOTES TO FINANCIAL
STATEMENTS.
24
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO-TM-
STATEMENT OF NET ASSETS
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number of Value
Shares (000s)
---------- ----------
<S> <C> <C>
MUTUAL FUNDS--97.3%
Accessor Value & Income Portfolio 36,348 $ 862
American Century--Benham Intermediate Term Treasury Fund 468,180 4,939
American Century--Benham Long Term Treasury Fund 193,743 2,044
American Century--Income & Growth Institutional Fund 352,741 9,804
American Century--Twentieth Century International Discovery
Fund 87,379 894
American Century--Twentieth Century International Growth
Fund 335,786 3,314
Baron Asset Fund 33,722 1,774
Barr Rosenberg U.S. Small Capitalizaton Fund 344,682 3,419
Brinson US Equity Fund, Class A 166,216 3,349
BT International Equity Fund 117,942 2,905
Delaware Group Income Fund 973,495 6,571
Excelsior Value & Restructuring Fund 193,343 4,648
Federated U.S. Government Securities Fund, 1-3 Years
Institutional Shares 157,941 1,643
Franklin California Growth Fund 10 0
Janus Worldwide Fund 96,508 4,339
Morgan Stanley Institutional International Equity Portfolio 119,636 2,421
Neuberger & Berman Fund+ 179,857 3,054
Oakmark Small Capital Fund+ 58,106 1,200
PIMCO Total Return Institutional Fund 770,704 8,177
RIMCO Monument Small Cap Equity Fund+ 28,233 531
<CAPTION>
Number of Value
Shares (000s)
---------- ----------
<S> <C> <C>
Rydex Series Nova Fund+ 66,203 $ 3,788
Rydex Series U.S. Government Money Market Fund 2,357,289 2,357
Sound Shore Fund 26,221 835
Strong Advantage Fund 436,272 4,393
Thornburg Value Fund, Class A 62,715 1,408
Vontobel U.S. Value Fund 115,986 2,087
White Oak Growth Stock Fund 46,714 1,673
----------
TOTAL MUTUAL FUNDS
(Cost $76,526) 82,429
----------
</TABLE>
<TABLE>
<CAPTION>
Par
----------
<S> <C> <C>
CASH EQUIVALENTS--2.5%
MSTC Cash Reserve Liquid Asset Fund
5.31%*, 05/07/98 $ 2,150 2,150
----------
TOTAL CASH EQUIVALENTS
(Cost $2,150) 2,150
----------
TOTAL INVESTMENTS--99.8%
(Cost $78,676) 84,579
----------
OTHER ASSETS AND LIABILITIES--0.2%
Other Assets 2,451
Liabilities (2,280)
----------
171
----------
NET ASSETS--100.0% $ 84,750
----------
----------
</TABLE>
SEE ACCOMPANYING NOTES TO STATEMENTS OF NET ASSETS AND NOTES TO FINANCIAL
STATEMENTS.
