<PAGE>
SCHWABFUNDS-REGISTERED TRADEMARK-
SCHWAB MARKETMANAGER
PORTFOLIOS-TRADE MARK-
ANNUAL REPORT
AND
AN IMPORTANT NOTICE REGARDING
DELIVERY OF SHAREHOLDER
DOCUMENTS
October 31, 1999
<PAGE>
IMPORTANT NOTICE REGARDING DELIVERY OF SHAREHOLDER DOCUMENTS
The Securities and Exchange Commission has adopted a rule permitting mutual
funds to deliver only one copy of shareholder documents, including prospectuses
and shareholder reports to fund investors with multiple accounts at the same
residential or post office box address. This practice is commonly called
"householding" and is intended to eliminate duplicate mailings of shareholder
documents.
Schwab may begin indefinitely householding prospectuses and shareholder reports
for SchwabFunds-Registered Trademark- effective February 29, 2000.
ADDITIONAL COPIES OF SHAREHOLDER DOCUMENTS
ALL SCHWABFUNDS PROSPECTUSES and shareholder reports ARE AVAILABLE FREE OF
CHARGE, AND MAY BE REQUESTED AT ANY TIME BY CALLING SCHWAB AS INDICATED BELOW.
SchwabFunds prospectuses are also available on our Web site at www.schwab.com.
If you would otherwise fall under our householding policy, but for any reason
prefer to receive multiple SchwabFunds prospectuses and shareholder reports,
please contact:
- - SCHWAB SIGNATURE SERVICES-TM- CLIENTS: Schwab Signature Services.
- - INVESTMENT MANAGER CLIENTS: Schwab at 1-800-515-2157, or your investment
manager.
- - ALL OTHER CLIENTS: Schwab at 1-800-435-4000.
Your instructions that householding not apply to your accounts holding
SchwabFunds will be effective within 30 days of receipt by Schwab.
<PAGE>
SCHWABFUNDS-REGISTERED TRADEMARK-
SCHWAB MARKETMANAGER
PORTFOLIOS-TRADE MARK-
- GROWTH
- BALANCED
- SMALL CAP
- INTERNATIONAL
Annual Report
October 31, 1999
<PAGE>
SCHWAB MARKETMANAGER PORTFOLIOS-TM-
We are pleased to bring you this annual report for the Schwab MarketManager
Portfolios (the Portfolios) for the one-year period ended October 31, 1999. 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
PORTFOLIO PERFORMANCE 8
PORTFOLIO SNAPSHOT 10
- ---------------------------------------------
Schwab MarketManager Balanced Portfolio
PORTFOLIO PERFORMANCE 12
PORTFOLIO SNAPSHOT 14
- ---------------------------------------------
Schwab MarketManager Small Cap Portfolio
PORTFOLIO PERFORMANCE 16
PORTFOLIO SNAPSHOT 18
- ---------------------------------------------
Schwab MarketManager International
Portfolio
PORTFOLIO PERFORMANCE 20
PORTFOLIO SNAPSHOT 22
- ---------------------------------------------
The Portfolio Management Team 24
- ---------------------------------------------
Portfolio Discussion 25
- ---------------------------------------------
Glossary 29
- ---------------------------------------------
Financial Statements and Notes 31
- ---------------------------------------------
</TABLE>
<PAGE>
A MESSAGE FROM THE CHAIRMAN
[PHOTO]
Dear Shareholder,
As 1999 draws to a close, I'd like to take this opportunity to reflect on the
year and the changes and milestones that have taken place at Charles Schwab
Investment Management, Inc. (CSIM), the investment adviser for the
SchwabFunds-Registered Trademark- Family.
First of all, we reached a significant milestone in September, when SchwabFunds
assets topped the $100 billion mark. With the support of investors like you,
SchwabFunds continue to be among the largest and fastest growing fund families
in the nation.
Secondly, we added two new products to our SchwabFunds offering:
- - SCHWAB TOTAL STOCK MARKET INDEX FUND-TM- seeks to track the total return of
the entire U.S. stock market, as measured by the Wilshire 5000 Total Market
Index, the broadest measure of U.S. stock market performance. In one single,
low-cost investment, fund investors can benefit from exposure to U.S.
companies of all types and sizes.
- - SCHWAB YIELDPLUS FUND-TM- The fund seeks high current income with minimal
changes in share price. It is designed to provide the potential for higher
yields than a money fund and lower risk than a longer-term bond fund through a
management strategy designed to minimize price fluctuation. Intended for your
long-term (over one-year) cash needs, the fund seeks to increase the overall
yield potential of the cash portion of your portfolio.
For more information on either of these funds, please call 1-800-435-4000 and
request a free prospectus. The prospectus contains more information on fund fees
and expenses. Please read it carefully before investing.
I encourage you to take a moment to read this annual report as it is designed to
provide timely information about your SchwabFunds investments. You will find
information on each fund's total returns and performance, as well as commentary
on market conditions provided by the portfolio management team. In the section
"What Every Investor Should Know", we've also provided guidelines that can help
you reach your goals by establishing--or maintaining--an ongoing investment
program.
As a leader in online brokerage, we recognize the value of the web as a means of
communicating timely, relevant information to investors. Regular updates on all
of the SchwabFunds, including performance data, are available on our Web site at
WWW.SCHWAB.COM/SCHWABFUNDS. We encourage you to take advantage of this valuable
resource which can help you keep track your funds' performance.
At Schwab our philosophy has always been that a combination of regular investing
and diversification is the best strategy over the long term. By investing in
SchwabFunds, you've already taken an important step in building a portfolio that
can help you meet your future goals. Thank you for your investment in
SchwabFunds.
Sincerely,
/s/ Charles R. Schwab
Charles R. Schwab
October 31, 1999
THE YEAR 2000
One issue with the potential to disrupt portfolio operations and affect
performance is the inability of some computers to recognize the year 2000.
The Investment Adviser will continue to take steps to enable its systems to
handle the year 2000 problem. The Investment Adviser is also seeking
assurances that its service providers and business partners are taking
similar steps as well. It is impossible to know in advance however, exactly
how this issue will affect portfolio administration, portfolio performance or
securities markets in general.
1
<PAGE>
WHAT EVERY INVESTOR SHOULD KNOW
WHY ASSET ALLOCATION MATTERS
As most investors know, one of the most compelling reasons to invest in a mutual
fund is diversification. By allocating your assets across many different
securities, a fund can help reduce the risk that you might otherwise encounter
by owning just a few stocks or bonds.
But remember that diversification ACROSS asset classes can be just as important
as diversification WITHIN one of the mutual funds you own. As you probably know,
stocks historically have offered much higher returns over the long term than
bonds, cash or other asset classes, but those returns have come at the price of
higher volatility. To help mitigate some of that risk, many investors often
include at least some bonds and cash in their portfolios. They also diversify
their exposure across different stock market segments--such as large-cap and
small-cap U.S. stocks and international stocks, which have tended to move with
less-than-perfect correlation over time. In short, allocating assets across
market segments may help reduce your overall portfolio risk.
REGULAR INVESTING STRATEGIES
Another way to help dampen the effects of short-term market volatility is to
invest the same amount of money on a regular basis. With this investment
strategy, known as DOLLAR-COST AVERAGING, you automatically buy more shares when
stock or bond prices are low and fewer when they're high.*
A hypothetical example can help illustrate this concept. Let's say you invest
$400 on a monthly basis in a single mutual fund, as shown below. Because of
fluctuating prices, your per-share purchase price varies monthly. A simple
average of your five purchase prices would yield $8.20 per share; however, your
AVERAGE COST BASIS (your total investment divided by the number of shares
actually purchased) would be significantly lower--by more than $0.50 per share.
The net result in this example is that your average cost per share is reduced
and you'd have purchased more shares than you would have had you paid the
average share price over the five-month period.
<TABLE>
<CAPTION>
No. of
Fixed Share Shares
Investment 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 -- 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.
(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.)
* Regular investing strategies such as dollar-cost averaging do not assure a
profit or protect against a loss in declining markets. Since such a strategy
involves continuous investment, investors should consider their ability to
continue purchases through periods of low price levels.
2
<PAGE>
SCHWAB'S 10 INVESTING PRINCIPLES
1. START WITH THE BASICS FOR LONG-TERM INVESTING.
2. GET STARTED NOW!
3. KNOW YOURSELF.
4. INVEST IN THE STOCK MARKET FOR GROWTH.
5. TAKE A LONG-TERM VIEW.
6. BUILD A DIVERSIFIED PORTFOLIO.
7. CONSIDER BONDS AND CASH FOR DIVERSIFICATION AND INCOME.
8. MINIMIZE YOUR EXPENSES.
9. STAY ON TRACK.
10. BECOME A LIFELONG INVESTOR.
In addition to reducing your per-share costs over time, dollar-cost averaging
provides another benefit: the discipline of investing regularly. You're more
likely to maintain a regular investment plan if it's automatic: You don't have
to think about it, and you minimize any propensity to skip an investment in
favor of some other expenditure. To encourage this discipline, Schwab offers you
two convenient, no-cost ways to begin or maintain a program of regular
investing:
Schwab's AUTOMATIC INVESTMENT PLAN (AIP) allows you to automatically
purchase--on a regular basis--additional shares in mutual funds that you already
own. For amounts as little as $100 per month, you can use the cash or sweep
shares of your existing Schwab Money Fund,(1) or you can enroll in
MONEYLINK,-Registered Trademark- Schwab's electronic transfer service, to
automatically transfer money to your Schwab account.
With MoneyLink, you can arrange to regularly and automatically transfer money
between your bank account and your Schwab account. It's a convenient way to
build your investment over time.
Please be aware that these programs--and dollar-cost averaging in general--do
not ensure a profit or protect against a loss, and investors should know that
markets fall as well as rise. Because dollar-cost averaging involves continuous
investment in securities regardless of fluctuating prices, you should consider
your financial ability to purchase in both up and down markets. Over the long
term, however, dollar-cost averaging may help to smooth out volatility caused by
shortterm market trends. For more information, please call us
at 1-800-435-4000.
WE MAKE IT EASY TO INVEST
We try to make it easy and convenient for you to invest in our
SchwabFunds.-Registered Trademark- In addition to our automated methods that
allow you to invest or transfer money to your Schwab account on a regular basis,
you can also invest through our Web site at WWW.SCHWAB.COM/SCHWABFUNDS; through
our automated touch-tone telephone service, TeleBroker,-Registered Trademark- by
calling 1-800-272-4922; or in person at any of our nationwide branches.
KEEPING YOU INFORMED
You can find a wealth of information about our investment philosophy and
funds, as well as updated fund performance data at our Web site:
WWW.SCHWAB.COM/SCHWABFUNDS.
(1) Includes uninvested cash and margin cash available. If sufficient cash is
not available, your automatic purchases will not be made.
3
<PAGE>
MARKET OVERVIEW
U.S. ECONOMIC GROWTH
The U.S. economy, as measured by gross domestic product (GDP), continued its
lengthy expansion with a strong real growth rate of 4.3% for the year ended
September 1999--a rate considered to be in excess of the long-term maximum
sustainable non-inflationary growth rate. High levels of consumer confidence and
spending, low interest rates, rising real wages and strong gains in stock prices
have been the principal factors responsible for this lengthy expansion.
In a major revision of the GDP benchmark data going back four decades, the
Commerce Department reported that, during the 1990s, growth was stronger,
personal savings higher, and inflation lower than previously calculated.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
REAL GDP GROWTH RATE
QUARTERLY PERCENTAGE CHANGE
(ANNUALIZED RATE)
<S> <C>
Q1 1990 5.0%
Q2 1990 1.0%
Q3 1990 -0.6%
Q4 1990 -3.0%
Q1 1991 -1.7%
Q2 1991 2.6%
Q3 1991 1.3%
Q4 1991 2.5%
Q1 1992 4.3%
Q2 1992 4.0%
Q3 1992 3.1%
Q4 1992 5.2%
Q1 1993 -0.7%
Q2 1993 2.1%
Q3 1993 1.5%
Q4 1993 6.0%
Q1 1994 3.6%
Q2 1994 5.7%
Q3 1994 2.2%
Q4 1994 5.1%
Q1 1995 1.5%
Q2 1995 0.8%
Q3 1995 3.2%
Q4 1995 3.3%
Q1 1996 2.9%
Q2 1996 6.9%
Q3 1996 2.2%
Q4 1996 4.9%
Q1 1997 4.9%
Q2 1997 5.1%
Q3 1997 4.0%
Q4 1997 3.1%
Q1 1998 6.7%
Q2 1998 2.1%
Q3 1998 3.8%
Q4 1998 5.9%
Q1 1999 3.7%
Q2 1999 1.9%
Q3 1999 5.5%
Source: BLOOMBERG L.P.
</TABLE>
Despite some recent slowing in the housing sector and a moderate decline in
consumer confidence, personal consumption and business fixed investment remain
strong. The consensus of most economists is that the U.S. economy appears poised
for continued growth, but at a more moderate pace than experienced so far in
1999.
Last year's concerns over the impact of international economic problems have
been displaced by concerns over imbalances in the domestic economy, namely the
surging current account (trade) deficit, record high stock valuations, and the
low savings rate. Looking ahead, the behavior of domestic consumers in response
to continued stock market volatility may also be a key determinant of whether
the economy continues on its current course or softens throughout 2000.
UNEMPLOYMENT
October's unemployment rate of 4.1% was a 29-year low. Labor markets continue to
be extremely tight in many areas of the country. Growth in the labor force has
slowed, and there continues to be concern that wage and benefits increases may
begin to put more pressure on labor costs (refer to Employment Cost Index on the
next page).
