<PAGE> 1
SchwabFunds(R)
SCHWAB MARKETMANAGER
PORTFOLIOS(R)
ANNUAL REPORT
AND
AN IMPORTANT NOTICE REGARDING
DELIVERY OF SHAREHOLDER
DOCUMENTS
October 31, 2000
<PAGE> 2
IMPORTANT NOTICE REGARDING DELIVERY OF SHAREHOLDER DOCUMENTS
The Securities and Exchange Commission (SEC) permits 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.
MAILING OF YOUR SCHWABFUNDS(R) SHAREHOLDER DOCUMENTS MAY BE HOUSEHOLDED
INDEFINITELY UNLESS YOU INSTRUCT US OTHERWISE.
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/schwabfunds.
If you would prefer that your SchwabFunds mailings not be householded, 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> 3
SchwabFunds(R)
SCHWAB MARKETMANAGER
PORTFOLIOS(R)
- GROWTH
- BALANCED
- SMALL CAP
- INTERNATIONAL
Annual Report
October 31, 2000
<PAGE> 4
SCHWAB MARKETMANAGER PORTFOLIOS(R)
We are pleased to bring you this annual report for the Schwab MarketManager
Portfolios (the portfolios) for the period ended October 31, 2000. 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. Portfolio Manager Jeff Mortimer and
his 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:(R)
Newspaper Listing* Symbol
------------------ ------
MM Gro SWOGX
MM Bal SWOBX
MM SCp SWOSX
MM Intl SWOIX
* Note that newspaper listings will indicate the previous day's quotation.
CONTENTS
<TABLE>
<S> <C>
A Message from the Chairman 1
Market Overview 2
Schwab MarketManager Growth Portfolio
Portfolio Performance 7
Portfolio Snapshot 9
Schwab MarketManager Balanced Portfolio
Portfolio Performance 11
Portfolio Snapshot 13
Schwab MarketManager Small Cap Portfolio
Portfolio Performance 15
Portfolio Snapshot 17
Schwab MarketManager International Portfolio
Portfolio Performance 19
Portfolio Snapshot 21
Portfolio Management 23
Portfolio Discussion 24
Glossary 28
Financial Statements and Notes 30
</TABLE>
<PAGE> 5
A MESSAGE FROM THE CHAIRMAN
[PHOTO OF CHARLES SCHWAB]
Dear Shareholder,
During the last few years, the benefits of investing have been readily apparent,
while the risks have been somewhat less obvious. In recent months, however,
investors have been subject to larger swings in the market, even within the span
of a single day.
Given this divergent environment, the message is clear: Expect volatility,
maintain a long-term view and ensure your investment strategy is appropriate for
your risk tolerance and time horizon. One way to lessen the impact of volatility
on your portfolio is to adequately diversify your investments, both within and
across asset sectors, namely stocks, bonds and cash equivalents. With its broad
range of funds, SchwabFunds(R) can help form the foundation of a diversified
investment plan. Our asset allocation funds can even provide diversification
within a single fund.
We recently added four new sector funds, the Schwab Focus Funds, to our
SchwabFunds offering. Each invests in a group of industries within a specific
sector -- Communications, Financial Services, Healthcare and Technology -- and
can be an effective complement to individual stock investing. Each Focus Fund
concentrates its investing in companies in a specific sector and may involve a
greater degree of risk than an investment in mutual funds with broader
diversification. For more information on the Schwab Focus Funds, please call
1-800-435-4000 and request a free prospectus. The prospectus contains more
information on fund fees and expenses as well as risks. Please read it carefully
before investing.
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
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.
Thank you for your investment in SchwabFunds. For its part, SchwabFunds will do
everything we can to warrant the trust you have placed in us.
Sincerely,
/s/ Charles Schwab
Charles Schwab
October 31, 2000
1
<PAGE> 6
MARKET OVERVIEW
GROWTH PERIOD IS THE LONGEST
IN U.S. HISTORY.
As of October 31, 2000, U.S. economic expansion was in the middle of its tenth
year, marking the longest period of continuous growth in U.S. history. The main
force behind the expansion has been high levels of consumer spending, fueled by
increases in personal income, personal wealth and consumer confidence.
The pace of economic growth remained robust through the second quarter of 2000,
then moderated somewhat in the third quarter, in part due to reduced government
spending. Actual Q3 growth was lower than many analysts had expected.
Although energy prices soared, inflation still appears to remain in check. The
GDP price deflator, a widely used inflation indicator, declined slightly from
2.4% in the second quarter to 2.0% in the third quarter.
Source: Bloomberg L.P.
PRODUCTIVITY EMERGES AS A KEY FACTOR.
[PHOTO OF CAR ASSEMBLY LINE]
In recent years, the Federal Reserve Bank (the Fed) demonstrated its resolve to
moderate the pace of the economy's growth by raising short-term interest rates
(since June 1999, it has raised these rates six
ASSET CLASS PERFORMANCE COMPARISON % returns during the report period
This graph compares the performance of four widely used measures of securities
market performance, including U.S. stocks and bonds and international stocks.