25
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO-TM-
STATEMENT OF NET ASSETS
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Number of Value
Shares (000s)
---------- ----------
<S> <C> <C>
MUTUAL FUNDS--98.5%
Accessor Small to Mid Cap Portfolio 227,406 $ 5,797
Baron Asset Fund 252,431 13,280
BlackRock Small Cap Growth Fund+ 549,930 12,357
BlackRock Small Cap Value Fund 759,109 14,886
Eclipse Equity Fund 407,398 6,559
Heritage Small Cap Stock Fund+ 316,869 9,893
Jurika & Voyles Mini Cap Fund 53,163 1,125
Longleaf Partners Realty Fund 321,826 5,658
Longleaf Partners Small Cap Fund 1,024,297 25,714
Managers Special Equity Fund 150,835 10,178
Munder Small Company Growth Fund, Class Y+ 461,675 10,198
Neuberger & Berman Fund+ 594,334 10,092
Nicholas Applegate Mini-Cap Growth Institutional Portfolio+ 89,272 2,274
Oakmark Small Capital Fund 387,377 7,999
PBHG Small Cap Value Fund+ 240,656 3,749
Perritt Growth Fund+ 38,398 597
Robertson Stephens MicroCap Growth Fund+ 112,910 1,971
Scudder Micro Cap Fund 226,574 4,434
Skyline Special Equities II Portfolio+ 390,605 5,679
State Street Research Aurora Fund, Class A 683,995 15,109
State Street Research Global Energy Fund, Class A 101,214 2,073
<CAPTION>
Number of Value
Shares (000s)
---------- ----------
<S> <C> <C>
Strong Advantage Fund 299,255 $ 3,013
Strong Small Cap Fund 452,231 6,055
Turner Small Cap Fund+ 197,020 5,635
Wachovia Special Values Fund, Class A 217,234 4,064
Wasatch MicroCap Fund+ 928,280 4,270
----------
TOTAL MUTUAL FUNDS
(Cost $182,356) 192,659
----------
</TABLE>
<TABLE>
<CAPTION>
Par
----------
<S> <C> <C>
CASH EQUIVALENTS--0.8%
MSTC Cash Reserve Liquid Asset Fund
5.31%*, 05/07/98 $ 1,487 1,487
----------
TOTAL CASH EQUIVALENTS
(Cost $1,487) 1,487
----------
TOTAL INVESTMENTS--99.3%
(Cost $183,843) 194,146
----------
OTHER ASSETS AND LIABILITIES--0.7%
Other Assets 1,671
Liabilities (336)
----------
1,335
----------
NET ASSETS--100.0% $ 195,481
----------
----------
</TABLE>
NOTES TO STATEMENTS OF NET ASSETS
+ Non-Income Producing Security.
* Interest rate represents the yield on report date.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES (in thousands)
April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios-TM-
--------------------------------------------------
International Growth Balanced Small Cap
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments at value (Cost: $71,706, $138,794, $78,676 and $183,843,
respectively) $ 84,337 $ 154,041 $ 84,579 $ 194,146
Cash 118 -- -- --
Receivables:
Investments sold -- 4,000 2,000 1,520
Fund shares sold -- 288 367 113
Dividends -- 28 67 15
Interest 7 13 5 13
Deferred organization cost 48 12 12 10
------------- --------- ----------- -----------
Total Assets 84,510 158,382 87,030 195,817
------------- --------- ----------- -----------
LIABILITIES
Payables:
Investments purchased -- 4,028 2,067 15
Fund shares redeemed -- 184 102 260
Investment advisory and administration fees 5 9 5 9
Custodian fees 37 16 12 16
Deferred organization costs 2 3 3 11
Other liabilities 97 154 91 25
------------- --------- ----------- -----------
Total Liabilities 141 4,394 2,280 336
------------- --------- ----------- -----------
Net Assets applicable to outstanding shares $ 84,369 $ 153,988 $ 84,750 $ 195,481
------------- --------- ----------- -----------
------------- --------- ----------- -----------
NET ASSETS CONSIST OF:
Paid-in-capital $ 70,790 $ 129,391 $ 74,664 $ 186,760
Undistributed (distributions in excess of) net investment income (132) 512 495 (537)
Accumulated net realized gain (loss) on investments sold 1,080 8,838 3,688 (1,045)
Net unrealized appreciation on investments 12,631 15,247 5,903 10,303
------------- --------- ----------- -----------
$ 84,369 $ 153,988 $ 84,750 $ 195,481
------------- --------- ----------- -----------
------------- --------- ----------- -----------
PRICING OF SHARES:
Outstanding shares, $0.00001 par value (unlimited shares authorized) 7,043 12,426 7,111 18,570
Net asset value, offering and redemption price per share $11.98 $12.39 $11.92 $10.53
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
STATEMENT OF OPERATIONS (in thousands)
For the six months ended April 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios-TM-
--------------------------------------------------
International Growth Balanced Small Cap
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income:
Dividends $ 2,443 $ 3,231 $ 1,724 $ 5,263
Interest 35 80 74 58
------------- --------- ----------- -----------