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
U.S. UNEMPLOYMENT RATE
<S> <C>
Jan-90 5.4%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.4%
Jun-90 5.2%
Jul-90 5.5%
Aug-90 5.7%
Sep-90 5.9%
Oct-90 5.9%
Nov-90 6.2%
Dec-90 6.3%
Jan-91 6.4%
Feb-91 6.6%
Mar-91 6.8%
Apr-91 6.7%
May-91 6.9%
Jun-91 6.9%
Jul-91 6.8%
Aug-91 6.9%
Sep-91 6.9%
Oct-91 7.0%
Nov-91 7.0%
Dec-91 7.3%
Jan-92 7.3%
Feb-92 7.4%
Mar-92 7.4%
Apr-92 7.4%
May-92 7.6%
Jun-92 7.8%
Jul-92 7.7%
Aug-92 7.6%
Sep-92 7.6%
Oct-92 7.3%
Nov-92 7.4%
Dec-92 7.4%
Jan-93 7.3%
Feb-93 7.1%
Mar-93 7.0%
Apr-93 7.1%
May-93 7.1%
Jun-93 7.0%
Jul-93 6.9%
Aug-93 6.8%
Sep-93 6.7%
Oct-93 6.8%
Nov-93 6.6%
Dec-93 6.5%
Jan-94 6.8%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.1%
Jun-94 6.1%
Jul-94 6.3%
Aug-94 6.0%
Sep-94 5.8%
Oct-94 5.8%
Nov-94 5.6%
Dec-94 5.5%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.3%
Apr-95 5.8%
May-95 5.8%
Jun-95 5.6%
Jul-95 5.6%
Aug-95 5.7%
Sep-95 5.6%
Oct-95 5.5%
Nov-95 5.7%
Dec-95 5.6%
Jan-96 5.6%
Feb-96 5.5%
Mar-96 5.6%
Apr-96 5.5%
May-96 5.6%
Jun-96 5.3%
Jul-96 5.5%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.4%
Jan-97 5.3%
Feb-97 5.3%
Mar-97 5.1%
Apr-97 5.0%
May-97 4.7%
Jun-97 5.0%
Jul-97 4.7%
Aug-97 4.9%
Sep-97 4.7%
Oct-97 4.7%
Nov-97 4.6%
Dec-97 4.7%
Jan-98 4.5%
Feb-98 4.6%
Mar-98 4.6%
Apr-98 4.3%
May-98 4.3%
Jun-98 4.5%
Jul-98 4.5%
Aug-98 4.5%
Sep-98 4.5%
Oct-98 4.5%
Nov-98 4.4%
Dec-98 4.3%
Jan-99 4.3%
Feb-99 4.4%
Mar-99 4.2%
Apr-99 4.3%
May-99 4.2%
Jun-99 4.3%
Jul-99 4.3%
Aug-99 4.2%
Sep-99 4.2%
Oct-99 4.1%
Source: BLOOMBERG L.P.
</TABLE>
INFLATION
Price inflation continued to remain well contained. The Consumer Price Index
(CPI) rose just 2.6% for the year ended October 1999. Its core rate (which
excludes
4
<PAGE>
the more volatile food and energy components) rose just 2.1%. The GDP price
deflator, the broadest measure of inflation, indicated prices rising at an
annual rate of 1.3% for the year ended September 1999.
The Employment Cost Index, which measures inflation in wages, salaries and
benefits was also well contained, increasing 3.1% for the year ended September
1999.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEASURES OF INFLATION
<S> <C> <C>
QUARTERLY EMPLOYMENT COST INDEX MONTHLY CONSUMER PRICE INDEX
Jan-90 5.5% 5.2%
Feb-90 5.5% 5.3%
Mar-90 5.5% 5.2%
Apr-90 5.4% 4.7%
May-90 5.4% 4.4%
Jun-90 5.4% 4.7%
Jul-90 5.2% 4.8%
Aug-90 5.2% 5.6%
Sep-90 5.2% 6.2%
Oct-90 4.9% 6.3%
Nov-90 4.9% 6.3%
Dec-90 4.9% 6.1%
Jan-91 4.6% 5.7%
Feb-91 4.6% 5.3%
Mar-91 4.6% 4.9%
Apr-91 4.6% 4.9%
May-91 4.6% 5.0%
Jun-91 4.6% 4.7%
Jul-91 4.3% 4.4%
Aug-91 4.3% 3.8%
Sep-91 4.3% 3.4%
Oct-91 4.3% 2.9%
Nov-91 4.3% 3.0%
Dec-91 4.3% 3.1%
Jan-92 4.0% 2.6%
Feb-92 4.0% 2.8%
Mar-92 4.0% 3.2%
Apr-92 3.6% 3.2%
May-92 3.6% 3.0%
Jun-92 3.6% 3.1%
Jul-92 3.5% 3.2%
Aug-92 3.5% 3.1%
Sep-92 3.5% 3.0%
Oct-92 3.5% 3.2%
Nov-92 3.5% 3.0%
Dec-92 3.5% 2.9%
Jan-93 3.5% 3.3%
Feb-93 3.5% 3.2%
Mar-93 3.5% 3.1%
Apr-93 3.6% 3.2%
May-93 3.6% 3.2%
Jun-93 3.6% 3.0%
Jul-93 3.6% 2.8%
Aug-93 3.6% 2.8%
Sep-93 3.6% 2.7%
Oct-93 3.5% 2.8%
Nov-93 3.5% 2.7%
Dec-93 3.5% 2.7%
Jan-94 3.2% 2.5%
Feb-94 3.2% 2.5%
Mar-94 3.2% 2.5%
Apr-94 3.2% 2.4%
May-94 3.2% 2.3%
Jun-94 3.2% 2.5%
Jul-94 3.2% 2.8%
Aug-94 3.2% 2.9%
Sep-94 3.2% 3.0%
Oct-94 3.0% 2.6%
Nov-94 3.0% 2.7%
Dec-94 3.0% 2.7%
Jan-95 2.9% 2.8%
Feb-95 2.9% 2.9%
Mar-95 2.9% 2.9%
Apr-95 2.9% 3.1%
May-95 2.9% 3.2%
Jun-95 2.9% 3.0%
Jul-95 2.7% 2.8%
Aug-95 2.7% 2.6%
Sep-95 2.7% 2.5%
Oct-95 2.7% 2.8%
Nov-95 2.7% 2.6%
Dec-95 2.7% 2.5%
Jan-96 2.8% 2.7%
Feb-96 2.8% 2.7%
Mar-96 2.8% 2.8%
Apr-96 2.9% 2.9%
May-96 2.9% 2.9%
Jun-96 2.9% 2.8%
Jul-96 2.8% 3.0%
Aug-96 2.8% 2.9%
Sep-96 2.8% 3.0%
Oct-96 2.9% 3.0%
Nov-96 2.9% 3.3%
Dec-96 2.9% 3.3%
Jan-97 2.9% 3.0%
Feb-97 2.9% 3.0%
Mar-97 2.9% 2.8%
Apr-97 2.8% 2.5%
May-97 2.8% 2.2%
Jun-97 2.8% 2.3%
Jul-97 3.0% 2.2%
Aug-97 3.0% 2.2%
Sep-97 3.0% 2.2%
Oct-97 3.3% 2.1%
Nov-97 3.3% 1.8%
Dec-97 3.3% 1.7%
Jan-98 3.3% 1.6%
Feb-98 3.3% 1.4%
Mar-98 3.3% 1.4%
Apr-98 3.5% 1.4%
May-98 3.5% 1.7%
Jun-98 3.5% 1.7%
Jul-98 3.7% 1.7%
Aug-98 3.7% 1.6%
Sep-98 3.7% 1.5%
Oct-98 3.4% 1.5%
Nov-98 3.4% 1.5%
Dec-98 3.4% 1.6%
Jan-99 3.0% 1.7%
Feb-99 3.0% 1.6%
Mar-99 3.0% 1.7%
Apr-99 3.2% 2.3%
May-99 3.2% 2.1%
Jun-99 3.2% 2.0%
Jul-99 3.1% 2.1%
Aug-99 3.1% 2.3%
Sep-99 3.1% 2.6%
Oct-99 2.6%
Source: BLOOMBERG L.P.
</TABLE>
Although there is little evidence of accelerating core inflation, the U.S.
Federal Reserve Board has expressed concern that should labor markets continue
to tighten, increases in wages may outpace productivity growth. In that
environment, productivity growth becomes particularly critical, as it enables
companies to pay higher wages without raising prices. Non-farm productivity grew
2.8% in 1998 and at a 2.7% annualized rate in the first three quarters of 1999,
continuing a healthy trend that began in 1996.
ASSET CLASS PERFORMANCE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL RETURN PERFORMANCE
GROWTH OF A HYPOTHETICAL $1 INVESTMENT
<S> <C> <C> <C> <C>
MSCI-EAFE-Registered S&P 500 Russell 2000 Lehman Aggregate
Trademark- Index Index Small-Cap Index Bond Index
Oct-98 $1.00 $1.00 $1.00 $1.00
Nov-98 $1.05 $1.06 $1.05 $1.01
Dec-98 $1.09 $1.12 $1.12 $1.01
Jan-99 $1.09 $1.17 $1.13 $1.02
Feb-99 $1.06 $1.13 $1.04 $1.00
Mar-99 $1.11 $1.18 $1.06 $1.00
Apr-99 $1.15 $1.22 $1.15 $1.01
May-99 $1.09 $1.19 $1.17 $1.00
Jun-99 $1.14 $1.26 $1.22 $0.99
Jul-99 $1.17 $1.22 $1.19 $0.99
Aug-99 $1.17 $1.22 $1.14 $0.99
Sep-99 $1.18 $1.18 $1.14 $1.00
Oct-99 $1.23 $1.26 $1.15 $1.01
</TABLE>
COMPILED BY CHARLES SCHWAB & CO., INC.
Large-cap domestic stocks, as represented by the S&P 500-Registered Trademark-
Index, continued to be the strongest performing asset class, achieving a total
return of 25.7% for the year ended October 1999. Within the S&P 500, growth
stocks continued to be the strongest performing style for the period. Small-cap
stocks as represented by the Russell 2000-Registered Trademark- Index also
experienced a positive return of 14.9%.
Assisted by the rebound in Asian markets, international stock returns, as
represented by the MSCI-EAFE Index, experienced a positive total return of
23.0% for the one-year reporting period ended October 31, 1999.
Reflecting the rise in intermediate and long-term interest rates, fixed income
returns were generally weak for the period. Bond returns, as represented by the
Lehman Brothers Aggregate Bond Index,-Registered Trademark- were 0.5% for the
one-year reporting period.
5
<PAGE>
MARKET OVERVIEW (continued)
U.S. EQUITY VALUATION
The price/earnings (P/E) ratio for the S&P 500-Registered Trademark- Index
reached record highs during the reporting period and ended the period at a lofty
29.9 times earnings, approximately twice its long-term average. The P/E ratio,
also known as a multiple, is the price of a stock divided by its earnings per
share, and generally indicates how much investors are willing to pay for a
company's earning potential. Based on other traditional market valuation
measures such as the price-to-book value ratio or dividend yield, the U.S. stock
market continues to remain at record high valuation levels.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 PRICE/EARNINGS RATIO
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.9
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
May-98 26.12
Jun-98 27.09
Jul-98 26.78
Aug-98 22.77
Sep-98 24.23
Oct-98 27.58
Nov-98 30.14
Dec-98 31.97
Jan-99 33.29
Feb-99 32.65
Mar-99 33.78
Apr-99 33.9
May-99 32.74
Jun-99 34.7
Jul-99 31.62
Aug-99 31.21
Sep-99 29.9
Oct-99 29.92
30-Year Average 15.5
Source: BLOOMBERG L.P.
</TABLE>
TREASURY BOND YIELDS
Continuing a trend which began in October 1998, both long-term and intermediate
term rates continued to climb upward during the reporting period. Scaled back
concerns about the impact of international economic problems and the continued
growth of the domestic economy were the primary drivers of this upward trend in
yields.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
30-YEAR AND FIVE-YEAR TREASURY BOND YIELDS
<S> <C> <C>
30-YEAR TREASURY FIVE-YEAR TREASURY
BOND YIELD NOTE YIELD
10/2/98 4.84% 4.08%
10/9/98 5.12% 4.46%
10/16/98 4.98% 4.04%
10/23/98 5.18% 4.30%
10/30/98 5.16% 4.23%
11/6/98 5.39% 4.59%
11/13/98 5.25% 4.50%
11/20/98 5.22% 4.60%
11/27/98 5.16% 4.59%
12/4/98 5.04% 4.39%
12/11/98 5.02% 4.39%
12/18/98 5.00% 4.36%
12/25/98 5.22% 4.71%
1/1/99 5.10% 4.54%
1/8/99 5.27% 4.73%
1/15/99 5.11% 4.55%
1/22/99 5.08% 4.52%
1/29/99 5.09% 4.55%
2/5/99 5.35% 4.86%
2/12/99 5.42% 4.96%
2/19/99 5.39% 4.99%
2/26/99 5.58% 5.22%
3/5/99 5.60% 5.22%
3/12/99 5.53% 5.06%
3/19/99 5.56% 5.08%
3/26/99 5.59% 5.08%
4/2/99 5.46% 4.96%
4/9/99 5.46% 4.96%
4/16/99 5.57% 5.11%
4/23/99 5.60% 5.14%
4/30/99 5.66% 5.21%
5/7/99 5.81% 5.37%
5/14/99 5.92% 5.50%
5/21/99 5.75% 5.43%
5/28/99 5.83% 5.58%
6/4/99 5.96% 5.73%
6/11/99 6.16% 5.91%
6/18/99 5.97% 5.73%
6/25/99 6.15% 5.89%
7/2/99 6.00% 5.69%
7/9/99 6.00% 5.69%
7/16/99 5.88% 5.55%
7/23/99 6.03% 5.69%
7/30/99 6.10% 5.79%
8/6/99 6.18% 5.91%
8/13/99 6.10% 5.86%
8/20/99 5.99% 5.77%
8/27/99 5.98% 5.77%
9/3/99 6.02% 5.77%
9/10/99 6.04% 5.78%
9/17/99 6.06% 5.75%
9/24/99 5.97% 5.66%
10/1/99 6.13% 5.86%
10/8/99 6.20% 5.95%
10/15/99 6.26% 5.97%
10/22/99 6.35% 6.10%
10/29/99 6.16% 5.95%
Source: BLOOMBERG L.P.