[ASSET CLASS PERFORMANCE COMPARISON LINE GRAPH]
<TABLE>
<CAPTION>
Lehman Brothers*
U.S. Aggregate
Bond Index MSCI-EAFE(R) Index** Russell 2000(R) Index*** S&P 500(R) Index****
---------- ------------------ --------------------- ----------------
<S> <C> <C> <C> <C>
11/5/99 0.0061 0.005 0.0323 0.0054
11/12/99 0.0073 0.02 0.0495 0.0244
11/19/99 0.0032 0.039 0.0762 0.0435
11/26/99 0.0011 0.052 0.0708 0.0395
12/3/99 0.0015 0.053 0.0843 0.0522
12/10/99 0.0078 0.067 0.0894 0.041
12/17/99 -0.003 0.068 0.0889 0.0439
12/24/99 -0.0061 0.107 0.1268 0.0713
12/31/99 -0.0051 0.126 0.1796 0.0804
1/7/00 -0.0057 0.074 0.1415 0.06
1/14/00 -0.0103 0.101 0.1867 0.0774
1/21/00 -0.0119 0.076 0.2483 0.0599
1/28/00 -0.0052 0.071 0.1801 0.0002
2/4/00 -0.0039 0.093 0.2292 0.0481
2/11/00 -0.0068 0.1 0.2568 0.0207
2/18/00 -0.0015 0.083 0.277 -0.0095
2/25/00 0.005 0.092 0.3029 -0.0189
3/3/00 0.0068 0.115 0.4004 0.0381
3/10/00 0.0048 0.114 0.4137 0.0277
3/17/00 0.0118 0.101 0.3458 0.0788
3/24/00 0.0105 0.123 0.3449 0.1251
3/31/00 0.0168 0.121 0.2632 0.1049
4/7/00 0.0249 0.11 0.2726 0.118
4/14/00 0.0242 0.071 0.064 0.0002
4/21/00 0.0233 0.062 0.1297 0.0577
4/28/00 0.0138 0.061 0.1872 0.0717
5/5/00 -0.0004 0.057 0.203 0.0571
5/12/00 -0.0017 0.046 0.1521 0.0485
5/19/00 0.0003 0.008 0.1258 0.0381
5/26/00 0.0112 0.014 0.0738 0.0168
6/2/00 0.023 0.081 0.2045 0.0916
6/9/00 0.0262 0.079 0.2287 0.0766
6/16/00 0.0349 0.075 0.2075 0.0822
6/23/00 0.0253 0.065 0.2002 0.0652
6/30/00 0.0344 0.073 0.2155 0.0757
7/7/00 0.0391 0.083 0.2406 0.0937
7/14/00 0.0376 0.079 0.2748 0.1166
7/21/00 0.0434 0.055 0.228 0.0946
7/28/00 0.0433 0.02 0.152 0.0501
8/4/00 0.0513 0.016 0.1839 0.0827
8/11/00 0.0531 0.031 0.2002 0.0893
8/18/00 0.0544 0.039 0.2129 0.104
8/25/00 0.0584 0.046 0.2359 0.115
9/01/00 0.0616 0.057 0.2758 0.127
9/8/00 0.0606 0.014 0.2598 0.1075
9/15/00 0.0588 -0.009 0.2506 0.0862
9/22/00 0.0613 -0.024 0.2224 0.0735
9/29/00 0.0657 -0.017 0.2293 0.0653
10/6/00 0.0654 -0.02 0.1579 0.0448
10/13/00 0.0692 -0.051 0.1332 0.019
10/20/00 0.0749 -0.052 0.15 0.0361
10/27/00 0.0736 -0.037 0.1321 0.0233
10/31/00 0.073 -0.029 0.1741 0.0609
</TABLE>
These figures assume dividends and distributions were reinvested. Index figures
don't include trading and management costs, which would lower performance.
Indices are unmanaged and you can't invest in them directly. Data source:
Charles Schwab & Co., Inc. (Schwab).
* measures the U.S. bond market
** measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the
Far East
*** measures U.S. small-cap stocks
**** measures U.S. large-cap stocks
2
<PAGE> 7
times). The Fed has voiced concern that increases in wages could outpace gains
in productivity, forcing companies to boost prices and potentially sparking
inflation.
Productivity gains are important because they enable companies to achieve
greater output for every dollar spent for labor costs. Spurred mainly by
technological advances, productivity grew at 4.0% during the first half of 2000
and 3.3% during the third quarter (these figures include all economic sectors
except farming). However, third quarter productivity gains were partially offset
by a 2.5% increase in unit labor costs--costs that had declined in the previous
quarter. Source: Bloomberg L.P.
UNEMPLOYMENT HITS NEW LOWS, YET INFLATION REMAINS AT BAY.
[PHOTO OF MAN WELDING]
The unemployment rate has been trending downward for years. In April it fell
below 4%--the lowest level in 30 years and one previously considered improbable
without high inflation.
Overall, labor markets continue to be extremely tight, and there has been
evidence in some regions of labor shortages driving up wages. In spite of these
regional trends, overall increases in prices and wages during the report period
were relatively
SIX FACTORS AND THEIR EFFECTS ON THESE FUNDS.
The following charts show recent figures for five common measures of the state
of the U.S. economy and the stock market, as well as one measure of
international stock performance.
While the relationship of each of these factors to the performance of the funds
is complex, the captions over each chart and the discussion above include
analysis of how we believe these factors may have influenced market behavior
during the report period.
REAL GDP GROWTH
Annualized growth rate for each quarter shown
The U.S. economy has grown steadily for more than nine years. Real GDP grew at a
2.4% annualized rate in Q3 2000--slower than the 5.2% for the first half of the
year.
[BAR CHART]
<TABLE>
<S> <C>
Dec-90 -3.2
Mar-91 -2
Jun-91 2.3
Sep-91 1
Dec-91 2.2
Mar-92 3.8
Jun-92 3.8
Sep-92 3.1
Dec-92 5.4
Mar-93 -0.1
Jun-93 2.5
Sep-93 1.8
Dec-93 6.2
Mar-94 3.4
Jun-94 5.7
Sep-94 2.2
Dec-94 5
Mar-95 1.5
Jun-95 0.8
Sep-95 3.1
Dec-95 3.2
Mar-96 2.9
Jun-96 6.8
Sep-96 2
Dec-96 4.6
Mar-97 4.4
Jun-97 5.9
Sep-97 4.2
Dec-97 2.8
Mar-98 6.5
Jun-98 2.9
Sep-98 3.4
Dec-98 5.6
Mar-99 3.5
Jun-99 2.5
Sep-99 5.7
Dec-99 8.3
Mar-00 4.8
Jun-00 5.6
Sep-00 2.4
</TABLE>
Gross domestic product (GDP), a broad measure of the goods and services
produced in the United States during a given time period, is a prime indicator
of the health of the country's economy. Typically, stock investors see increases
in GDP as a positive, since it indicates stronger demand, production and
corporate earnings. The figures shown here are adjusted for inflation.
Data source: Bloomberg L.P.
3
<PAGE> 8
modest, due in part to strong productivity gains. However, an upturn in labor
costs may make the Fed more sensitive to other potential signs of inflation.
STOCKS STUMBLE, RECOVER; MOST BONDS POST HEALTHY RETURNS.
U.S. equities, as measured by the major indices (chart, page 2) had positive
returns for the report period. By historical standards, they also remained
highly valued (P/E chart, page 5).
[PHOTO OF THE STOCK EXCHANGE]
--------------------------------------------------------------------------------
"Old economy" stocks and value stocks regained popularity as many newer company
stocks fell.