Total investment income 2,478 3,311 1,798 5,321
------------- --------- ----------- -----------
Expenses:
Investment advisory and administration fees 290 503 263 737
Transfer agency and shareholder service fees 98 170 89 249
Custodian fees 17 14 14 19
Portfolio accounting fees 14 24 14 38
Registration fees 1 35 1 77
Professional fees 13 20 8 54
Shareholder reports 27 35 28 39
Trustees' fees 4 5 3 5
Amortization of deferred organization costs 7 2 2 1
Insurance and other expenses 39 36 40 20
------------- --------- ----------- -----------
510 844 462 1,239
Less: expenses reduced (see Note 4) (314) (504) (284) (741)
------------- --------- ----------- -----------
Total expenses incurred by Fund 196 340 178 498
------------- --------- ----------- -----------
Net investment income 2,282 2,971 1,620 4,823
------------- --------- ----------- -----------
Net realized gain (loss) received from underlying funds (972) 5,399 2,431 (898)
Net unrealized appreciation on investments 9,068 4,923 1,756 13,093
------------- --------- ----------- -----------
Net gain on investments 8,096 10,322 4,187 12,195
------------- --------- ----------- -----------
Increase in net assets resulting from operations $ 10,378 $ 13,293 $ 5,807 $ 17,018
------------- --------- ----------- -----------
------------- --------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios-TM-
---------------------------------------------------------------------------------------------------------
International Growth Balanced Small Cap
------------------------ ------------------------- ------------------------- -------------------------
Six months Six months Six months
ended Six months ended ended
April 30, Year ended ended April Year ended April 30, Year ended April 30, Year ended
1998 October 31, 30, 1998 October 31, 1998 October 31, 1998 October 31,
(Unaudited) 1997 (Unaudited) 1997+ (Unaudited) 1997+ (Unaudited) 1997++
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income $ 2,282 $ 1,078 $ 2,971 $ 1,988 $ 1,620 $ 1,409 $ 4,823 $ 316
Net realized gain
(loss) on investments -- 1,075 -- 2,349 -- 804 -- (159)
Net realized gain
(loss) received from
underlying funds (972) 977 5,399 1,090 2,431 453 (898) 12
Net unrealized
appreciation
(depreciation) on
investments sold 9,068 4,087 4,923 10,324 1,756 4,147 13,093 (2,790)
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Increase (decrease) in
net assets resulting
from operations 10,378 7,217 13,293 15,751 5,807 6,813 17,018 (2,621)
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Dividends to shareholders
from net investment
income (2,252) (1,090) (3,302) (1,148) (2,017) (520) (5,140) --
Dividend in excess of net
investment income (133) (43) -- -- -- -- (536) --
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(2,385) (1,133) (3,302) (1,148) (2,017) (520) (5,676) --
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Capital Share
Transactions:
Proceeds from shares
sold 12,425 46,429 34,103 140,642 26,441 69,114 19,422 218,803
Net asset value of
shares issued in
reinvestment of
dividends 4,313 1,062 6,623 1,078 3,111 488 5,420 --
Less payments for
shares redeemed (21,448) (31,669) (20,606) (32,446) (9,725) (14,762) (47,753) (9,132)
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Increase (decrease) in
net assets from
capital share
transactions (4,710) 15,822 20,120 109,274 19,827 54,840 (22,911) 209,671
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Total increase in net
assets 3,283 21,906 30,111 123,877 23,617 61,133 (11,569) 207,050
Net Assets:
Beginning of period 81,086 59,180 123,877 -- 61,133 -- 207,050 --
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
End of period
(including
undistributed and
distributions in
excess of net
investment income of
$(132), $(43), $512,
$840, $495, $889,
$(537) and $316,
respectively) $ 84,369 $ 81,086 $ 153,988 $ 123,877 $ 84,750 $ 61,133 $ 195,481 $ 207,050
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Number of Fund shares:
Sold 1,141 4,299 2,908 13,607 2,306 6,715 1,963 21,761
Reinvested 424 105 596 112 284 49 569 --
Redeemed (1,987) (2,909) (1,759) (3,038) (850) (1,393) (4,819) (904)
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
Net increase in shares
outstanding (422) 1,495 1,745 10,681 1,740 5,371 (2,287) 20,857
Shares outstanding:
Beginning of period 7,465 5,970 10,681 -- 5,371 -- 20,857 --
---------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
End of period 7,043 7,465 12,426 10,681 7,111 5,371 18,570 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.