</TABLE>
INTERNATIONAL PERFORMANCE
The MSCI-EAFE-Registered Trademark- Index gained 23.0% in U.S. dollar terms
(excluding reinvested dividends) during the one-year reporting period. In local
currency terms, it gained 26.90%, reflecting the relative weakness of most
foreign currencies (compared to the dollar) during the period.
With the exception of Austria, Belgium, Ireland, Switzerland and Spain, all of
the MSCI-EAFE component countries had positive returns for the period. In
particular, many of the Asian countries reversed their severe declines of the
prior period to post strong returns. The strongest-performing countries for the
period were Finland, Singapore and Japan.
6
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
EAFE COUNTRY RETURNS
ONE YEAR ENDED 10/31/99
<S> <C> <C>
Finland 100.43%
Singapore 87.76%
Japan 57.38%
Sweden 46.01%
Hong Kong 23.22%
France 23.03%
Netherlands 10.52%
United Kingdom 10.50%
Australia 9.14%
Germany 6.27%
Denmark 6.00%
New Zealand 4.46%
Norway 1.32%
Italy 0.34%
Spain -0.40%
Switzerland -1.44%
Ireland -2.74%
Belgium -6.67%
Austria -15.16%
Source: DATASTREAM
</TABLE>
This market overview has been provided by the portfolio management team.
7
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
PORTFOLIO PERFORMANCE
TOTAL RETURNS FOR THE PERIODS ENDED 10/31/99
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
-----------------------------
SINCE INCEPTION
ONE YEAR (11/18/96)
<S> <C> <C>
- -------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER GROWTH PORTFOLIO(1) 27.38% 16.15%
- -------------------------------------------------------------------------------------------
Growth Composite Index(2,3) 20.09% 13.70%
- -------------------------------------------------------------------------------------------
S&P 500-Registered Trademark- Index 25.67% 25.03%
- -------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 0.53% 5.92%
- -------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 9/30/99. As of 9/30/99, the Portfolio's one-year and
since-inception average annual total returns were 26.17% and 14.70%,
respectively. Without fee waivers and guarantees, the one-year and
since-inception average annual total returns would have been 25.56% and 13.97%,
respectively, as of 9/30/99.
(1) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 10/31/99, the fund's one-year and
since-inception average annual returns would have been 26.84% and 15.43%.
(2) The Growth Composite Index is composed of Morningstar category averages and
cash equivalents as represented by the 90-day T-bill and is calculated using
the portfolio allocations: 35% large-cap, 20% small-cap, 25% foreign, 15%
bonds and 5% cash.
(3) As of 10/31/99 there were 2,173 large-cap funds, 852 small-cap funds, 657
foreign funds and 561 intermediate-term bond funds tracked by Morningstar.
Performance includes changes in price and reinvestment of dividends and
capital gains.
8
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO S&P 500 INDEX LEHMAN BROS. AGGREGATE BOND INDEX GROWTH COMPOSITE INDEX
<S> <C> <C> <C> <C>
11/18/96 $10,000 $10,000 $10,000 $10,000
11/30/96 $10,120 $10,271 $10,071 $10,144
12/31/96 $10,077 $10,068 $9,977 $10,120
1/31/97 $10,371 $10,696 $10,008 $10,363
2/28/97 $10,310 $10,780 $10,033 $10,325
3/31/97 $10,016 $10,338 $9,922 $10,064
4/30/97 $10,229 $10,955 $10,071 $10,221
5/31/97 $10,848 $11,621 $10,166 $10,854
6/30/97 $11,274 $12,141 $10,287 $11,268
7/31/97 $11,841 $13,106 $10,565 $11,848
8/31/97 $11,547 $12,372 $10,475 $11,518
9/30/97 $12,145 $13,049 $10,630 $12,103
10/31/97 $11,760 $12,613 $10,784 $11,655
11/30/97 $11,750 $13,197 $10,834 $11,705
12/31/97 $11,927 $13,424 $10,943 $11,818
1/31/98 $11,959 $13,573 $11,084 $11,904
2/28/98 $12,622 $14,552 $11,075 $12,581
3/31/98 $13,146 $15,297 $11,112 $13,074
4/30/98 $13,242 $15,452 $11,170 $13,202
5/31/98 $13,135 $15,186 $11,276 $12,987
6/30/98 $13,306 $15,802 $11,372 $13,131
7/31/98 $13,135 $15,635 $11,396 $12,914
8/31/98 $11,639 $13,377 $11,582 $11,293
9/30/98 $11,745 $14,235 $11,853 $11,587
10/31/98 $12,216 $15,392 $11,790 $12,166
11/30/98 $12,814 $16,325 $11,857 $12,737
12/31/98 $13,734 $17,265 $11,893 $13,316
1/31/99 $14,255 $17,987 $11,977 $13,531
2/28/99 $13,712 $17,427 $11,768 $13,050
3/31/99 $14,266 $18,124 $11,832 $13,409
4/30/99 $14,830 $18,826 $11,870 $13,948
5/31/99 $14,487 $18,381 $11,766 $13,744
6/30/99 $15,118 $19,402 $11,728 $14,368
7/31/99 $14,919 $18,796 $11,679 $14,302
8/31/99 $14,896 $18,702 $11,673 $14,203
9/30/99 $14,819 $18,190 $11,808 $14,141
10/31/99 $15,560 $19,341 $11,852 $14,610
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager Growth Portfolio, made at its inception, with similar
investments in the Growth Composite Index, the S&P 500-Registered Trademark-
Index and the Lehman Brothers Aggregate Bond Index. The hypothetical $10,000
investment assumes investment on the first day of the month following inception
and includes changes in share price and reinvestment of dividends and capital
gains. A detailed analysis of the respective performances of the Portfolios and
the indices is provided in the PORTFOLIO DISCUSSION section later in this
report.
THE INFORMATION PRESENTED 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.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 10/31/98 (000s) $151,854
- ----------------------------------------------------------------------
Total net assets as of 10/31/99 (000s) $180,602
- ----------------------------------------------------------------------
Percentage growth over reporting period 18.9%
- ----------------------------------------------------------------------
</TABLE>
9
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager Growth Portfolio seeks capital growth with less
volatility than a portfolio composed entirely of stock funds. The Portfolio
allocations will vary as the portfolio managers adjust the respective asset
mixes based on changing market conditions. The information below and on the
following page provides a snapshot of the Portfolio's characteristics as of
10/31/99, and is not indicative of its composition after that date. The terms
used below are defined on page 29. A complete list of the securities in the
Portfolio as of 10/31/99 is provided in the Schedule of Investments later in
this report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER PEER GROUP
GROWTH PORTFOLIO* AVERAGE++
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Number of Holdings 40** 131
- -----------------------------------------------------------------------------------------------------------------------
Median Market Cap ($ Mil) $35,682++ $45,601
- -----------------------------------------------------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 32.2++ 33.6
- -----------------------------------------------------------------------------------------------------------------------
Price/Book (P/B) Ratio 7.5++ 8.0
- -----------------------------------------------------------------------------------------------------------------------
12-Month Yield 1.45%++ 0.47%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 284% 75%
- -----------------------------------------------------------------------------------------------------------------------
Three-Year Beta N/A++ 0.95
- -----------------------------------------------------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.34%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. This information is for illustrative
purposes only and is not intended to show, predict or guarantee future
composition of the Portfolio.
** The Portfolio invests primarily in other funds, whereas most large-cap funds
invest primarily in individual securities.
+ Reflects a reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 2/29/00. Underlying funds also charge fees
and incur expenses.
++ Source: Morningstar. The peer group average is based on 2,173 large-cap
funds as tracked by Morningstar.
10
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ASSET MIX
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
Sector 2.0%
Short-Term Investments 5.4%
Bonds 7.2%
Small-Cap/Mid-Cap 22.9%
International 23.9%
Large Cap 38.6%
</TABLE>
<TABLE>
<CAPTION>
MIX AS OF TARGET MIX IN
10/31/99 NEUTRAL MARKETS
<S> <C> <C>
- ---------------------------------------------------
Stock Funds 87.50% 80.00%
- ---------------------------------------------------
Bond Funds 7.20% 15.00%
- ---------------------------------------------------
Short-Term Investments 5.50% 5.00%
- ---------------------------------------------------
Total 100% 100%
- ---------------------------------------------------
</TABLE>
TOP 10 HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
- -------------------------------------------
Marsico Focus Fund 9.97%
- -------------------------------------------
White Oak Growth Stock Fund 5.72%
- -------------------------------------------
Hotchkis & Wiley International Fund 4.68%
- -------------------------------------------
Janus Twenty Fund 4.31%
- -------------------------------------------
Janus Enterprise Fund 4.28%
- -------------------------------------------
Janus Mercury Fund 3.58%
- -------------------------------------------
- -------------------------------------------
Artisan International Fund 3.38%
- -------------------------------------------
Thornburg Value Fund, Class A 3.34%
- -------------------------------------------
Rydex Series Nova Fund 3.24%
- -------------------------------------------
American Century International
Growth Fund, Institutional Class 3.19%
- -------------------------------------------
</TABLE>
11
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
PORTFOLIO PERFORMANCE
TOTAL RETURNS FOR THE PERIODS ENDED 10/31/99
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
-----------------------------
SINCE INCEPTION
ONE YEAR (11/18/96)
<S> <C> <C>
- -------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER BALANCED PORTFOLIO(1) 21.28% 13.84%
- -------------------------------------------------------------------------------------------
Balanced Composite Index(2,3) 14.73% 11.90%
- -------------------------------------------------------------------------------------------
S&P 500-Registered Trademark- Index 25.67% 25.03%
- -------------------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index 0.53% 5.92%
- -------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 9/30/99. As of 9/30/99, the Portfolio's one-year and
since-inception average annual total returns were 20.26% and 12.78%,
respectively. Without fee waivers and guarantees, the one-year and
since-inception average annual total returns would have been 19.76% and 11.98%,
respectively, as of 9/30/99.
(1) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 10/31/99, the fund's one-year and
since-inception average annual returns would have been 20.75% and 13.05%.
(2) The Balanced Composite Index is composed of Morningstar category averages
and cash equivalents as represented by the 90-day T-bill and is calculated
using the portfolio allocations: 30% large-cap, 15% small-cap, 15% foreign,
35% bonds and 5% cash.
(3) As of 10/31/99 there were 2,173 large-cap funds, 852 small-cap funds, 657
foreign funds and 561 intermediate-term bond funds tracked by Morningstar.
Performance includes changes in price and reinvestment of dividends and
capital gains.
12
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO S&P 500 INDEX LEHMAN BROS. AGGREGATE BOND INDEX BALANCED COMPOSITE INDEX
<S> <C> <C> <C> <C>
11/18/96 $10,000 $10,000 $10,000 $10,000
11/30/96 $10,100 $10,271 $10,071 $10,134
12/31/96 $10,059 $10,068 $9,977 $10,088
01/31/97 $10,322 $10,696 $10,008 $10,296
02/28/97 $10,271 $10,780 $10,033 $10,268
03/31/97 $10,018 $10,338 $9,922 $10,030
04/30/97 $10,200 $10,955 $10,071 $10,195
05/31/97 $10,676 $11,621 $10,166 $10,694
06/30/97 $11,041 $12,141 $10,287 $11,028
07/31/97 $11,517 $13,106 $10,565 $11,546
08/31/97 $11,284 $12,372 $10,475 $11,291
09/30/97 $11,770 $13,049 $10,630 $11,758
10/31/97 $11,527 $12,613 $10,784 $11,481
11/30/97 $11,558 $13,197 $10,834 $11,544
12/31/97 $11,719 $13,424 $10,943 $11,657
01/31/98 $11,762 $13,573 $11,084 $11,748
02/28/98 $12,251 $14,552 $11,075 $12,249
03/31/98 $12,634 $15,297 $11,112 $12,616
04/30/98 $12,688 $15,452 $11,170 $12,720
05/31/98 $12,613 $15,186 $11,276 $12,580
06/30/98 $12,783 $15,802 $11,372 $12,728
07/31/98 $12,677 $15,635 $11,396 $12,560
08/31/98 $11,581 $13,377 $11,582 $11,407
09/30/98 $11,740 $14,235 $11,853 $11,729
10/31/98 $12,092 $15,392 $11,790 $12,147
11/30/98 $12,560 $16,325 $11,857 $12,595
12/31/98 $13,311 $17,265 $11,893 $13,053
01/31/99 $13,693 $17,987 $11,977 $13,243
02/28/99 $13,224 $17,427 $11,768 $12,827
03/31/99 $13,650 $18,124 $11,832 $13,117
04/30/99 $14,130 $18,826 $11,870 $13,518
05/31/99 $13,868 $18,381 $11,766 $13,346
06/30/99 $14,226 $19,402 $11,728 $13,788
07/31/99 $14,141 $18,796 $11,679 $13,699
08/31/99 $14,119 $18,702 $11,673 $13,611
09/30/99 $14,119 $18,190 $11,808 $13,584
10/31/99 $14,664 $19,341 $11,852 $13,936
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager Balanced Portfolio, made at its inception, with similar
investments in the Balanced Composite Index, the S&P 500-Registered Trademark-
Index and the Lehman Brothers Aggregate Bond Index. The hypothetical $10,000
investment assumes investment on the first day of the month following inception
and includes changes in share price and reinvestment of dividends and capital
gains. A detailed analysis of the respective performances of the Portfolios and
the indices is provided in the PORTFOLIO DISCUSSION section later in this
report.