--------------------------------------------------------------------------------
However, the report period saw extreme volatility in the stock market,
particularly for U.S. stocks. In March and April, the P/E for the Nasdaq 100
Index lost one-third of its value in just a two-week period. (The Nasdaq 100
Index reflects 100 of the largest Nasdaq companies across major industry groups,
including computers, telecommunications, retail/wholesale and biotechnology, but
excluding financial companies.) Volatility continued through
U.S. UNEMPLOYMENT RATE
Adjusted for seasonal variations
Unemployment hit a three-decade low of 3.9% in April. Although it trended up to
4.1% during the summer months, it closed the reporting period back at 3.9%.
[LINE GRAPH]
<TABLE>
<S> <C>
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
Nov-91 7
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
Apr-93 7.1
May-93 7.1
Jun-93 7
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
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 5.4
Apr-95 5.8
May-95 5.6
Jun-95 5.6
Jul-95 5.7
Aug-95 5.7
Sep-95 5.6
Oct-95 5.5
Nov-95 5.6
Dec-95 5.6
Jan-96 5.7
Feb-96 5.5
Mar-96 5.5
Apr-96 5.5
May-96 5.6
Jun-96 5.3
Jul-96 5.5
Aug-96 5.1
Sep-96 5.2
Oct-96 5.2
Nov-96 5.4
Dec-96 5.4
Jan-97 5.3
Feb-97 5.3
Mar-97 5.2
Apr-97 5
May-97 4.9
Jun-97 5
Jul-97 4.8
Aug-97 4.8
Sep-97 4.9
Oct-97 4.7
Nov-97 4.6
Dec-97 4.7
Jan-98 4.7
Feb-98 4.6
Mar-98 4.7
Apr-98 4.3
May-98 4.4
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 4.4
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
Nov-99 4.1
Dec-99 4.1
Jan-00 4
Feb-00 4.1
Mar-00 4.1
Apr-00 3.9
May-00 4.1
Jun-00 4
Jul-00 4
Aug-00 4.1
Sep-00 3.9
Oct-00 3.9
</TABLE>
This measures the portion of the U.S. labor force that is unemployed and is
either seeking a job or waiting to return to one. Low unemployment often
accompanies prosperity and is generally a positive factor for investors,
although very low unemployment may boost inflation as employers raise pay to
compete for workers. Rising unemployment may mean a softening economy.
Data source: Bloomberg L.P.
MEASURES OF INFLATION
Annualized figures for the Consumer Price Index (monthly) and Employment Cost
Index (quarterly)
CPI was up 3.4% for the 12 months ended October 31, 2000 (2.5% if food and
energy are excluded). ECI rose 4.3% for the 12 months ended September 30,
2000.
[LINE GRAPH]
<TABLE>
<CAPTION>
CPI ECI
--- ---
<S> <C> <C>
Sep-90 6.2 5.2
Oct-90 6.4 5.2
Nov-90 6.3 5.2
Dec-90 6.3 4.9
Jan-91 5.6 4.9
Feb-91 5.3 4.9
Mar-91 4.9 4.6
Apr-91 4.8 4.6
May-91 5 4.6
Jun-91 4.7 4.6
Jul-91 4.4 4.6
Aug-91 3.8 4.6
Sep-91 3.4 4.3
Oct-91 2.8 4.3
Nov-91 3.1 4.3
Dec-91 3 4.3
Jan-92 2.7 4.3
Feb-92 2.8 4.3
Mar-92 3.2 4
Apr-92 3.2 4
May-92 3 4
Jun-92 3 3.6
Jul-92 3.2 3.6
Aug-92 3.1 3.6
Sep-92 3 3.5
Oct-92 3.3 3.5
Nov-92 3.1 3.5
Dec-92 3 3.5
Jan-93 3.2 3.5
Feb-93 3.2 3.5
Mar-93 3 3.5
Apr-93 3.2 3.5
May-93 3.2 3.5
Jun-93 3 3.6
Jul-93 2.8 3.6
Aug-93 2.8 3.6
Sep-93 2.8 3.6
Oct-93 2.8 3.6
Nov-93 2.7 3.6
Dec-93 2.8 3.5
Jan-94 2.5 3.5
Feb-94 2.5 3.5
Mar-94 2.6 3.2
Apr-94 2.4 3.2
May-94 2.3 3.2
Jun-94 2.5 3.2
Jul-94 2.7 3.2
Aug-94 2.9 3.2
Sep-94 3 3.2
Oct-94 2.6 3.2
Nov-94 2.7 3.2
Dec-94 2.6 3
Jan-95 2.8 3
Feb-95 2.9 3
Mar-95 2.9 2.9
Apr-95 2.8 2.9
May-95 3.1 2.9
Jun-95 3 2.9
Jul-95 2.8 2.9
Aug-95 2.6 2.9
Sep-95 2.5 2.7
Oct-95 2.8 2.7
Nov-95 2.6 2.7
Dec-95 2.6 2.8
Jan-96 2.7 2.8
Feb-96 2.7 2.8
Mar-96 2.9 2.8
Apr-96 2.8 2.8
May-96 2.9 2.8
Jun-96 2.8 2.9
Jul-96 2.9 2.9
Aug-96 2.8 2.9
Sep-96 3 2.8
Oct-96 3 2.8
Nov-96 3.2 2.8
Dec-96 3.2 2.9
Jan-97 3 2.9
Feb-97 3 2.9
Mar-97 2.8 2.9
Apr-97 2.5 2.9
May-97 2.2 2.9
Jun-97 2.3 2.8
Jul-97 2.2 2.8
Aug-97 2.2 2.8
Sep-97 2.2 3
Oct-97 2.1 3
Nov-97 1.9 3
Dec-97 1.7 3.3
Jan-98 1.6 3.3
Feb-98 1.4 3.3
Mar-98 1.4 3.3
Apr-98 1.5 3.3
May-98 1.7 3.3
Jun-98 1.6 3.5
Jul-98 1.7 3.5
Aug-98 1.7 3.5
Sep-98 1.4 3.7
Oct-98 1.4 3.7
Nov-98 1.5 3.7
Dec-98 1.6 3.4
Jan-99 1.7 3.4
Feb-99 1.7 3.4
Mar-99 1.8 3
Apr-99 2.3 3
May-99 2.1 3
Jun-99 2 3.2
Jul-99 2.1 3.2
Aug-99 2.3 3.2
Sep-99 2.6 3.1
Oct-99 2.6 3.1
Nov-99 2.6 3.1
Dec-99 2.7 3.4
Jan-00 2.7 3.4
Feb-00 3.2 3.4
Mar-00 3.8 4.3
Apr-00 3.1 4.3
May-00 3.2 4.3
Jun-00 3.7 4.4
Jul-00 3.7 4.4
Aug-00 3.4 4.4
Sep-00 3.5 4.3
Oct-00 3.4
</TABLE>
The Consumer Price Index (CPI) tracks changes in the cost of goods and services
and is the most common measure of inflation. The Employment Cost Index (ECI)
measures the cost of employing workers, including benefits costs. Financial
markets are very sensitive to increases in inflation because of the potentially
negative impact on corporate earnings, investors and consumers.