29
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
--------------------------------------- ---------------------------------------------
Net Distributions
Fiscal Net Asset Realized & Total Dividends from Net Asset
Period Value Net Unrealized from from Net Realized Value
Ended Beginning Investment Gains on Investment Investment Gain on Total End of
Oct. 31 of Period Income Investment Operation Income Investment Distributions Period
- --------- ---------- ----------- ----------- ----------- ----------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO-TM-
1998(2) $10.86 $0.32 $ 1.44 $ 1.76 $(0.34) $(0.30) $(0.64) $11.98
1997 $ 9.91 $0.17 $ 0.95 $ 1.12 $(0.17) -- $(0.17) $10.86
1996(3) $10.00 -- $(0.09) $(0.09) -- -- -- $ 9.91
SCHWAB MARKETMANAGER GROWTH PORTFOLIO-TM-
1998(2) $11.60 $0.33 $ 1.06 $ 1.39 $(0.29) $(0.31) $(0.60) $12.39
1997(4) $10.00 $0.08 $ 1.66 $ 1.74 $(0.14) -- $(0.14) $11.60
SCHWAB MARKETMANAGER BALANCED PORTFOLIO-TM-
1998(2) $11.38 $0.41 $ 0.69 $ 1.10 $(0.34) $(0.22) $(0.56) $11.92
1997(4) $10.00 $0.17 $ 1.34 $ 1.51 $(0.13) -- $(0.13) $11.38
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO-TM-
1998(2) $ 9.93 $0.24 $ 0.63 $ 0.87 $(0.27) -- $(0.27) $10.53
1997(5) $10.00 $0.02 $(0.09) $(0.07) -- -- -- $ 9.93
</TABLE>
(1) The information contained in the above table is based on actual expenses
for the periods, after giving effect to the portion of expenses reduced by
the Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
<TABLE>
<CAPTION>
International Portfolio Growth Portfolio Balanced Portfolio Small Cap Portfolio
------------------------- ------------------------- ------------------------- -------------------------
Ratio of Net Ratio of Net Ratio of Net Ratio of Net
Fiscal Ratio of Investment Ratio of Investment Ratio of Investment Ratio of Investment
Period Expenses Income Expenses Income Expenses Income Expenses Income
Ended to Ave. to Average to Ave. to Average to Ave. to Average to Ave. to Average
Oct. 31 Net Assets Net Assets Net Assets Net Assets Net Assets Net Assets Net Assets Net Assets
- --------- ---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998(2) 1.30%* 5.02%* 1.24%* 3.63%* 1.30%* 3.75%* 1.25%* 4.10%*
1997 1.30% 0.60% 1.27%* 1.30%* 1.45%* 2.08%* 1.25%* 0.54%*
1996(3) 3.41%* (2.39)%* -- -- -- -- -- --
</TABLE>
(2) For the six months ended April 30, 1998 (Unaudited).
(3) Period from October 16, 1996 (commencement of operations) to October 31,
1996.
(4) Period from November 18, 1996 (commencement of operations) to October 31,
1997.
(5) Period from September 16, 1997 (commencement of operations) to October 31,
1997.
* Annualized.