THE INFORMATION PRESENTED 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.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 10/31/98 (000s) $ 92,794
- ----------------------------------------------------------------------
Total net assets as of 10/31/99 (000s) $121,781
- ----------------------------------------------------------------------
Percentage growth over reporting period 31.2%
- ----------------------------------------------------------------------
</TABLE>
13
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager Balanced Portfolio seeks capital growth and income with
less volatility than the Growth Portfolio. The Portfolio's allocation will vary
as the portfolio managers adjust the respective asset mixes based on changing
market conditions. The information below and on the following page provides a
snapshot of the Portfolio's characteristics as of 10/31/99, and is not
indicative of its composition after that date. The terms used below are defined
on page 29. A complete list of the securities in the Portfolio as of 10/31/99 is
provided in the Schedule of Investments later in this report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER PEER GROUP
BALANCED PORTFOLIO* AVERAGE++
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Number of Holdings 37** 230
- -----------------------------------------------------------------------------------------------------------------------
Median Market Cap ($ Mil) $27,686++ $31,733
- -----------------------------------------------------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 30.2++ 29.8
- -----------------------------------------------------------------------------------------------------------------------
Price/Book (P/B) Ratio 6.7++ 6.5
- -----------------------------------------------------------------------------------------------------------------------
12-Month Yield 2.27%++ 2.36%
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 244% 95%
- -----------------------------------------------------------------------------------------------------------------------
Three-Year Beta N/A++ 0.55
- -----------------------------------------------------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.31%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. This information is for illustrative
purposes only and is not intended to show, predict or guarantee future
composition of the Portfolio.
** The Portfolio invests primarily in other funds, whereas most domestic hybrid
funds invest primarily in individual securities.
+ Reflects a reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 2/29/00. Underlying funds also charge fees
and incur expenses.
++ Source: Morningstar. This information is as of 10/31/99. The peer group
average is based on 745 domestic hybrid funds as tracked by Morningstar.
14
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ASSET MIX
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
Large-Cap 28.69%
Bond 27.86%
Small-Cap/Mid-Cap 19.47%
International 16.32%
Short-Term Investments 5.72%
Sector 1.94%
</TABLE>
<TABLE>
<CAPTION>
MIX AS OF TARGET MIX IN
10/31/99 NEUTRAL MARKETS
<S> <C> <C>
- ---------------------------------------------------
Stock Funds 66.42% 60.00%
- ---------------------------------------------------
Bond Funds 27.86% 35.00%
- ---------------------------------------------------
Short-Term Investments 5.72% 5.00%
- ---------------------------------------------------
Total 100% 100%
- ---------------------------------------------------
</TABLE>
TOP 10 HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
- -------------------------------------------
PIMCO Total Return Fund,
Institutional Class 13.34%
- -------------------------------------------
Marsico Focus Fund 7.99%
- -------------------------------------------
Federated U.S. Government
Securities Fund, 2-5 Years,
Institutional Class 5.90%
- -------------------------------------------
White Oak Growth Stock Fund 5.15%
- -------------------------------------------
American Century Intermediate Term
Treasury Fund 4.97%
- -------------------------------------------
- -------------------------------------------
Janus Twenty Fund 4.29%
- -------------------------------------------
Melody 4500 Fund, L.P.(1) 3.75%
- -------------------------------------------
Hotchkis & Wiley International Fund 3.71%
- -------------------------------------------
Marsico Growth & Income Fund 3.50%
- -------------------------------------------
Thornburg Value Fund, Institutional
Class 3.34%
- -------------------------------------------
</TABLE>
(1) See Note 3 in the Notes to Financial Statements.
15
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO PERFORMANCE
TOTAL RETURNS FOR THE PERIODS ENDED 10/31/99
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS
-----------------------------
SINCE INCEPTION
ONE YEAR (9/16/97)
<S> <C> <C>
- -------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO(1) 30.38% 6.42%
- -------------------------------------------------------------------------------------------
Russell 2000-Registered Trademark- Index 14.87% (0.59)%
- -------------------------------------------------------------------------------------------
Average Small-Cap Fund(2) 24.90% 3.35%
- -------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 9/30/99. As of 9/30/99, the Portfolio's one-year and
since-inception average annual total returns were 30.28% and 4.73%,
respectively. Without fee waivers and guarantees, the one-year and
since-inception average annual total returns would have been 29.58% and 4.02%,
respectively, as of 9/30/99.
(1) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 10/31/99, the fund's one-year and
since-inception average annual returns would have been 29.71% and 5.71%
(2) Source: Morningstar, Inc. The small-cap fund category contains 852 funds as
of 10/31/99.
16
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
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
5/31/98 $10,359 $10,321
6/30/98 $10,411 $10,342
7/31/98 $9,896 $9,505
8/31/98 $8,271 $7,659
9/30/98 $8,435 $8,259
10/31/98 $8,754 $8,595
11/30/98 $9,238 $9,046
12/31/98 $9,946 $9,606
1/31/99 $10,101 $9,734
2/28/99 $9,563 $8,945
3/31/99 $10,029 $9,085
4/30/99 $10,773 $9,899
5/31/99 $10,752 $10,043
6/30/99 $11,311 $10,497
7/31/99 $11,228 $10,210
8/31/99 $10,938 $9,832
9/30/99 $10,990 $9,834
10/31/99 $11,414 $9,874
</TABLE>
The above 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. The hypothetical
$10,000 investment assumes investment on the first day of the month following
inception and includes changes in share price and reinvestment of dividends and
capital gains. A detailed analysis of the performances of the Portfolio and its
index is provided in the PORTFOLIO DISCUSSION section later in this report.
THE INFORMATION PRESENTED 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.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 10/31/98 (000s) $128,547
- ----------------------------------------------------------------------
Total net assets as of 10/31/99 (000s) $122,998
- ----------------------------------------------------------------------
Percentage change over reporting period (4.3)%
- ----------------------------------------------------------------------
</TABLE>
17
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager Small Cap Portfolio seeks long-term capital
appreciation. It invests primarily in small-company stock funds. The information
below and on the following page provides a snapshot of the Portfolio's
characteristics as of 10/31/99, and is not indicative of its composition after
that date. The terms used below are defined on page 29. A complete list of the
securities in the Portfolio as of 10/31/99 is provided in the Schedule of
Investments later in this report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER PEER GROUP
SMALL CAP PORTFOLIO* AVERAGE++
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Number of Holdings 24** 161
- --------------------------------------------------------------------------------------------------------------------
Median Market Cap ($ Mil) $757++ $822
- --------------------------------------------------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 26.3++ 26.6
- --------------------------------------------------------------------------------------------------------------------
Price/Book (P/B) Ratio 3.9++ 5.2
- --------------------------------------------------------------------------------------------------------------------
12-Month Yield 0.43%++ 0.17%
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 145% 94%
- --------------------------------------------------------------------------------------------------------------------
Three-Year Beta N/A++ 0.94
- --------------------------------------------------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.58%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. This information is for illustrative
purposes only and is not intended to show, predict or guarantee future
composition of the Portfolio.
** The Portfolio invests primarily in other funds, whereas most small-cap funds
invest primarily in individual securities.
+ Reflects a reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 2/29/00. Underlying funds also charge fees
and incur expenses.
++ Source: Morningstar. The peer group average is based on 852 small-cap funds
as tracked by Morningstar.
18
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ASSET MIX
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
Growth 27.15%
Value 30.09%
Blend 30.83%
Sector 5.08%
Short-Term Investments 6.86%
</TABLE>
TOP 10 HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
- -------------------------------------------
Melody 4500 Fund, L.P.(1) 14.64%
- -------------------------------------------
Weitz Series Hickory Fund 9.91%
- -------------------------------------------
Fremont U.S. Micro-Cap Fund 7.57%
- -------------------------------------------
Value Line Special Situations Fund 6.67%
- -------------------------------------------
Baron Small Cap Fund 6.57%
- -------------------------------------------
- -------------------------------------------
Turner Small Cap Growth Fund 6.53%
- -------------------------------------------
Accessor Small to Mid Cap Portfolio 6.27%
- -------------------------------------------
Longleaf Partners Reality Fund 5.69%
- -------------------------------------------
Berger Small Cap Value Fund 4.87%
- -------------------------------------------
Longleaf Partners Small Cap Fund 3.88%
- -------------------------------------------
</TABLE>
(1) See Note 3 in the Notes to Financial Statements.
19
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO PERFORMANCE
TOTAL RETURNS FOR THE PERIODS ENDED 10/31/99
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN
-----------------------------
SINCE INCEPTION
ONE YEAR (10/16/96)
<S> <C> <C>
- -------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO(1) 41.92% 17.25%
- -------------------------------------------------------------------------------------------
MSCI-EAFE-Registered Trademark- Index 26.89% 11.26%
- -------------------------------------------------------------------------------------------
Average Foreign Fund(2) 27.12% 12.66%
- -------------------------------------------------------------------------------------------
</TABLE>
National Association of Securities Dealers (NASD) regulations require that we
report performance data as of the most recent calendar quarter--in this case,
the quarter ended 9/30/99. As of 9/30/99, the Portfolio's one-year and
since-inception average annual total returns were 39.94%, and 15.71%,
respectively. Without fee waivers and guarantees, the one-year and
since-inception average annual total returns would have been 39.20% and 14.94%,
respectively, as of 9/30/99.
(1) A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, as of 10/31/99, the fund's one-year and
since-inception average annual returns would have been 41.21% and 16.48%.
(2) Source: Morningstar, Inc. The foreign fund category contains 657 funds as of
10/31/99.
20
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
SCHWAB 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
5/31/98 $13,265 $11,821
6/30/98 $13,157 $11,911
7/31/98 $13,525 $12,031
8/31/98 $11,654 $10,540
9/30/98 $11,006 $10,217
10/31/98 $11,438 $11,281
11/30/98 $12,011 $11,859
12/31/98 $12,481 $12,327
1/31/99 $12,820 $12,290
2/28/99 $12,415 $11,998
3/31/99 $12,853 $12,498
4/30/99 $13,815 $13,004
5/31/99 $13,170 $12,335
6/30/99 $14,428 $12,816
7/31/99 $14,985 $13,196
8/31/99 $15,248 $13,203
9/30/99 $15,401 $13,336
10/31/99 $16,232 $13,836
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
MarketManager International Portfolio, made at its inception, with a similar
investment in the Morgan Stanley Capital International Europe Australasia, Far
East (MSCI-EAFE)-Registered Trademark- Index. A detailed analysis of the
performances of the Portfolio and its index is provided in the PORTFOLIO
DISCUSSION section later in this report.
THE INFORMATION PRESENTED 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.
ASSETS
<TABLE>
<S> <C>
- ----------------------------------------------------------------------
Total net assets as of 10/31/98 (000s) $ 73,804
- ----------------------------------------------------------------------
Total net assets as of 10/31/99 (000s) $103,804
- ----------------------------------------------------------------------
Percentage change over reporting period 40.6%
- ----------------------------------------------------------------------
</TABLE>
21
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager International Portfolio offers broad diversification
with the convenience of a single investment. The Portfolio can be used to
fulfill all or part of the international equity component of your asset
allocation plan. The information below and on the following page provides a
snapshot of the Portfolio's characteristics as of 10/31/99, and is not
indicative of its composition after that date. The terms used below are defined
on page 29. A complete list of the securities in the Portfolio as of 10/31/99 is
provided in the Schedule of Investments later in this report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER PEER GROUP
INTERNATIONAL PORTFOLIO* AVERAGE++
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Number of Holdings 23** 163
- ---------------------------------------------------------------------------------------------------------------------------------
Median Market Cap ($ Mil) $11,358++ $16,886
- ---------------------------------------------------------------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 28.2++ 32.1
- ---------------------------------------------------------------------------------------------------------------------------------
Price/Book (P/B) Ratio 5.7++ 5.0
- ---------------------------------------------------------------------------------------------------------------------------------
12-Month Yield 0.90%++ 0.67%
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 249% 77%
- ---------------------------------------------------------------------------------------------------------------------------------
Three-Year Beta 0.65++ 0.68
- ---------------------------------------------------------------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.71%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. This information is not intended to
show, predict or guarantee future composition of the Portfolio. WEBS Germany
Index Series was not included when compiling Portfolio Facts because
information was not available.
** The Portfolio invests primarily in other funds, whereas most foreign funds
invest primarily in individual securities.
+ Reflects a reduction by the Investment Adviser and Schwab, which is
guaranteed through at least 2/29/00. Underlying funds also charge fees and
incur expenses.
++ Source: Morningstar. The peer group average is based on 657 foreign funds as
tracked by Morningstar.