Data source: Bloomberg L.P.
4
<PAGE> 9
the end of the report period as investors shifted their focus from hard-hit
sectors such as technology to undervalued and established companies.
Outside the U.S., stocks were held back by uncertainty over oil prices and
corporate earnings. For U.S. investors, the continued rise of the dollar against
the euro and yen was a factor as well, because it eroded the dollar value of
foreign stocks.
[PHOTO OF PEOPLE WINDOW SHOPPING]
A major factor for bonds during the report period was the U.S. Treasury's
decision to use some of the budget surplus to buy back its own bonds. This
created a major change in the picture for supply and demand of bonds, and
resulted in an inverted yield curve (a situation where short-term bonds actually
pay higher yields than long-term bonds). While short-term interest rates rose
during the report period, intermediate and long-term rates actually fell.
Although these events were comparatively unusual, their net effect on
performance was generally positive for bond investments.
LOOKING AHEAD: GROWTH MAY CONTINUE, BUT RATE MAY SLOW.
Through its aggressive tightening of short-term interest rates in late 1999 and
the first half of 2000,
S&P 500(R) PRICE/EARNINGS RATIO (P/E)
Dollar-weighted average P/E for all stocks in the index
Despite the recent downturn in stocks, the P/E ratio of the S&P 500 ended the
report period at 25.6, a level still significantly above the 30-year average of
15.8.
[LINE GRAPH]
<TABLE>
<CAPTION>
S&P 500 P/E Ratio
S&P 500 P/E Ratio 30 Year Average
---------------- -----------------
<S> <C> <C>
Sep-90 14.34 15.8
Oct-90 14.67 15.8
Nov-90 14.65 15.8
Dec-90 15.28 15.8
Jan-91 15.55 15.8
Feb-91 16.87 15.8
Mar-91 17.56 15.8
Apr-91 17.77 15.8
May-91 18.23 15.8
Jun-91 17.7 15.8
Jul-91 18.37 15.8
Aug-91 20.35 15.8
Sep-91 19.98 15.8
Oct-91 20.37 15.8
Nov-91 20.99 15.8
Dec-91 22.89 15.8
Jan-92 23.03 15.8
Feb-92 25.78 15.8
Mar-92 25.51 15.8
Apr-92 26.03 15.8
May-92 25.22 15.8
Jun-92 25.23 15.8
Jul-92 26.08 15.8
Aug-92 24.22 15.8
Sep-92 24.7 15.8
Oct-92 24.64 15.8
Nov-92 23.8 15.8
Dec-92 24.31 15.8
Jan-93 24.29 15.8
Feb-93 24.44 15.8
Mar-93 23.48 15.8
Apr-93 22.92 15.8
May-93 22.96 15.8
Jun-93 22.9 15.8
Jul-93 22.91 15.8
Aug-93 24.21 15.8
Sep-93 23.77 15.8
Oct-93 24.04 15.8
Nov-93 22.52 15.8
Dec-93 22.95 15.8
Jan-94 22.98 15.8
Feb-94 21.17 15.8
Mar-94 20.34 15.8
Apr-94 20.1 15.8
May-94 20.16 15.8
Jun-94 19.77 15.8
Jul-94 18.63 15.8
Aug-94 18.91 15.8
Sep-94 18.32 15.8
Oct-94 17.51 15.8
Nov-94 16.56 15.8
Dec-94 16.98 15.8
Jan-95 16.05 15.8
Feb-95 16.22 15.8
Mar-95 16.47 15.8
Apr-95 16 15.8
May-95 16.45 15.8
Jun-95 16.77 15.8
Jul-95 16.61 15.8
Aug-95 16.18 15.8
Sep-95 16.85 15.8
Oct-95 16.18 15.8
Nov-95 17.86 15.8
Dec-95 17.41 15.8
Jan-96 18.29 15.8
Feb-96 18.57 15.8
Mar-96 18.94 15.8
Apr-96 19.16 15.8
May-96 19.48 15.8
Jun-96 19.3 15.8
Jul-96 18.31 15.8
Aug-96 18.62 15.8
Sep-96 19.73 15.8
Oct-96 19.59 15.8
Nov-96 21.06 15.8
Dec-96 20.77 15.8
Jan-97 20.52 15.8
Feb-97 20.95 15.8
Mar-97 19.87 15.8
Apr-97 20.23 15.8
May-97 21.45 15.8
Jun-97 22.44 15.8
Jul-97 23.99 15.8
Aug-97 22.74 15.8
Sep-97 24 15.8
Oct-97 22.84 15.8
Nov-97 24.12 15.8
Dec-97 24.53 15.8
Jan-98 25.03 15.8
Feb-98 26.49 15.8
Mar-98 27.98 15.8
Apr-98 26.69 15.8
May-98 26.15 15.8
Jun-98 27.27 15.8
Jul-98 26.94 15.8
Aug-98 22.9 15.8
Sep-98 24.35 15.8
Oct-98 28.07 15.8
Nov-98 30.31 15.8
Dec-98 32.15 15.8
Jan-99 33.9 15.8
Feb-99 32.64 15.8
Mar-99 33.92 15.8
Apr-99 33.9 15.8
May-99 32.74 15.8
Jun-99 34.7 15.8
Jul-99 31.31 15.8
Aug-99 31.21 15.8
Sep-99 30.39 15.8
Oct-99 30.41 15.8
Nov-99 30.65 15.8
Dec-99 32.53 15.8
Jan-00 29.78 15.8
Feb-00 28.59 15.8
Mar-00 31.5 15.8
Apr-00 29.41 15.8
May-00 28.82 15.8
Jun-00 29.31 15.8
Jul-00 28.94 15.8
Aug-00 30.35 15.8
Sep-00 28.64 15.8
Oct-00 25.6 15.8
</TABLE>
P/E is stock price divided by earnings per share (for one company or, as here,
an entire index). P/E indicates the value that investors have placed on a stock,
or group of them. When index P/E is well above its long-term average, it shows
high investor confidence about future earnings growth. It also can mean that if
confidence wanes, there could be a substantial drop in stock prices.