30
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-------------------------------------------------------------------------
Ratio of Net
Ratio of Investment
Expenses Income
Fiscal Total to Average to Average Portfolio
Period Return Net Assets Net Net Turnover
Ended (not annualized) End of Period Assets(1) Assets(1) Rate
Oct. 31 (%) (000's) (%) (%) (%)
- --------- ---------------- -------------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO-TM-
1998(2) 17.25 $ 84,369 0.50* 5.82* 91
1997 11.47 $ 81,086 0.50 1.40 179
1996(3) (0.90) $ 59,180 0.50* 0.52* 0
SCHWAB MARKETMANAGER GROWTH PORTFOLIO-TM-
1998(2) 12.60 $153,988 0.50* 4.37* 161
1997(4) 17.60 $123,877 0.50* 2.07* 192
SCHWAB MARKETMANAGER BALANCED PORTFOLIO-TM-
1998(2) 10.07 $ 84,750 0.50* 4.55* 128
1997(4) 15.27 $ 61,133 0.50* 3.03* 171
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO-TM-
1998(2) 9.09 $195,481 0.50* 4.84* 63
1997(5) (0.70) $207,050 0.50* 1.29* 10
</TABLE>
(1) The information contained in the above table is based on actual expenses
for the periods, after giving effect to the portion of expenses reduced by
the Investment Manager and Schwab. Had these expenses not been reduced, the
Fund's expense and net investment income ratios would have been:
<TABLE>
<CAPTION>
International Portfolio Growth Portfolio Balanced Portfolio Small Cap Portfolio
------------------------- ------------------------- ------------------------- -------------------------
Ratio of Net Ratio of Net Ratio of Net Ratio of Net
Fiscal Ratio of Investment Ratio of Investment Ratio of Investment Ratio of Investment
Period Expenses Income Expenses Income Expenses Income Expenses Income
Ended to Ave. to Average to Ave. to Average to Ave. to Average to Ave. to Average
Oct. 31 Net Assets Net Assets Net Assets Net Assets Net Assets Net Assets Net Assets Net Assets
- --------- ---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998(2) 1.30%* 5.02%* 1.24%* 3.63%* 1.30%* 3.75%* 1.25%* 4.10%*
1997 1.30% 0.60% 1.27%* 1.30%* 1.45%* 2.08%* 1.25%* 0.54%*
1996(3) 3.41%* (2.39)%* -- -- -- -- -- --
</TABLE>
(2) For the six months ended April 30, 1998 (Unaudited).
(3) Period from October 16, 1996 (commencement of operations) to October 31,
1996.
(4) Period from November 18, 1996 (commencement of operations) to October 31,
1997.
(5) Period from September 16, 1997 (commencement of operations) to October 31,
1997.
* Annualized.
31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the six months ended April 30, 1998 (Unaudited)
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-Registered Trademark-, Schwab Small-Cap Index
Fund-Registered Trademark-, Schwab MarketTrack All Equity Portfolio-TM-
(effective on April 16, 1998, and commenced operations on May 19, 1998), Schwab
MarketTrack Growth Portfolio-TM- (formerly Schwab Asset
Director-Registered Trademark---High Growth Fund), Schwab MarketTrack Balanced
Portfolio-TM- (formerly Schwab Asset Director-Registered Trademark--- Balanced
Growth Fund), Schwab MarketTrack Conservative Portfolio-TM- (formerly Schwab
Asset Director-Registered Trademark--- Conservative Growth Fund) and Schwab
Analytics Fund-Registered Trademark-. The assets of each series are segregated
and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
SECURITY VALUATION--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 and
unlisted securities are valued at the last quoted sale price on the exchange on
which such securities are primarily traded, or if a sale is not reported for
that day, at the mean between the most recent bid and asked prices. Other
investments, for which no quotations are readily available, are valued at fair
value as determined by the Funds' investment manager pursuant to guidelines
adopted in good faith by the Board of Trustees.
SECURITY TRANSACTIONS AND INVESTMENT INCOME--Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income is accrued on a daily basis.
DEFERRED ORGANIZATION COSTS--Costs incurred in connection with the organization
of the Funds and their initial registration with the Securities and Exchange
Commission are amortized on a straight-line basis over a five-year period from
each Fund's commencement of operations.
32
<PAGE>
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.