22
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ASSET MIX
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
International Diversified Mutual Funds 77.34%
Asian Regional Mutual Funds 11.53%
Short-Term Investments 6.96%
European Regional Mutual Funds 4.17%
</TABLE>
TOP FIVE COUNTRIES
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
- -------------------------------------------
Japan 26.87%
- -------------------------------------------
United Kingdom 10.57%
- -------------------------------------------
Germany 6.79%
- -------------------------------------------
France 6.61%
- -------------------------------------------
Canada 4.21%
- -------------------------------------------
</TABLE>
REGIONAL DIVERSIFICATION
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
- -------------------------------------------
Developed Europe(1) 40.41%
- -------------------------------------------
Developed Pacific(2) 34.57%
- -------------------------------------------
Short-Term Investments 11.53%
- -------------------------------------------
Emerging Markets 5.55%
- -------------------------------------------
- -------------------------------------------
Canada 4.21%
- -------------------------------------------
United States 2.31%
- -------------------------------------------
Other Countries 1.42%
- -------------------------------------------
Total 100%
- -------------------------------------------
</TABLE>
TOP 10 HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<TABLE>
<S> <C>
- -------------------------------------------
Janus Overseas Fund 10.64%
- -------------------------------------------
Scudder Japan Fund 8.66%
- -------------------------------------------
Federated International Equity Fund 8.56%
- -------------------------------------------
Artisan International Fund 8.48%
- -------------------------------------------
Pilgrim International Small Cap
Growth Fund, Class Q 7.98%
- -------------------------------------------
- -------------------------------------------
Federated International Small
Company Fund 5.99%
- -------------------------------------------
William Blair International Growth
Fund 5.62%
- -------------------------------------------
Driehaus International Growth Fund 4.81%
- -------------------------------------------
Northstar International Value Fund 4.76%
- -------------------------------------------
American Century International
Growth Fund, Institutional Class 4.73%
- -------------------------------------------
</TABLE>
(1) Developed Europe includes the following countries: Austria, Belgium,
Denmark, Finland, Germany, Ireland, Italy, Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland and the United Kingdom.
(2) Developed Pacific includes the following countries: Australia, China/Hong
Kong, Indonesia, Japan, Malaysia, New Zealand, Singapore and Thailand.
23
<PAGE>
PORTFOLIO MANAGEMENT
THE PORTFOLIO MANAGEMENT TEAM
CYNTHIA LIU--vice president and senior portfolio manager, is the portfolio
manager of the MarketManager International and Small-Cap Portfolios and
co-portfolio panager of the Growth and Balanced Portfolios. Cynthia joined CSIM
in July 1996. Prior to joining CSIM, 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. Cynthia holds a B.A. in economics
from National Cheng-chi University in Taiwan and is a Chartered Financial
Analyst (CFA).
JEFF MORTIMER--vice president and senior portfolio manager, is co-portfolio
manager of the MarketManager Growth and Balanced Portfolios. Jeff joined CSIM in
November 1997. Prior to joining CSIM Jeff was employed by Higgins Associates,
where he was Chief Investment Officer, 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. Finance from Babson College, and is a Chartered Financial
Analyst (CFA).
24
<PAGE>
PORTFOLIO DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
MARKETMANAGER GROWTH AND BALANCED PORTFOLIOS
Q. HOW DID THE FUNDS PERFORM DURING THE ONE-YEAR REPORTING PERIOD?
A. The Growth and Balanced Portfolios produced total returns of 27.38% and
21.28%, respectively for the one-year reporting period ended October 31, 1999.
As shown on the preceding pages, both portfolios achieved returns that were
significantly greater than their respective composite indices. Additionally,
both portfolios have achieved inception-to-date total returns (from 11/18/96) in
excess of their respective composite indices.
Q. WHICH ASSET CLASSES PERFORMED WELL FOR THE PORTFOLIOS?
A. During the reporting period large capitalization growth stocks were the top
performing asset class, as this asset class continued to build upon its lead
which began several years ago. Large capitalization value stock funds performed
well in the second quarter of calendar year 1999, but otherwise have been
dominated by the large capitalization growth stocks.
<TABLE>
<CAPTION>
ONE-YEAR
RETURN AS OF
ASSET CLASS INDEX(1) 10/31/99
<S> <C> <C>
- ------------------------------------------------------------------------------------------------
S&P
500-Registered Trademark-
Large-Cap Stocks Index 25.67%
- ------------------------------------------------------------------------------------------------
Russell
2000-Registered Trademark-
Small-Cap Stocks Index 14.87%
- ------------------------------------------------------------------------------------------------
MSCI-EAFE-Registered Trademark-
International Stocks Index 23.03%
- ------------------------------------------------------------------------------------------------
Lehman Brothers
Bonds Aggregate Bond Index 0.53%
- ------------------------------------------------------------------------------------------------
Three-Month Treasury
Cash Bill 4.73%
- ------------------------------------------------------------------------------------------------
</TABLE>
Q. WHICH UNDERLYING FUNDS PERFORMED PARTICULARLY WELL FOR THE PORTFOLIOS?
A. Those mutual funds that focused their investments in the strongest areas of
the market fared the best during the reporting period. Focusing on the
technology sector also increased returns. As such, the strongest funds included
Janus Twenty, Janus Mercury, Marsico Focus, White Oak, and Marsico Growth and
Income. In the small/ mid capitalization area, Baron Small Cap and Thornburg
Value funds performed well. Internationally, Artisan International and American
Century International Growth performed well.
(1) The S&P Index is composed of 500 large-company common stocks representing
key industries, including many from the most recognizable companies in the
United States. The Russell 2000 consisted of the smallest 2000 companies in
the Russell 3000 Index (largest 3000 companies), representing approximately
7% of the total market capitalization. MSCI EAFE (refers to Europe,
Australasia, and Far East) is widely accepted as a benchmark for internation
stock performance, the EAFE Index is an aggregate of 21 individual country
indexes that collectivley represent many of the major markets of the world.
The Lehman Brother Aggregate Bond Index includes fixed-rate debt issues
rated investment grade or higher.
Small capitalization growth stock funds and international stock funds had
positive returns for the period, but were again overshadowed by large cap
growth. The primary reason for the difference in performance among these
asset classes was the continued strong performance in the technology sector
during the reporting period. The table summarizes the one-year returns of
several major asset classes.
25
<PAGE>
PORTFOLIO DISCUSSION (continued)
Q. HOW DID THE PORTFOLIOS' STRATEGIES CHANGE DURING THE REPORTING PERIOD?
RELATIVE TO THEIR NEUTRAL TARGETS, HOW WERE THE PORTFOLIOS POSITIONED AT THE
CLOSE OF THE REPORTING PERIOD?
A. The overall strategy of the Portfolios changed little over the reporting
period. Large capitalization mutual funds remained overweighted throughout the
period, small capitalization and international mutual funds were slightly
underweighted throughout most of the period.
At the close of the reporting period, the Portfolios were overweight in equity
mutual funds relative to their benchmarks, underweight in fixed income, and
slightly overweight in cash. Within the equity component of the asset
allocation, the Portfolios were overweight in large capitalization stock mutual
funds, near neutral in small cap mutual funds, and slightly underweight in
international funds.
The charts below show the two Portfolios' actual asset mixes during the
reporting period. The cash holdings shown include both the actual cash holdings
of the Portfolios as well as the cash holdings of the underlying funds.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
ACTUAL ASSET MIX: 10/31/98-10/31/99
<S> <C> <C> <C> <C> <C>
Cash International Equity Large Cap Equity Bonus Small-Cap Equity
10/98 6.19% 17.84% 52.34% 9.92% 13.71%
11/98 7.29% 19.96% 54.81% 8.18% 9.76%
12/98 2.77% 19.85% 52.93% 11.63 12.82%
1/99 6.08% 20.07% 47.47% 11.54 14.84%
2/99 8.63% 19.90% 46.09% 11.97 13.41%
3/99 4.24% 18.81% 51.87% 12.22 12.85%
4/99 7.25% 21.18% 44.09% 8.83% 18.65%
5/99 12.34% 18.56% 38.56% 9.71% 20.83%
6/99 5.34% 17.75% 45.69% 10.32 20.90%
7/99 6.54% 20.57% 41.38% 10.50 21.01%
8/99 5.83% 23.90% 41.86% 7.95% 20.46%
9/99 7.74% 24.21% 38.66% 7.51% 21.88%
10/99 5.50% 23.90% 40.54% 7.20% 22.86%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
ACTUAL ASSET MIX: 10/31/98-10/31/99
<S> <C> <C> <C> <C> <C>
Cash International Equity Large-Cap Equity Bonds Small-Cap Equity
10/98 7.15% 10.10% 40.77% 28.70% 13.28%
11/98 5.60% 11.15% 42.98% 30.97% 9.30%
12/98 3.98% 10.96% 42.64% 31.00% 11.42%
1/99 4.70% 13.03% 37.71% 32.44% 12.12%
2/99 7.93% 11.51% 35.13% 32.27% 13.16%
3/99 3.60% 11.36% 39.80% 33.04% 12.20%
4/99 6.68% 14.41% 33.26% 29.66% 15.99%
5/99 10.49% 12.11% 27.82% 30.58% 19.00%
6/99 4.03% 12.38% 34.59% 30.44% 18.56%
7/99 3.86% 12.57% 34.74% 30.40% 18.43%
8/99 4.82% 15.59% 33.06% 28.19% 18.34%
9/99 5.21% 16.55% 29.21% 29.12% 19.91%
10/99 5.77% 16.33% 30.58% 27.85% 19.47%
</TABLE>
Q. CAN YOU SHARE A FEW EXAMPLES OF ANY NEW FUNDS THE PORTFOLIOS PURCHASED DURING
THE PERIOD, AND WHY?
A. Two funds purchased during the period were Marsico Focus and Janus Mercury
Funds. These funds were purchased because of their managers' historical ability
to participate during large cap growth rallies.
26
<PAGE>
Marsico Focus is a large capitalization growth fund with some exposure to the
technology sector. Marsico, however, can change the portfolio if other
opportunities present themselves. Janus Mercury is also a large cap growth
mutual fund with some internet exposure. Both these funds should remain in the
portfolio if markets continue to be led by large capitalization growth stocks.
SMALL-CAP PORTFOLIO
Q. HOW DID THE PORTFOLIO PERFORM DURING THE REPORTING PERIOD?
A. The Portfolio achieved a total return of 30.38% for the one-year reporting
period ended October 31, 1999, comparing very favorably to the average small
capitalization mutual fund, which returned 24.90% and the Russell 2000 Index
which was up 14.87%. Although the Portfolio performed better than the
S&P 500-Registered Trademark- Index, small capitalization stocks as a group
continued to trail their large capitalization counterparts which were up 25.67%
as measured by the S&P 500 Index.
Q. WHICH UNDERLYING FUNDS PERFORMED PARTICULARLY WELL FOR THE PORTFOLIO?
A. Turner Small Cap was a particularly strong performer for the period, mainly
due to its large technology exposure. Other funds that added to the strong
relative return of the Portfolio included Baron Small Cap and Weitz Hickory
Funds. The reason for these two funds' strong performance was primarily superior
stock selection by their managers.
Q. HOW DID THE PORTFOLIO'S STRATEGY CHANGE DURING THE REPORTING PERIOD, AND HOW
WAS THE PORTFOLIO POSITIONED AT THE CLOSE OF THE PERIOD?
A. The Portfolio did not change significantly during the reporting period, as
the strategy put in place at the start served the Portfolio well during these
past twelve months. Toward the end of the reporting period, however, the
Portfolio did add some mutual funds that focus more on the growth side of the
spectrum in order to take advantage of the strong market in that style.
Q. CAN YOU SHARE A COUPLE OF EXAMPLES OF NEW FUNDS PURCHASED DURING THE PERIOD,
AND WHY?
A. To increase our small cap and mid cap growth exposure, two of the funds added
during the period were Red Oak Technology and Turner Small Cap Growth Funds. Red
Oak Technology is an aggressive growth fund purchasing companies with high
growth rates and a strong potential going forward, according to the fund's
manager. Turner Small Cap Growth Fund also purchases growth companies, but will
stay sector neutral to its benchmark, attempting to add value through stock
selection only. Both funds performed well for the reporting period.
INTERNATIONAL PORTFOLIO
Q. HOW DID THE PORTFOLIO PERFORM DURING THE REPORTING PERIOD?
A. The Portfolio achieved a total return of 41.92% for the one-year reporting
period ended October 31, 1999, comparing very favorably to the average Foreign
mutual fund, which returned 27.12% and the MSCI-EAFE Index which was up 23.03%.
Although the
27
<PAGE>
PORTFOLIO DISCUSSION (continued)
Portfolio performed better than the S&P 500 Index, International stocks as a
group continued to trail their large capitalization counterparts which were up
25.67% as measured by the S&P 500 Index.
Q. WHICH SECTORS OR REGIONS PERFORMED WELL FOR THE PORTFOLIO?
A. There were many strong sectors of the international market over the past
twelve months, as the world seemed to get back on track after a difficult late
summer and early autumn of 1998. The strongest regions were those that had been
generally the hardest hit during the Asian crisis, and include such countries as
Japan, Hong Kong, Singapore, and New Zealand (refer to the individual country
returns in the Market Overview section). Another country that did well that is
outside this region was Finland. The Portfolio had about 25-35% of its assets
invested in the Pacific region, allowing it to capture much of the returns
offered there.
Q. WHAT IMPACT DID CURRENCY EXCHANGE RATES HAVE ON THE PERFORMANCE OF
INTERNATIONAL EQUITIES AND THE PORTFOLIO?
A. Over the period, the general trend of foreign currencies was to weaken vs.
the dollar, although the Yen/Dollar relationship was volatile over the period,
as the dollar has weakened against the yen late in the reporting period. The
Euro has weakened against the dollar since its inception on January 1, 1999. A
strengthening dollar generally hurts portfolio returns, however, strong foreign
markets were more than able to offset this slight negative influence. The rally
of the yen late in the reporting period served to increase the Japanese returns
when converted to US dollars, benefiting shareholders.
Q. HOW DID THE PORTFOLIO'S STRATEGY CHANGE DURING THE REPORTING PERIOD, AND HOW
WAS THE PORTFOLIO POSITIONED VERSUS ITS BENCHMARK AT THE CLOSE OF THE PERIOD?