Data source: Bloomberg L.P.
YIELDS OF U.S. TREASURY BONDS
Effective yields of five-year and ten-year Treasuries
With its buyback program, the U.S. Treasury emerged as a major customer for its
own bonds, driving prices up (and yields down) on long-term Treasuries.
[LINE GRAPH]
<TABLE>
<CAPTION>
FIVE-YEAR TREASURY TEN-YEAR TREASURY
BOND YIELD BOND YIELD
------------------ -----------------
<S> <C> <C>
Sep-90 8.46 8.8
Oct-90 8.22 8.62
Nov-90 7.99 8.25
Dec-90 7.68 8.07
Jan-91 7.61 8.01
Feb-91 7.7 8.03
Mar-91 7.75 8.06
Apr-91 7.61 8.01
May-91 7.71 8.06
Jun-91 7.88 8.23
Jul-91 7.74 8.15
Aug-91 7.34 7.82
Sep-91 6.91 7.45
Oct-91 6.74 7.46
Nov-91 6.48 7.38
Dec-91 5.93 6.7
Jan-92 6.43 7.27
Feb-92 6.56 7.25
Mar-92 6.92 7.53
Apr-92 6.88 7.58
May-92 6.6 7.32
Jun-92 6.27 7.12
Jul-92 5.82 6.71
Aug-92 5.58 6.6
Sep-92 5.32 6.35
Oct-92 5.89 6.79
Nov-92 6.22 6.94
Dec-92 5.99 6.69
Jan-93 5.55 6.36
Feb-93 5.21 6.02
Mar-93 5.24 6.02
Apr-93 5.11 6.01
May-93 5.37 6.15
Jun-93 5.05 5.78
Jul-93 5.15 5.81
Aug-93 4.79 5.45
Sep-93 4.77 5.38
Oct-93 4.85 5.43
Nov-93 5.16 5.82
Dec-93 5.21 5.79
Jan-94 5.02 5.64
Feb-94 5.57 6.13
Mar-94 6.23 6.74
Apr-94 6.64 7.04
May-94 6.76 7.15
Jun-94 6.95 7.32
Jul-94 6.73 7.11
Aug-94 6.8 7.17
Sep-94 7.28 7.6
Oct-94 7.49 7.81
Nov-94 7.79 7.91
Dec-94 7.83 7.82
Jan-95 7.51 7.58
Feb-95 7.04 7.2
Mar-95 7.07 7.2
Apr-95 6.88 7.06
May-95 6.05 6.28
Jun-95 5.97 6.2
Jul-95 6.16 6.43
Aug-95 6.07 6.28
Sep-95 6.02 6.18
Oct-95 5.81 6.02
Nov-95 5.52 5.74
Dec-95 5.38 5.57
Jan-96 5.24 5.58
Feb-96 5.73 6.1
Mar-96 6.09 6.33
Apr-96 6.41 6.67
May-96 6.63 6.85
Jun-96 6.46 6.71
Jul-96 6.57 6.79
Aug-96 6.73 6.94
Sep-96 6.46 6.7
Oct-96 6.07 6.34
Nov-96 5.83 6.04
Dec-96 6.21 6.42
Jan-97 6.25 6.49
Feb-97 6.39 6.55
Mar-97 6.75 6.9
Apr-97 6.57 6.72
May-97 6.5 6.66
Jun-97 6.38 6.5
Jul-97 5.9 6.01
Aug-97 6.22 6.34
Sep-97 5.99 6.1
Oct-97 5.71 5.83
Nov-97 5.84 5.87
Dec-97 5.71 5.74
Jan-98 5.38 5.51
Feb-98 5.59 5.62
Mar-98 5.62 5.65
Apr-98 5.64 5.67
May-98 5.55 5.55
Jun-98 5.47 5.45
Jul-98 5.5 5.49
Aug-98 4.8 4.98
Sep-98 4.22 4.42
Oct-98 4.23 4.61
Nov-98 4.48 4.71
Dec-98 4.54 4.65
Jan-99 4.55 4.65
Feb-99 5.22 5.29
Mar-99 5.1 5.24
Apr-99 5.21 5.35
May-99 5.58 5.62
Jun-99 5.65 5.78
Jul-99 5.79 5.9
Aug-99 5.87 5.97
Sep-99 5.75 5.88
Oct-99 5.95 6.02
Nov-99 6.11 6.19
Dec-99 6.34 6.44
Jan-00 6.68 6.67
Feb-00 6.6 6.41
Mar-00 6.31 6
Apr-00 6.54 6.21
May-00 6.52 6.27
Jun-00 6.18 6.03
Jul-00 6.15 6.03
Aug-00 5.97 5.72
Sep-00 5.85 5.8
Oct-00 5.81 5.75
</TABLE>
Yields, or interest rates, represent the cost of borrowing money. Rapid economic
growth or the expectation of higher inflation can drive rates up, while the
opposite conditions can push rates down. Other factors being equal, low interest
rates are positive for stock investors because low borrowing costs can help
boost corporate earnings.
Data source: Bloomberg L.P.
5
<PAGE> 10
the Fed has sought to slow the economy to a "soft landing" -- a growth rate that
is high enough to avoid recession but not so high as to tempt inflation.
Recent evidence indicates that economic growth has indeed slowed from its torrid
pace of the first half of 2000.
The question remains whether the slowdown is only a temporary condition prompted
by a build-up of manufacturing inventories or is the "soft landing" desired by
the Fed.
--------------------------------------------------------------------------------
The consensus among economists is that the U.S. economy appears poised for
continued growth, albeit at lower rates than those of the past few years.
--------------------------------------------------------------------------------
Source: Schwab.
Factors to watch may include consumer spending and employer competition for
workers. If the slowdown is in fact the desired "soft landing," we would expect
to see a slackening in one or both of these factors.
STOCK MARKETS OF SELECTED COUNTRIES
Four best-performing and four worst-performing countries in the MSCI-EAFE(R)
Index during the report period.
While foreign stocks rose 11.8% when measured in their local currencies, a
rising U.S. dollar changed that into a -2.9% return for American investors.
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
Finland 25.54
Denmark 16.93
Norway 14.06
Italy 11.77
MSCI-EAFE Index -2.9
Ireland -13.08
Austria -13.92
Belgium -17.75
New Zealand -29.06
</TABLE>
The MSCI Europe, Australasia and Far East (EAFE) Index includes 19 non-U.S.
countries with major stock markets. In any report period, the gap between the
best and worst performers may be substantial. Similarly, a country's performance
may vary widely from period to period, although it's possible for a country to
perform above or below average for an extended time.