At April 30, 1998 (for financial reporting and federal income tax purposes:)
<TABLE>
<CAPTION>
Net
Unrealized Appreciated Depreciated
Appreciation Securities Securities
----------- ----------- -----------
<S> <C> <C> <C>
Schwab MarketManager International
Portfolio-TM- $12,631,000 $12,644,000 $ 13,000
Schwab MarketManager Growth
Portfolio-TM- $15,247,000 $15,456,000 $ 209,000
Schwab MarketManager Balanced
Portfolio-TM- $5,903,000 $6,066,000 $ 163,000
Schwab MarketManager Small Cap
Portfolio-TM- $10,303,000 $12,137,000 $1,834,000
</TABLE>
At October 31, 1997, the unused capital loss carryforwards, for federal income
tax purposes with expiration dates, are as follows:
<TABLE>
<CAPTION>
Schwab MarketManager
Expiring in: Small Cap Portfolio
---------------------
<S> <C>
10/31/05 $ 95,000
--------
Total capital loss carryforward $ 95,000
--------
--------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT--The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager") whereby the Investment Manager manages the
Funds' business affairs and provides underlying fund analysis, selection,
ongoing monitoring, and investment management services. For these services, 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 Manager reduced a portion of its fees for the
six months ended April 30, 1998 (see Note 4).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS--The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced a portion of its fees for the six months ended April 30, 1998
(see Note 4).
OFFICERS AND TRUSTEES--Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. For the six
months ended April 30, 1998, the Trust made no direct payments to its
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
officers or trustees who are "interested persons" within the meaning of the 1940
Act, as amended. The Funds incurred fees aggregating $17,000 related to the
Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager 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 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 Agent and Shareholder Services fees through at least December 31, 2001.
For the period ended April 30, 1998, the total of such fees and expenses reduced
by the Investment Manager was $216,000, $334,000, $195,000, and $492,000 for the
International, Growth, Balanced and Small Cap, respectively, and the total of
such fees reduced by Schwab was $98,000, $170,000, $89,000, and $249,000 for the
International, Growth, Balanced and Small Cap, respectively.
5. BORROWING AGREEMENT
The Trust has a line of credit arrangement with Bank of New York Company whereby
the Funds may borrow, in aggregate, up to $100,000,000, on a temporary basis, to
fund redemptions. Amounts borrowed under this arrangement bear interest at
periodically negotiated rates and may be collateralized by the assets of the
Funds. During the six months ended April 30, 1998, no borrowings were made under
this arrangement.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, other than short-term obligations,
for the six months ended April 30, 1998, were as follows (in thousands):
<TABLE>
<CAPTION>
International Growth Balanced Small Cap
Portfolio Portfolio Portfolio Portfolio
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Purchases $ 96,556 $ 299,475 $ 147,846 $ 169,408
Proceeds of sales and maturities $ 101,258 $ 281,209 $ 128,994 $ 186,071
</TABLE>
34
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help you meet your
investment goals. You can diversify your portfolio in a single step with our
asset allocation funds. Or you can customize your portfolio with a combination
of our stock funds as well as our taxable and tax-advantaged bond and money
market funds.
Please call 1-800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio(1)
Schwab MarketTrack Growth Portfolio(1)
Schwab MarketTrack Balanced Portfolio(1)
Schwab MarketTrack Conservative Portfolio(1)
Schwab MarketManager Growth Portfolio(2)
Schwab MarketManager Balanced Portfolio(2)
SCHWAB STOCK FUNDS
Schwab 1000 Fund-Registered Trademark-
Schwab S&P 500 Fund
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio(2)
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio(2)
SCHWAB BOND FUNDS
Schwab Total Bond Market Index Fund(3)
Schwab Short-Term Bond Market Index Fund(3)
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds(4) that seek high current income
with safety and liquidity. Choose from taxable or tax-advantaged alternatives.
Many can be linked to your Schwab account to "sweep" cash balances automatically
when you're between investments. Or, for your larger cash reserves, choose one
of our Value Advantage Investments-Registered Trademark-.
(1)Formerly the Schwab Asset Director Funds.
(2)Formerly the Schwab OneSource-TM- Portfolios.
(3)Formerly the Schwab Government Bond Funds.
(4)Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
<PAGE>
SCHWABFUNDS
FAMILY-R-
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 20293 (0598-2346) MKT3563(6/98)