A. During the reporting period, the Portfolio's European weighting was decreased
slightly, in favor of the developed Pacific region and emerging markets. As the
Pacific region rallied, however, profits were taken and moved back to the
European markets. Small company exposure was also increased over the reporting
period, as the Portfolio attempted to take advantage of the relative values
offered by this category. For most of the reporting period, the Portfolio was
overweighted in European and small company stocks relative to the MSCI-EAFE
Index, with the Pacific region carrying about an index weight.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
ACTUAL ASSET MIX: 10/31/98-10/31/99
<S> <C> <C> <C> <C> <C>
Canada Developed Europe Other Countries Developed Pacific Emerging Markets
10/98 0.91% 60.55% 0.46% 24.68% 4.77%
11/98 0.84% 60.37% 0.95% 24.86% 4.17%
12/98 1.56% 66.35% 0.97% 22.90% 3.28%
1/99 2.14% 66.61% 1.17% 21.35% 2.93%
2/99 2.65% 64.82% 1.06% 21.08% 3.42%
3/99 2.87% 51.48% 0.86% 31.85% 8.54%
4/99 1.91% 43.70% 1.39% 37.02% 8.94%
5/99 2.76% 43.38% 1.19% 33.89% 7.85%
6/99 2.03% 41.65% 1.41% 39.68% 7.07%
7/99 2.47% 43.62% 1.29% 35.42% 7.50%
8/99 3.17% 45.62% 1.35% 33.94% 6.75%
9/99 4.41% 42.50% 1.31% 34.64% 6.69%
10/99 4.21% 40.41% 1.42% 34.57% 5.55%
<CAPTION>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
ACTUAL ASSET MIX: 10/31/98-10/31/99
<S> <C> <C>
Cash USA
10/98 6.28% 2.35%
11/98 6.15% 2.66%
12/98 4.23% 0.71%
1/99 4.62% 1.18%
2/99 6.03% 0.94%
3/99 3.14% 1.27%
4/99 5.79% 1.24%
5/99 8.93% 2.00%
6/99 6.55% 1.61%
7/99 7.87% 1.83%
8/99 6.13% 3.04%
9/99 7.94% 2.50%
10/99 11.53% 2.31%
</TABLE>
28
<PAGE>
GLOSSARY
ASSET ALLOCATION--The division of holdings among different types of assets, such
as domestic stocks, international stocks, bonds and cashequivalent securities.
BETA--A measure of a stock's volatility relative to the overall stock market.
The beta of the S&P 500-Registered Trademark- Index is 1. Any investment that is
more volatile than the market as a whole has a beta value higher than 1. If the
beta is less than 1, the investment is considered to be less volatile than the
market.
CAPITAL GAIN (LOSS)--When a stock is sold for a profit, the difference between
the net sales price and its net purchase price, or cost basis, is a capital
gain. If a stock is sold below cost, the difference is a capital loss.
EARNINGS GROWTH RATE--The average annual rate of growth in earnings over the
past five years for the stocks in a fund's portfolio.
EARNINGS PER SHARE (EPS)--The net income (or earnings) of a company for the past
12 months divided by the current number of shares outstanding.
EXPENSE RATIO--Amount, expressed as a percentage of total investment, that
shareholders pay annually for mutual fund operating expenses and management
fees.
MARKET CAPITALIZATION--The dollar value of a company or the amount someone would
pay to buy the company today. It is calculated by multiplying the total number
of outstanding shares by the current price per share. Median market cap is the
midpoint of a fund's total market capitalization, weighted by the portion of
assets invested in each holding. As a result, half of the fund's holdings will
have market caps above the median, and the rest below it.
NET ASSET VALUE (NAV)--The market value of a fund share.
PRICE/BOOK (P/B) RATIO--Compares a stock's market value with the value of total
assets minus intangible assets and total liabilities (the book value). It is
determined by dividing the current price of the stock by common stockholder
equity per share. In evaluating stocks, comparing P/B ratios often works well in
situations where price/earnings ratios do not, because the P/B ratio is stable
over time and is always a positive number. P/B ratios are best used for
comparisons within an industry rather than between industries, as certain
industries will usually contain stocks that have all high or all low P/B ratios.
For mutual funds the P/B ratio is the weighted average of all the stocks' P/B
ratios in the portfolio.
PRICE/EARNINGS (P/E) RATIO--The ratio of a company's stock price to its earnings
per share over the past year. For mutual funds the P/E ratio is the weighted
average of all the stocks' P/E ratios in the mutual fund's portfolio. The P/E is
an indicator of market expectations about a company's prospects. Typically, the
higher the P/E, the greater the expectations for a company's future growth.
Because earnings are volatile and sometimes "negative," however, the P/E has its
limitations and may fail as a measure for a significant number of stocks at any
given time.
RETURN ON EQUITY--The average annual rate of return generated by the companies a
fund holds during the past five years for each dollar of shareholders' equity
(net income divided by shareholders' equity).
STOCK--A share of ownership, or equity, in a corporation.
29
<PAGE>
GLOSSARY (continued)
TOTAL RETURN--The sum of dividends, plus capital gains (or losses).
TURNOVER RATE--An indication of a fund's trading activity. Funds with higher
turnover rates typically incur higher transaction costs and are more likely to
distribute capital gains, which are taxable to investors.
YIELD--The income generated by an investment, expressed as a percentage of its
price.
30
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1999
NUMBER VALUE
OF SHARES (000S)
--------- --------
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 94.6%
- --------------------------------------------------------------------------------
ASIAN FUNDS -- 4.5%
- --------------------------------------------------------------------------------
Scudder Japan Fund+ 245,082 $ 3,885
Warburg Pincus Japan Small
Company Fund+ 232,668 4,330
-------
8,215
-------
- --------------------------------------------------------------------------------
BOND FUNDS -- 7.2%
- --------------------------------------------------------------------------------
American Century Intermediate
Term Treasury Fund 483,757 4,900
American Century Long Term
Treasury Fund 223,750 2,132
Federated U.S. Government
Securities Fund, 1-3 Years,
Institutional Shares 83,582 868
PIMCO Total Return Fund,
Institutional Class 509,656 5,117
-------
13,017
-------
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK FUNDS -- 19.4%
- --------------------------------------------------------------------------------
American Century International
Growth Fund, Institutional Class 509,106 5,758
Artisan International Fund+ 291,820 6,105
Federated International Small
Company Fund 87,136 2,519
Hotchkis & Wiley
International Fund 322,745 8,453
Morgan Stanley Institutional
International Equity
Portfolio 224,735 4,546
Northstar International Value
Fund 180,600 2,664
Oakmark International Fund 351,442 4,969
-------
35,014
-------
NUMBER VALUE
OF SHARES (000S)
--------- --------
- --------------------------------------------------------------------------------
LARGE-CAP FUNDS -- 38.6%
- --------------------------------------------------------------------------------
Accessor Value & Income Portfolio 96,198 $ 2,128
American Century Income &
Growth Fund, Institutional Class 164,073 5,193
Brinson U.S. Equity Fund, Class A 138,303 2,549
Heritage Capital Appreciation
Fund, Class A 42,756 1,280
Janus Mercury Fund 181,406 6,465
Janus Twenty Fund 111,667 7,784
Longleaf Partners Fund 17,133 436
Marsico Focus Fund+ 970,813 18,009
Marsico Growth & Income Fund+ 294,865 5,157
Rydex Series Nova Fund 157,903 5,857
Rydex Series Trust OTC Fund 76,441 4,533
White Oak Growth Stock Fund+ 193,964 10,334
-------
69,725
-------
- --------------------------------------------------------------------------------
SECTOR FUNDS -- 2.0%
- --------------------------------------------------------------------------------
T. Rowe Price New Era Fund 150,836 3,542
-------
3,542
-------
- --------------------------------------------------------------------------------
SMALL-CAP / MID-CAP FUNDS -- 22.9%
- --------------------------------------------------------------------------------
Baron Small Cap Fund+ 243,364 3,422
Berger Small Cap Value Fund 92,464 1,916
BT Investment Small Cap Fund 193,281 4,347
Janus Enterprise Fund 131,981 7,739
Loomis Sayles Small Cap
Growth Fund+ 57,705 1,090
Melody 4500 Fund, L.P.+** 419,711 4,789
Riggs Small Company
Stock Fund+ 90,090 941
Robertson Stephens Mid Cap
Opportunities Fund 206,637 3,548
Thornburg Value Fund, Class A 215,874 6,025
Thornburg Value Fund,
Institutional Class 159,448 4,460
Weitz Series Hickory Fund 79,266 3,015
-------
41,292
-------
TOTAL INVESTMENT FUNDS
(Cost $148,662) 170,805
-------
31
<PAGE>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
October 31, 1999
Number Value
of Shares (000s)
--------- -------
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 5.4%
- -------------------------------------------------------------------------------
Cayman Time Deposit
4.75%*, 11/01/99 504,816 $ 505
Morgan Guaranty London
Time Deposit
4.75%*, 11/01/99 5,000,000 5,000
Rydex U.S. Government
Money Market Fund 4.45%* 4,316,407 4,316
--------
TOTAL SHORT-TERM INVESTMENTS
(Cost $9,821) 9,821
--------
TOTAL INVESTMENTS -- 100.0%
(Cost $158,483) 180,626
--------
OTHER ASSETS AND LIABILITIES, NET--0.0%
Other assets 205
Liabilities (229)
--------
(24)
--------
TOTAL NET ASSETS-- 100.0% $180,602
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
32
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1999
Number Value
of Shares (000s)
--------- ------
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 94.3%
- --------------------------------------------------------------------------------
ASIAN FUNDS -- 4.5%
- --------------------------------------------------------------------------------
Scudder Japan Fund+ 166,486 $ 2,639
Warburg Pincus Japan Small
Company Fund+ 155,496 2,894
-------
5,533
-------
- --------------------------------------------------------------------------------
BOND FUNDS -- 27.9%
- --------------------------------------------------------------------------------
American Century Intermediate
Term Treasury Fund 597,531 6,053
American Century Long Term
Treasury Fund 221,816 2,114
Federated U.S. Government
Securities Fund, 1-3 Years,
Institutional Shares 224,662 2,332
Federated U.S. Government
Securities Fund, 2-5 Years,
Institutional Shares 684,338 7,179
PIMCO Total Return Fund,
Institutional Class 1,618,548 16,250
--------
33,928
--------
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK FUNDS -- 11.8%
- --------------------------------------------------------------------------------
Artisan International Fund+ 136,362 2,853
Federated International Small
Company Fund 63,959 1,849
Hotchkis & Wiley
International Fund 172,486 4,517
Northstar International Value
Fund 121,097 1,786
Oakmark International Fund 235,936 3,336
--------
14,341
--------
Number Value
of Shares (000s)
--------- --------
- --------------------------------------------------------------------------------
LARGE-CAP FUNDS -- 28.7%
- --------------------------------------------------------------------------------
Accessor Value & Income Portfolio 40,843 $ 904
American Century Income &
Growth Fund, Institutional Class 36,404 1,152
Brinson U.S. Equity Fund, Class A 58,474 1,078
Heritage Capital Appreciation
Fund, Class A 42,756 1,280
Janus Mercury Fund 38,656 1,378
Janus Twenty Fund 74,925 5,223
Longleaf Partners Fund 22,044 562
Marsico Focus Fund+ 524,373 9,727
Marsico Growth & Income Fund+ 243,420 4,257
Rydex Series Nova Fund 83,711 3,105
White Oak Growth Stock Fund+ 117,684 6,270
--------
34,936
--------
- --------------------------------------------------------------------------------
SECTOR FUNDs -- 1.9%
- --------------------------------------------------------------------------------
T. Rowe Price New Era Fund 100,630 2,363
--------
2,363
--------
- --------------------------------------------------------------------------------
SMALL-CAP / MID-CAP FUNDS-- 19.5%
- --------------------------------------------------------------------------------
Baron Small Cap Fund+ 187,183 2,632
Berger Small Cap Value Fund 46,232 958
BT Investment Small Cap Fund 78,711 1,770
Janus Enterprise Fund 56,002 3,284
Loomis Sayles Small Cap
Growth Fund+ 37,338 705
Melody 4500 Fund, L.P.+** 400,000 4,564
Robertson Stephens Mid Cap
Opportunities Fund 100,187 1,720
Thornburg Value Fund, Class A 77,226 2,155
Thornburg Value Fund,
Institutional Class 145,456 4,068
Weitz Series Hickory Fund 48,836 1,857
--------
23,713
--------
TOTAL INVESTMENT FUNDS
(Cost $105,224) 114,814
--------
33
<PAGE>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
SCHEDULE OF INVESTMENTS (continued)
October 31, 1999
Number Value
of Shares (000s)
--------- ---------
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 5.7%
- -----------------------------------------------------------------------------
Republic National Bank
Time Deposit
4.75%*, 11/01/99 2,000,000 $ 2,000
Morgan Guaranty London
Time Deposit
4.75%*, 11/01/99 1,608,751 1,609
Rydex U.S. Government
Money Market Fund 4.45%* 3,357,723 3,358
--------
TOTAL SHORT-TERM INVESTMENTS
(Cost $6,967) 6,967
--------
TOTAL INVESTMENTS -- 100.0%
(Cost $112,191) 121,781
--------
OTHER ASSETS AND LIABILITIES, NET -- 0.0%
Other assets 111
Liabilities (111)
--------
--
--------
TOTAL NET ASSETS -- 100.0% $121,781
========
See accompanying Notes to Schedules of Investments and Notes to Financial
Statements.