Data source: Bloomberg L.P.
6
<PAGE> 11
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
PORTFOLIO PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 10/31/00
<TABLE>
<CAPTION>
Since Inception
One Year (11/18/96)
-------------------------------------------------------------------------------------
<S> <C> <C>
SCHWAB MARKETMANAGER GROWTH PORTFOLIO 1 12.98% 15.34%
-------------------------------------------------------------------------------------
Growth Composite Index 2 12.56% 13.49%
-------------------------------------------------------------------------------------
S&P 500(R) Index 6.09% 19.94%
-------------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index 7.30% 6.27%
-------------------------------------------------------------------------------------
</TABLE>
1 A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, the fund's average annual returns would have been
lower.
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. As of 10/31/00 there were 2,620 large-cap funds, 892
small-cap funds, 732 foreign funds and 559 intermediate-term bond funds
tracked by Morningstar. Performance includes changes in price and
reinvestment of dividends and capital gains.
Past performance doesn't indicate future results.
7
<PAGE> 12
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
[LINE GRAPH]
<TABLE>
<CAPTION>
Schwab MarketManager Lehman Brothers U.S.
Growth Portfolio S&P 500(R) Index Aggregate Bond Index Growth Composite Index
------------------ ---------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
11/18/96 10000 10000 10000 10000
11/30/96 10120 10271 10071 10144
12/31/96 10077 10068 9977 10122
1/31/97 10371 10696 10008 10362
2/28/97 10310 10780 10033 10326
3/31/97 10016 10338 9922 10069
4/30/97 10229 10955 10071 10227
5/31/97 10848 11621 10166 10856
6/30/97 11274 12141 10287 11270
7/31/97 11841 13106 10565 11848
8/31/97 11547 12372 10475 11521
9/30/97 12145 13049 10630 12107
10/31/97 11760 12613 10784 11662
11/30/97 11750 13197 10834 11713
12/31/97 11927 13424 10943 11826
1/31/98 11959 13573 11084 11912
2/28/98 12622 14552 11075 12588
3/31/98 13146 15297 11112 13083
4/30/98 13242 15452 11170 13210
5/31/98 13135 15186 11276 12999
6/30/98 13306 15802 11372 13140
7/31/98 13135 15635 11396 12924
8/31/98 11639 13377 11582 11307
9/30/98 11745 14235 11853 11601
10/31/98 12216 15392 11790 12188
11/30/98 12814 16325 11857 12760
12/31/98 13734 17265 11893 13341
1/31/99 14255 17987 11977 13555
2/28/99 13712 17427 11768 13072
3/31/99 14266 18124 11832 13433
4/30/99 14830 18826 11870 13975
5/31/99 14487 18381 11766 13778
6/30/99 15118 19402 11728 14404
7/31/99 14919 18796 11679 14343
8/31/99 14896 18702 11673 14240
9/30/99 14819 18190 11808 14180
10/31/99 15560 19341 11852 14650
11/30/99 16557 19734 11851 15346
12/31/99 18630 20897 11794 16551
1/31/00 17808 19848 11755 16051
2/29/00 19681 19472 11897 16935
3/31/00 19516 21376 12054 17380
4/30/00 18086 20733 12019 16648
5/31/00 17289 20308 12013 16179
6/30/00 18263 20809 12263 16906
7/31/00 17922 20485 12375 16603
8/31/00 18997 21757 12554 17458
9/30/00 18213 20608 12633 16882
10/31/00 17580 20522 12717 16490
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager Growth Portfolio, made at its inception, to similar
investments in the Growth Composite Index, the S&P 500(R) Index and the Lehman
Brothers U.S. Aggregate Bond Index. The hypothetical $10,000 investment assumes
investment on the first day of the month following inception and includes
changes in share price and reinvestment of dividends and capital gains. A
detailed analysis of the respective performances of the portfolios and the
indices is provided in the Portfolio Discussion section later in this report.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the portfolio. Investors cannot invest in an
index directly.
ASSETS
<TABLE>
<S> <C>
Total net assets as of 10/31/99 ($M) $181
--------------------------------------------------------------
Total net assets as of 10/31/00 ($M) $248
--------------------------------------------------------------
Percentage growth from 10/31/99 to 10/31/00 37%
--------------------------------------------------------------
</TABLE>
8
<PAGE> 13
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager Growth Portfolio seeks capital growth with less
volatility than a portfolio composed entirely of stock funds. The portfolio
allocations will vary as the portfolio manager adjusts the respective asset
mixes based on changing market conditions. The information below and on the
following page provides a snapshot of the portfolio's characteristics as of
October 31, 2000, and is not indicative of its composition after that date. The
terms used below are defined in the Glossary. A complete list of the securities
in the portfolio as of October 31, 2000 is provided in the Schedule of
Investments later in this report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
Schwab MarketManager Peer Group
Growth Portfolio* Average++
----------------------------------------------------------------------------
<S> <C> <C>
Number of Holdings 43 137
----------------------------------------------------------------------------
Median Market Cap ($M) $ 19,499 $ 56,749
----------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 40.2 34.3
----------------------------------------------------------------------------
Price/Book (P/B) Ratio 10.6 8.7
----------------------------------------------------------------------------
12-Month Yield 2.37% 0.45%
----------------------------------------------------------------------------
Portfolio Turnover Rate 179% 98%
----------------------------------------------------------------------------
Three-Year Beta 0.71++ 0.95
----------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.34%
----------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. (Schwab). 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 voluntary reduction by the investment adviser, Charles Schwab
Investment Management, Inc. (CSIM), and Schwab, which is guaranteed through
at least 2/28/01 (excluding interest, taxes and certain non-routine
expenses). The actual expense ratio during the report period was 0.01%
higher due to certain non-routine expenses. Underlying funds also charge
fees and incur expenses.
++ Source: Morningstar. The peer group average is based on 2,620 large-cap
funds as tracked by Morningstar as of 10/31/00.
9
<PAGE> 14
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
ASSET MIX
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
[PIE CHART]
<TABLE>
<S> <C>
Large-Cap 39.5
Small-Cap 23
International 20.4
Short-Term Investments 8.6
Bonds 8.5
</TABLE>
<TABLE>
<CAPTION>
Mix as of Target Mix in
10/31/00 Neutral Markets
-------------------------------------------------------------------
<S> <C> <C>
Stock Funds 82.9% 80.0%
-------------------------------------------------------------------
Bond Funds 8.5% 15.0%
-------------------------------------------------------------------
Short-Term Investments 8.6% 5.0%
===================================================================
Total 100.0% 100.0%
-------------------------------------------------------------------
</TABLE>
TOP TEN HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS 1
<TABLE>
<S> <C>
White Oak Growth Stock Fund 14.3%
------------------------------------------------------------
Artisan International Fund 6.1%
------------------------------------------------------------
American Century International Growth
Fund, Institutional Class 5.9%
------------------------------------------------------------
Rydex U.S. Government Money Market Fund 5.4%
------------------------------------------------------------
Oakmark Select Fund, Class I 5.3%
------------------------------------------------------------
Thornburg Value Fund, Institutional Class 4.6%
------------------------------------------------------------
T. Rowe Price Value Fund 4.1%
------------------------------------------------------------
Janus Olympus Fund 3.9%
------------------------------------------------------------
Schwab YieldPlus Fund, Select Shares 3.1%
------------------------------------------------------------
Janus Worldwide Fund 3.0%
------------------------------------------------------------
Total 55.7%
------------------------------------------------------------
</TABLE>
1 Nothing in this report represents a recommendation of a security by the
investment adviser. Portfolio holdings may have changed since the report
date.
10
<PAGE> 15
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
PORTFOLIO PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 10/31/00
<TABLE>
<CAPTION>
Since Inception
One Year (11/18/96)
---------------------------------------------------------------------------------
<S> <C> <C>
SCHWAB MARKETMANAGER BALANCED PORTFOLIO 1 12.00% 13.37%
---------------------------------------------------------------------------------
Balanced Composite Index 2 11.23% 11.79%
---------------------------------------------------------------------------------
S&P 500(R) Index 6.09% 19.94%
---------------------------------------------------------------------------------
Lehman Brothers U.S. Aggregate Bond Index 7.30% 6.27%
---------------------------------------------------------------------------------
</TABLE>
1 A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, the fund's average annual returns would have been
lower.
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. As of 10/31/00 there were 2,620 large-cap funds, 892
small-cap funds, 732 foreign funds and 559 intermediate-term bond funds
tracked by Morningstar. Performance includes changes in price and
reinvestment of dividends and capital gains.
Past performance doesn't indicate future results.
11
<PAGE> 16
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
Schwab Lehman Brothers Balanced
MarketManager S&P 500(R) U.S. Aggregate Bond Composite
Balanced Portfolio Index Index Index
------------------ ----------- -------------------- ----------
<S> <C> <C> <C> <C>
11/18/96 10000 10000 10000 10000
11/30/96 10100 10271 10071 10134
12/31/96 10059 10068 9977 10090
1/31/97 10322 10696 10008 10295
2/28/97 10271 10780 10033 10270
3/31/97 10018 10338 9922 10035
4/30/97 10200 10955 10071 10200
5/31/97 10676 11621 10166 10695
6/30/97 11041 12141 10287 11029
7/31/97 11517 13106 10565 11546
8/31/97 11284 12372 10475 11294
9/30/97 11770 13049 10630 11761
10/31/97 11527 12613 10784 11486
11/30/97 11558 13197 10834 11550
12/31/97 11719 13424 10943 11663
1/31/98 11762 13573 11084 11754
2/28/98 12251 14552 11075 12254
3/31/98 12634 15297 11112 12623
4/30/98 12688 15452 11170 12726
5/31/98 12613 15186 11276 12588
6/30/98 12783 15802 11372 12734
7/31/98 12677 15635 11396 12566
8/31/98 11581 13377 11582 11416
9/30/98 11740 14235 11853 11739
10/31/98 12092 15392 11790 12163
11/30/98 12560 16325 11857 12612
12/31/98 13311 17265 11893 13073
1/31/99 13693 17987 11977 13263
2/28/99 13224 17427 11768 12845
3/31/99 13650 18124 11832 13137
4/30/99 14130 18826 11870 13540
5/31/99 13868 18381 11766 13373
6/30/99 14326 19402 11728 13816
7/31/99 14141 18796 11679 13732
8/31/99 14119 18702 11673 13641
9/30/99 14119 18190 11808 13615
10/31/99 14664 19341 11852 13969
11/30/99 15341 19734 11851 14441
12/31/99 16742 20897 11794 15251
1/31/00 16155 19848 11755 14896
2/29/00 17353 19472 11897 15512
3/31/00 17390 21376 12054 15906
4/30/00 16534 20733 12019 15402
5/31/00 16033 20308 12013 15073
6/30/00 16705 20809 12263 15646
7/31/00 16498 20485 12375 15477
8/31/00 17341 21757 12554 16155
9/30/00 16815 20608 12633 15787
10/31/00 16424 20522 12717 15538
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
Schwab MarketManager Balanced Portfolio, made at its inception, to similar
investments in the Balanced Composite Index, the S&P 500(R) Index and the Lehman
Brothers U.S. Aggregate Bond Index. The hypothetical $10,000 investment assumes
investment on the first day of the month following inception and includes
changes in share price and reinvestment of dividends and capital gains. A
detailed analysis of the respective performances of the portfolios and the
indices is provided in the Portfolio Discussion section later in this report.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the portfolio. Investors cannot invest in an
index directly.
ASSETS
<TABLE>
<S> <C>
Total net assets as of 10/31/99 ($M) $122
-----------------------------------------------------------------
Total net assets as of 10/31/00 ($M) $153
-----------------------------------------------------------------
Percentage growth from 10/31/99 to 10/31/00 25%
-----------------------------------------------------------------
</TABLE>
12
<PAGE> 17
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager Balanced Portfolio seeks capital growth and income with
less volatility than the Growth Portfolio. The portfolio's allocation will vary
as the portfolio manager adjusts the respective asset mixes based on changing
market conditions. The information below and on the following page provides a
snapshot of the portfolio's characteristics as of October 31, 2000, and is not
indicative of its composition after that date. The terms used below are defined
in the Glossary. A complete list of the securities in the portfolio as of
October 31, 2000 is provided in the Schedule of Investments later in this
report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
Schwab MarketManager Peer Group
Balanced Portfolio* Average++
-----------------------------------------------------------------------------------
<S> <C> <C>
Number of Holdings 41 232
-----------------------------------------------------------------------------------
Median Market Cap ($M) $ 6,783 $ 43,750
-----------------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 32.5 30.6
-----------------------------------------------------------------------------------
Price/Book (P/B) Ratio 8.3 7.2
-----------------------------------------------------------------------------------
12-Month Yield 2.64% 2.65%
-----------------------------------------------------------------------------------
Portfolio Turnover Rate 114% 95%
-----------------------------------------------------------------------------------
Three-Year Beta 0.56++ 0.52
-----------------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.28%
-----------------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. (Schwab). 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 voluntary reduction by CSIM and Schwab, which is guaranteed
through at least 2/28/01 (excluding interest, taxes and certain non-routine
expenses). The actual expense ratio during the report period was 0.01%
higher due to certain non-routine expenses. Underlying funds also charge
fees and incur expenses.