34
<PAGE>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS
October 31, 1999
Number Value
of Shares (000s)
--------- --------
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 94.7%
- --------------------------------------------------------------------------------
SECTOR FUNDS -- 5.2%
- --------------------------------------------------------------------------------
Excelsior Energy & Natural
Resources Fund 116,340 $ 1,428
Red Oak Technology Select
Fund+ 290,757 4,925
-------
- --------------------------------------------------------------------------------
6,353
-------
- --------------------------------------------------------------------------------
SMALL-CAP / MID-CAP FUNDS -- 89.5%
- --------------------------------------------------------------------------------
Accessor Small to Mid Cap
Portfolio 302,158 7,847
Baron Small Cap Fund+ 584,454 8,217
Berger Small Cap Value Fund 294,258 6,097
Brazos Micro Cap Growth Fund 153,405 2,482
Fremont U.S. Micro-Cap Fund 333,884 9,469
Fremont U.S. Small Cap Fund 30,657 483
Longleaf Partners Realty Fund 533,398 7,116
Longleaf Partners Small Cap
Fund 215,037 4,853
Loomis Sayles Small Cap
Growth Fund+ 42,906 811
Melody 4500 Fund, L.P.+** 1,605,081 18,314
PBHG Small Cap Value Fund 141,908 1,859
Pin Oak Aggressive Stock Fund 92,241 3,860
Robertson Stephens Diversified
Growth Fund, Class A 152,293 4,078
Scudder Micro Cap Fund 137,093 1,967
Turner Small Cap Growth Fund+ 217,304 8,168
Value Line Special Situations
Fund 377,687 8,343
Van Wagoner Micro Cap Fund+ 151,717 3,805
Weitz Series Hickory Fund 326,098 12,402
--------
110,171
--------
TOTAL INVESTMENT FUNDS
(Cost $103,801) 116,524
--------
Number Value
of Shares (000s)
--------- -------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 7.0%
- --------------------------------------------------------------------------------
CaymanTime Deposit
4.75%*, 11/01/99 2,575,558 $ 2,576
First National Bank of Chicago
Time Deposit
4.75%*, 11/01/99 2,000,000 2,000
Republic National Bank
Time Deposit
4.75%*, 11/01/99 2,000,000 2,000
Morgan Guaranty London
Time Deposit
4.75%*, 11/01/99 2,000,000 2,000
--------
Total Short-Term Investments
(Cost $8,576) 8,576
--------
Total Investments -- 101.7%
(Cost $112,377) 125,100
--------
OTHER ASSETS AND Liabilities, NET -- (1.7%)
Other assets 115
Liabilities (2,217)
--------
(2,102)
--------
TOTAL NET ASSETS -- 100.0% $122,998
========
SEE ACCOMPANYING NOTES TO SCHEDULES OF INVESTMENTS AND NOTES TO FINANCIAL
STATEMENTS.
35
<PAGE>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
SCHEDULE OF INVESTMENTS
October 31, 1999
Number Value
of Shares (000s)
--------- ---------
- --------------------------------------------------------------------------------
INVESTMENT FUNDS -- 96.3%
- --------------------------------------------------------------------------------
Asian Funds -- 12.0%
Colonial Newport Japan Fund+ 49,616 $ 1,031
Colonial Newport Tiger Fund,
Class A 197,407 2,049
Scudder Japan Fund+ 586,682 9,299
--------
12,379
--------
- --------------------------------------------------------------------------------
EUROPEAN FUNDS -- 4.3%
- --------------------------------------------------------------------------------
Legg Mason Europe Fund,
Class A 114,477 2,933
WEBS-Germany Index Series 70,470 1,550
--------
4,483
--------
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK FUNDS -- 80.0%
- --------------------------------------------------------------------------------
American Century International
Discovery Fund,
Institutional Class 392,487 4,965
American Century International
Growth Fund, Institutional
Class 448,902 5,077
Artisan International Fund+ 435,100 9,102
Driehaus International
Growth Fund 348,971 5,165
Federated International
Equity Fund 380,371 9,194
Federated International Small
Company Fund 222,583 6,435
Icon North Europe Region Fund 50,632 606
Ivy International Fund, Class A 44,607 1,995
Janus Overseas Fund 451,256 11,430
Montgomery Global Long-
Short Fund 103,105 2,346
Number Value
of Shares (000s)
--------- ---------
Northstar International Value
Fund 346,371 $ 5,109
Oakmark International Fund 141,822 2,005
Pilgrim International Small Cap
Growth Fund, Class Q 270,106 8,570
SoGen Overseas Fund+ 360,643 5,035
William Blair International
Growth Fund 284,408 6,032
-------
83,066
-------
TOTAL INVESTMENT FUNDS
(Cost $82,206) 99,928
-------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 7.2%
- --------------------------------------------------------------------------------
CaymanTime Deposit
4.75%*, 11/01/99 3,471,421 $ 3,471
Republic National Bank
Time Deposit
4.75%*, 11/01/99 2,000,000 2,000
Morgan Guaranty London
Time Deposit
4.75%*, 11/01/99 2,000,000 2,000
-------
Total Short-Term Investments
(Cost $7,471) 7,471
--------
Total Investments -- 103.5%
(Cost $89,677) 107,399
--------
OTHER ASSETS AND LIABILITIES, NET -- (3.5%)
Other assets 373
Liabilities (3,968)
--------
(3,595)
--------
TOTAL NET ASSETS -- 100.0% $103,804
========
NOTES TO SCHEDULES OF INVESTMENTS
October 31, 1999
+ Non-income producing security.
* Interest rate represents the yield on report date.
** See Note 3 of Notes to Financial Statements.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
October 31, 1999
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(TM)
-------------------------------------
Growth Balanced Small Cap International
--------- ---------- ------------ ------------
ASSETS
Investments, at value (Cost: $158,483,
<S> <C> <C> <C> <C>
$112,191, $112,377, and $89,677, respectively) $180,626 $121,781 $125,100 $107,399
Receivables:
Fund shares sold 149 55 76 347
Dividends 9 31 -- --
Interest 37 16 28 18
Prepaid expenses 10 9 11 8
-------- -------- -------- --------
Total assets 180,831 121,892 125,215 107,772
-------- -------- -------- --------
LIABILITIES
Payables:
Investments purchased 2 22 1,800 3,733
Fund shares redeemed 160 36 373 183
Investment advisory and administration fees 25 13 16 7
Accrued expenses 42 40 28 45
-------- -------- -------- --------
Total liabilities 229 111 2,217 3,968
-------- -------- -------- --------
Net assets applicable to outstanding shares $180,602 $121,781 $122,998 $103,804
======== ======== ======== ========
NET ASSETS CONSIST OF:
Paid-in capital $134,901 $ 99,145 $113,886 $ 71,953
Undistributed/(overdistributed)net investment
income 806 1,400 2,145 (143)
Accumulated net realized gain (loss) on
investments sold 22,752 11,646 (5,756) 14,272
Net unrealized appreciation on investments 22,143 9,590 12,723 17,722
-------- -------- -------- --------
$180,602 $121,781 $122,998 $103,804
======== ======== ======== ========
PRICING OF SHARES:
Outstanding shares, $0.00001 par value (unlimited
shares authorized) 12,849 9,063 11,144 6,997
Net asset value, offering and redemption price
per share $14.06 $13.44 $11.04 $14.84
</TABLE>
See accompanying Notes to Financial Statements.
37
<PAGE>
STATEMENTS OF OPERATIONS (in thousands)
For the year ended October 31, 1999
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(TM)
--------------------------------------------------------
Growth Balanced Small Cap International
------------ ------------ ------------ ------------
Investment income:
<S> <C> <C> <C> <C>
Dividend $ 2,760 $ 2,790 $ 3,314 $ 1,116
Interest 158 123 109 72
------- ------- ------- -------
Total investment income 2,918 2,913 3,423 1,188
------- ------- ------- -------
Expenses:
Investment advisory and administration fees 1,015 649 765 496
Transfer agency and shareholder service fees 420 270 314 206
Custodian fees 12 4 9 8
Portfolio accounting fees 25 16 19 12
Registration fees 13 20 70 8
Professional fees 28 26 31 26
Shareholder reports 32 22 50 34
Trustees' fees 5 5 6 5
Other expenses 8 9 9 8
------- ------- ------- -------
1,558 1,021 1,273 803
Less:expenses reduced (see Note 5) (717) (481) (645) (390)
------- ------- ------- -------
Net expenses incurred by fund 841 540 628 413
------- ------- ------- -------
Net investment income 2,077 2,373 2,795 775
------- ------- ------- -------
Net realized gain on investments:
Net realized gain on investments sold 19,916 10,077 5,707 13,982
Net realized gain received from underlying funds 2,831 1,397 4,813 1,240
------- ------- ------- -------
Net realized gain on investments 22,747 11,474 10,520 15,222
------- ------- ------- -------
Change in net unrealized appreciation on investments:
Net unrealized appreciation on investments 15,237 6,255 20,277 13,138
------- ------- ------- -------
Net gain on investments 37,984 17,729 30,797 28,360
------- ------- ------- -------
Increase in net assets resulting from operations $40,061 $20,102 $33,592 $29,135
======= ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
For the years ended October 31,
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(TM)
-------------------------------------------------------------------------
Growth Balanced Small Cap International
--------------- ------------------ -------------------- ---------------
1999 1998 1999 1998 1999 1998 1999 1998
------- ------ -------- ------ -------- -------- -------- ------
Operations:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net investment income $ 2,077 $ 3,886 $ 2,373 $ 2,639 $ 2,795 $ 4,681 $ 775 $ 2,378
Net realized gain (loss) on
investments 19,916 1,116 10,077 (624) 5,707 (23,840) 13,982 (3,210)
Net realized gain received from
underlying funds 2,831 1,940 1,397 804 4,813 7,711 1,240 2,360
Change in net unrealized
appreciation
(depreciation) on investments 15,237 (3,418) 6,255 (812) 20,277 (4,764) 13,138 1,021
-------- ------- ------- ------- ------- -------- ------- -------
Increase (decrease) in net assets
resulting from operations 40,061 3,524 20,102 2,007 33,592 (16,212) 29,135 2,549
-------- ------- ------- ------- ------- -------- ------- -------
Dividends and distributions:
Dividends to shareholders from net
investment income (2,077) (3,302) (2,373) (2,017) (673) (4,998) (775) (2,348)
Dividends in excess of net
investment income (625) -- (118) -- -- (678) (143) (37)
Distributions to shareholders from
net capital gains (3,029) (3,461) -- (1,265) -- -- -- (2,152)
-------- ------- ------- ------- ------- -------- ------- -------
Total dividends and distributions
to shareholders (5,731) (6,763) (2,491) (3,282) (673) (5,676) (918) (4,537)
-------- ------- ------- ------- ------- -------- ------- -------
Capital share transactions:
Proceeds from shares sold 40,223 68,937 38,953 56,699 20,774 27,954 47,140 28,116
Net asset value of shares issued in
reinvestment of dividends 5,639 6,623 2,389 3,111 642 5,420 879 4,313
Payments for shares redeemed (51,444) (44,344) (29,966) (26,874) (59,884) (89,989) (46,236) (37,723)
-------- ------- ------- ------- ------- -------- ------- -------
Increase (decrease) in net assets from
capital share transactions (5,582) 31,216 11,376 32,936 (38,468) (56,615) 1,783 (5,294)
-------- ------- ------- ------- ------- -------- ------- -------
Total increase (decrease) in net
assets 28,748 27,977 28,987 31,661 (5,549) (78,503) 30,000 (7,282)
Net assets:
Beginning of period 151,854 123,877 92,794 61,133 128,547 207,050 73,804 81,086
-------- ------- ------- ------- ------- -------- ------- -------
End of period (including undistributed
net investment income (loss) of $806,
$1,428, $1,400, $1,515, $2,145, $22,
$(143), and $(12), respectively) $180,602 $151,854 $121,781 $92,794 $122,998 $128,547 $103,804 $73,804
======== ======== ======== ======= ======== ======== ======== =======
Number of fund shares:
Sold 3,089 5,804 3,085 4,875 2,046 2,919 3,661 2,484
Reinvested 457 596 196 284 68 569 78 424
Redeemed (3,980) (3,798) (2,386) (2,362) (6,075) (9,240) (3,716) (3,399)
--------- -------- -------- -------- -------- -------- -------
Net increase (decrease) in
shares outstanding (434) 2,602 895 2,797 (3,961) (5,752) 23 (491)
Shares outstanding:
Beginning of period 13,283 10,681 8,168 5,371 15,105 20,857 6,974 7,465
-------- ------- ------- ------- ------- -------- ------- -------
End of period 12,849 13,283 9,063 8,168 11,144 15,105 6,997 6,974
======== ======== ======== ======= ======== ======== ======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
39
<TABLE>
<CAPTION>
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
11/1/98- 11/1/97- 11/18/96-
SCHWAB MARKETMANAGER GROWTH PORTFOLIO 10/31/99 10/31/98 10/31/97
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 11.43 11.60 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
<S> <C> <C> <C>
Net investment income 0.16 0.32 0.08
Net realized and unrealized gain
on investments 2.91 0.11 1.66
- ------------------------------------------------------------------------------------------------------------------------------------
Total income from investment operations 3.07 0.43 1.74
Less distributions:
Dividends from net investment income (0.16) (0.29) (0.14)
Dividends in excess of net investment income (0.05) -- --
Distributions from capital gains (0.23) (0.31) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.44) (0.60) (0.14)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE AT END OF PERIOD 14.06 11.43 11.60
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 27.38 3.87 17.60(1)
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average
net assets 0.50 0.50 0.50(2)
Expense reductions reflected in above ratio 0.43 0.67 0.77(2)
Ratio of net investment income to average
net assets 1.23 2.66 2.07(2)
Portfolio turnover rate 284 384 192
Net assets, end of period ($ x 1,000) 180,602 151,854 123,877
1 Not annualized.
2 Annualized.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
- ------------------------------------------------------------------------------------------------------------------------------------
11/1/98- 11/1/97- 11/18/96-
SCHWAB MARKETMANAGER BALANCED PORTFOLIO 10/31/99 10/31/98 10/31/97
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 11.36 11.38 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.27 0.36 0.17
Net realized and unrealized gain
on investments 2.11 0.18 1.34
- ------------------------------------------------------------------------------------------------------------------------------------
Total income from investment operations 2.38 0.54 1.51
Less distributions:
Dividends from net investment income (0.28) (0.34) (0.13)
Dividends in excess of net investment income (0.02) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions from capital gains -- (0.22) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.30 (0.56) (0.13)
NET ASSET VALUE AT END OF PERIOD 13.44 11.36 11.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 21.28 4.89 15.27(1)
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average
net assets 0.50 0.50 0.50(2)
Expense reductions reflected in above ratio 0.45 0.69 0.95(2)
Ratio of net investment income to average
net assets 2.20 3.21 3.03(2)
Portfolio turnover rate 244 353 171
Net assets, end of period ($ x 1,000) 1121,781 92,794 61,133
1 Not annualized.
2 Annualized.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
11/1/98- 11/1/97- 9/16/97-
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO 10/31/99 10/31/98 10/31/97
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period 8.51 9.93 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.24 0.21 0.02
Net realized and unrealized gain (loss)
on investments 2.34 (1.36) (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment
operations 2.58 (1.15) (0.07)
Less distributions:
Dividends from net investment income (0.05) (0.21) --
Dividends in excess of net investment income -- (0.03) --
Distributions from capital gains -- (0.03) --
- ----------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.27) --
NET ASSET VALUE AT END OF PERIOD 11.04 8.51 9.93
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 30.38 (11.84) (0.70)(1)
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average
net assets 0.50 0.50 0.50(2)
Expense reductions reflected in above ratio 0.51 0.69 0.75(2)
Ratio of net investment income to average
net assets 2.23 2.65 1.29(2)
Portfolio turnover rate 145 166 10
Net assets, end of period ($ x 1,000) 122,998 128,547 207,050
1 Not annualized.
2 Annualized.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SCHWAB MARKETMANAGER INTERNATIONAL 11/1/98- 11/1/97- 11/1/96- 10/16/96-
PORTFOLIO 10/31/99 10/31/98 10/31/97 10/31/96
PER-SHARE DATA ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 10.58 10.86 9.91 10.00
- -----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.11 0.34 0.17 --
Net realized and unrealized gain (loss)
on investments 4.28 0.02 0.95 (0.09)
- ------------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from investment
operations 4.39 0.36 1.12 (0.09)
Less distributions:
Dividends from net investment income (0.11) (0.33) (0.17) --
Dividends in excess of net investment
income (0.02) (0.01) -- --
Distributions from capital gains -- (0.30) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.13) (0.64) (0.17) --
NET ASSET VALUE AT END OF PERIOD 14.84 10.58 10.86 9.91
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 41.92 3.55 11.47 (0.90)(1)
RATIOS/SUPPLEMENTAL DATA (%)
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of actual operating expenses to
average net assets 0.50 0.50 0.50 0.50(2)
Expense reductions reflected in above ratio 0.47 0.70 0.80 2.91(2)
Ratio of net investment income to average
net assets 0.94 2.96 1.40 0.52(2)
Portfolio turnover rate 249 236 179 --
Net assets, end of period ($ x 1,000) 103,804 73,804 81,086 59,180
1 Not annualized.
2 Annualized.
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 1999
(All currency amounts are in thousands unless otherwise noted.)
1. DESCRIPTION OF THE FUNDS
The Schwab MarketManager Growth Portfolio, Schwab MarketManager Balanced
Portfolio, Schwab MarketManager Small Cap Portfolio, and Schwab MarketManager
International Portfolio, (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 Total Stock Market Index Fund(TM), Schwab S&P 500
Fund, Schwab Small-Cap Index Fund(R), Schwab International Index Fund(R), Schwab
MarketTrack Growth Portfolio, Schwab MarketTrack Balanced Portfolio, Schwab
MarketTrack Conservative Portfolio, Schwab MarketTrack All Equity Portfolio,
Schwab Analytics Fund(R), Institutional Select(TM) S&P 500 Fund, Institutional
Select(TM) Large-Cap Value Index Fund and Institutional Select(TM) Small-Cap
Value Index Fund. The assets of each series are segregated and accounted for
separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with
generally accepted accounting principles. The preparation of financial
statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
SECURITY VALUATION -- Investments in underlying funds are valued at their
respective net asset values as determined by those funds, in accordance
with the 1940 Act, for a given day. Investments in securities traded on
an exchange or in the over-the-counter market value are valued at the
last-quoted sale price for a given day, or if a sale is not reported for that
day, at the mean between the most recent quoted bid and asked prices. Other
investments, including limited partnerships, for which no quotations are
readily available, are valued at fair value as determined by the funds'
investment adviser pursuant to guidelines adopted in good faith by the
Board of Trustees.
SECURITY TRANSACTIONS, INVESTMENT INCOME AND REALIZED GAINS (LOSSES) --
Security transactions are accounted for on a trade-date basis (date the order
to buy or sell is executed). Dividend income and distributions to
shareholders are recorded on theex-dividend date. Interest income,
(including accretion of discounts) is recorded on the accrual basis.
Realized gains and losses from security transactions are determined on an
identified cost basis.
EXPENSES -- Expenses arising in connection with a fund are charged directly to
that fund. Expenses common to all series of the trust are generally
allocated to each series in proportion to their relative net assets.
FEDERAL INCOME TAXES -- It is each fund's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies
and to distribute substantially 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.
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
The aggregate gross unrealized appreciation and depreciation for securities held
by the funds at October 31, 1999 (for financial reporting and federal income tax
purposes) is as follows:
<TABLE>
<CAPTION>
Net Unrealized Appreciated Depreciated
Portfolio Appreciation Securities Securities
-------- ------------ ---------- ----------
<S> <C> <C> <C>
Schwab MarketManager Growth Portfolio $ 22,143 $23,015 $ (872)
Schwab MarketManager Balanced Portfolio 9,590 11,061 (1,471)
Schwab MarketManager Small Cap Portfolio 12,723 14,164 (1,441)
Schwab MarketManager International Portfolio 17,722 17,741 (19)
</TABLE>
At October 31, 1999, the unused capital loss carryforwards, for
federal income tax purposes with expiration dates, are as follows:
Schwab MarketManager PortfoliosTM
-----------------------------------
Capital Loss Expirations Small Cap
-------------------- ----------
12/31/05 $14,553
----------
RECLASSIFICATIONS -- Generally accepted accounting principles require that
certain components of net assets be reclassified between financial and tax
reporting. These reclassifications have no effect on net assets or net asset
values per share.
On the statements of assets and liabilities, the following reclassifications
were made:
Undistributed
Net Investment
Portfolio Income Paid-In Capital
------------ ----------- --------------
Schwab MarketManager Growth Portfolio $ 3 $ (3)
Schwab MarketManager Balanced Portfolio 3 (3)
Schwab MarketManager Small Cap Portfolio 1 (1)
Schwab MarketManager International Portfolio 12 (12)
3. TRANSACTIONS WITH LIMITED PARTNERSHIPS
As of October 31, 1999, the MarketManager Growth Portfolio, the MarketManager
Balanced Portfolio, and the MarketManager Small Cap Portfolio owned 2.7%, 3.7%,
and 14.9% limited partnership ownership interests, respectively, in the Melody
4500 Fund, L.P. ("Melody"). Melody invests in publicly traded securities of
small-to-medium capitalization issuers located in the United States and will
attempt to equal or exceed the total return performance of the Wilshire 4500
Index over a market cycle of five years. As stated in the partnership agreement,
under normal market conditions, each fund can generally redeem up to 50% of its
interest upon three business days notice to the general partner, and the
remainder of the capital account as of the last business day of any calendar
month on at least 30 days prior notice to the general partner.
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
4. TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENT -- The trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "investment adviser"). For advisory services and facilities furnished,
each fund pays an annual fee, payable monthly, of 0.54% of the first $500
million of average daily net assets, and 0.49% of such net assets over $500
million. Prior to March 1, 1999, each fund paid an annual fee, payable monthly,
of 0.74% of the first $1 billion of average daily net assets, and 0.69% of the
next $1 billion and 0.64% of such net assets over $2 billion. The investment
adviser has reduced a portion of its fee for the year ended October 31, 1999
(see Note 5).
TRANSFER AGENCY AND SHAREHOLDER SERVICE AGREEMENTS -- The trust
has transfer agency and shareholder service agreements with Charles Schwab &
Co., Inc. ("Schwab"). For services provided under these agreements, Schwab
receives an annual fee, payable monthly, of 0.05% of each fund's average daily
net assets for transfer agency services and 0.20% of such net assets for
shareholder services. Schwab has waived all of its transfer agency and
shareholder service fees for the year ended October 31, 1999 (see Note 5).
OFFICERS AND TRUSTEES -- Certain officers and trustees of the trust are also
officers and/or directors of the investment adviser and/or Schwab. During the
year ended October 31, 1999, the trust made no direct payments to its officers
or trustees who are "interested persons" within the meaning of the Investment
Company Act of 1940, as amended. The funds incurred fees aggregating $21 related
to the trust's unaffiliated trustees.
5. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser and Schwab guarantee that through at least February 29,
2000, each fund's total operating expenses will not exceed 0.50% of the fund's
average daily net assets, after waivers and reimbursements. For the purpose of
this guarantee, operating expenses do not include interest expenses,
extraordinary expenses, taxes, foreign taxes and capital items. Schwab has
agreed to waive its transfer agency and shareholder service fees through at
least December 31, 2001. For the year ended October 31, 1999, the total of such
fees and expenses reduced by the investment adviser was $297, $211, $331 and
$184 for the Schwab MarketManager Growth, Schwab MarketManager Balanced, Schwab
MarketManager Small Cap, and Schwab MarketManager International Portfolios,
respectively, and the total of such fees reduced by Schwab was $420, $270, $314
and $206, respectively for the Schwab MarketManager Growth, Schwab MarketManager
Balanced, Schwab MarketManager Small Cap, and Schwab MarketManager International
Portfolios.
6. BORROWING AGREEMENT
The trust has lines of credit arrangements with The Bank of New York whereby the
trust may borrow on behalf of the funds an aggregate amount of up to $250
million on a temporary basis to fund shareholder redemptions. Amounts borrowed
under this arrangement bear interest at periodically negotiated rates and may be
collateralized by the assets of the funds. The funds borrowed against the lines
of credit during the year, but as of October 31, 1999, there were no outstanding
borrowings under these arrangements on behalf of the funds.
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
7. INVESTMENT TRANSACTIONS
Aggregate purchases and sales of investment securities, other than short-term
obligations and U.S. Government securities, for the year ended October 31, 1999,
were as follows:
Proceeds of
sales and
Portfolio Purchases maturities
-------- ---------- ----------
Schwab MarketManager Growth Portfolio $445,349 $452,292
Schwab MarketManager Balanced Portfolio 260,572 248,318
Schwab MarketManager Small Cap Portfolio 178,331 216,021
Schwab MarketManager International Portfolio 201,972 202,831
47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of:
Schwab MarketManager Growth Portfolio,
Schwab MarketManager Balanced Portfolio,
Schwab MarketManager Small Cap Portfolio, and
Schwab MarketManager International Portfolio,
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Schwab MarketManager Growth
Portfolio, Schwab MarketManager Balanced Portfolio, Schwab MarketManager Small
Cap Portfolio, and Schwab MarketManager International Portfolio (four of the
portfolios constituting Schwab Capital trust, hereafter referred to as the
"funds") at October 31, 1999, and the results of each of their operations for
the year then ended, the changes in each of their net assets and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, CA
December 9, 1999
48
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THIS SPACE RESERVED FOR YOUR COMMENTS AND QUESTIONS.
A SCHWAB REPRESENTATIVE WILL BE HAPPY TO ASSIST YOU.
<PAGE>
THE SCHWABFUNDS FAMILY-REGISTERED TRADEMARK-
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money market
funds.
Please call 800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.-Registered Trademark-
This report must be preceded or accompanied by a current prospectus.
METHODS FOR PLACING ORDERS
The information below outlines how Schwab brokerage account investors can place
orders. If you are investing through a third-party investment provider, methods
for placing orders may be different.
PHONE
Call 800-435-4000, day or night (for TDD service, call 800-345-2550).
INTERNET
www.schwab.com/schwabfunds
MAIL
Write to SchwabFunds at:
P. O. Box 7575, San Francisco, CA 94120-7575
When selling or exchanging shares, be sure to include the signatures of at least
one of the persons whose name is on the account.
IN PERSON
Visit the nearest Charles Schwab office.
SCHWAB ASSET ALLOCATION FUNDS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketManager Growth Portfolio
Schwab MarketManager Balanced Portfolio
SCHWAB STOCK FUNDS
Schwab S&P 500-Registered Trademark- Fund
Schwab 1000 Fund-Registered Trademark-
Schwab Total Stock Market Index Fund-TM-
Schwab Analytics Fund-Registered Trademark-
Schwab Small-Cap Index Fund-Registered Trademark-
Schwab MarketManager Small Cap Portfolio
Schwab International Index Fund-Registered Trademark-
Schwab MarketManager International Portfolio
SCHWAB BOND FUNDS
Schwab YieldPlus Fund-TM-
Schwab Total Bond Market Index Fund
Schwab Short-Term Bond Market Index Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds that seek high current income
consistent with safety and liquidity.(1) Choose from taxable or tax-advantaged
alternatives. Many can be linked to your Schwab account to "sweep" cash balances
automatically when you're between investments. Or, for your larger cash
reserves, choose one of our Value Advantage Investments.-Registered Trademark-
(1) Investments in money market funds are neither insured nor guaranteed by the
Federal Deposit Insurance Corporation (FDIC) or any other government agency
and, although they seek to preserve the value of your investment at $1 per
share, it is possible to lose money.
<PAGE>
[LOGO]
INVESTMENT ADVISER
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- 1999 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. MKT3812-2 (12/99)
<PAGE>