++ Source: Morningstar. The peer group average is based on 736 domestic hybrid
funds as tracked by Morningstar as of 10/31/00.
13
<PAGE> 18
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
ASSET MIX
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
[PIE CHART]
<TABLE>
<S> <C>
Short-Term Investments 2.4%
International 13.1%
Small-Cap 19.6%
Bond 30.5%
Large-Cap 34.4%
</TABLE>
<TABLE>
<CAPTION>
Mix as of Target Mix in
10/31/00 Neutral Markets
---------------------------------------------------------------------------
<S> <C> <C>
Stock Funds 67.1% 60.0%
---------------------------------------------------------------------------
Bond Funds 30.5% 35.0%
---------------------------------------------------------------------------
Short-Term Investments 2.4% 5.0%
===========================================================================
Total 100.0% 100.0%
---------------------------------------------------------------------------
</TABLE>
TOP TEN HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS 1
<TABLE>
<S> <C>
------------------------------------------------------------
PIMCO Total Return Fund,
Institutional Class 14.0%
------------------------------------------------------------
White Oak Growth Stock Fund 10.4%
------------------------------------------------------------
Oakmark Select Fund, Class I 7.1%
------------------------------------------------------------
T. Rowe Price Value Fund 6.2%
------------------------------------------------------------
Thornburg Value Fund,
Institutional Class 5.9%
------------------------------------------------------------
Artisan International Fund 5.1%
------------------------------------------------------------
MainStay High Yield Corporate Bond
Fund, Class A 4.5%
------------------------------------------------------------
Federated U.S. Government Securities
Fund, 2-5 Years, Institutional Shares 4.5%
------------------------------------------------------------
American Century Intermediate
Term Treasury Fund 4.3%
------------------------------------------------------------
Janus Worldwide Fund 3.5%
------------------------------------------------------------
Total 65.5%
------------------------------------------------------------
</TABLE>
1 Nothing in this report represents a recommendation of a security by the
investment adviser. Portfolio holdings may have changed since the report
date.
14
<PAGE> 19
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 10/31/00
<TABLE>
<CAPTION>
Since Inception
One Year (9/16/97)
-----------------------------------------------------------------------------------------------
<S> <C> <C>
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO 1 15.17% 9.14%
-----------------------------------------------------------------------------------------------
Russell 2000(R) Index 17.41% 5.23%
-----------------------------------------------------------------------------------------------
Average Small-Cap Fund 2 29.08% 11.48%
-----------------------------------------------------------------------------------------------
</TABLE>
1 A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, the fund's average annual returns would have been
lower.
2 Source: Morningstar, Inc. The small-cap fund category contains 892 funds as
of 10/31/00.
Past performance doesn't indicate future results.
15
<PAGE> 20
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
<TABLE>
<CAPTION>
Schwab MarketManager Small
Cap Portfolio Russell 2000(R) Index
------------- ---------------------
<S> <C> <C>
9/16/97 10000 10000
9/30/97 10260 10201
10/31/97 9930 9753
11/30/97 9770 9690
12/31/97 9886 9859
1/31/98 9701 9704
2/28/98 10277 10420
3/31/98 10781 10849
4/30/98 10832 10909
5/31/98 10359 10321
6/30/98 10411 10342
7/31/98 9896 9505
8/31/98 8271 7659
9/30/98 8435 8259
10/31/98 8754 8595
11/30/98 9238 9046
12/31/98 9946 9606
1/31/99 10101 9734
2/28/99 9563 8945
3/31/99 10029 9085
4/30/99 10773 9899
5/31/99 10752 10043
6/30/99 11311 10497
7/31/99 11228 10210
8/31/99 10938 9832
9/30/99 10990 9834
10/31/99 11414 9874
11/30/99 12272 10464
12/31/99 13714 11648
1/31/00 13339 11460
2/29/00 15171 13353
3/31/00 14496 12473
4/30/00 13178 11722
5/31/00 12482 11038
6/30/00 14003 12001
7/31/00 13478 11615
8/31/00 14924 12501
9/30/00 14164 12133
10/31/00 13146 11592
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
MarketManager Small Cap Portfolio, made at its inception, to a similar
investment in the Russell 2000(R) Index. The hypothetical $10,000 investment
assumes investment on the first day of the month following inception and
includes changes in share price and reinvestment of dividends and capital gains.
A detailed analysis of the performances of the portfolio and its index is
provided in the Portfolio Discussion section later in this report.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the portfolio. Investors cannot invest in an
index directly.
ASSETS
<TABLE>
<S> <C>
------------------------------------------------------------------
Total net assets as of 10/31/99 ($M) $123
------------------------------------------------------------------
Total net assets as of 10/31/00 ($M) $162
------------------------------------------------------------------
Percentage change from 10/31/99 to 10/31/00 32%
------------------------------------------------------------------
</TABLE>
16
<PAGE> 21
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager Small Cap Portfolio seeks long-term capital
appreciation. It invests primarily in small-company stock funds. The information
below and on the following page provides a snapshot of the portfolio's
characteristics as of October 31, 2000, and is not indicative of its composition
after that date. The terms used below are defined in the Glossary. A complete
list of the securities in the portfolio as of October 31, 2000 is provided in
the Schedule of Investments later in this report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
Schwab MarketManager Peer Group
Small Cap Portfolio* Average++
--------------------------------------------------------------------------------
<S> <C> <C>
Number of Holdings 25 181
--------------------------------------------------------------------------------
Median Market Cap ($M) $1,441 $1,256
--------------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 37.4 27.7
--------------------------------------------------------------------------------
Price/Book (P/B) Ratio 7.5 5.5
--------------------------------------------------------------------------------
12-Month Yield 3.73%++ 0.22%
--------------------------------------------------------------------------------
Portfolio Turnover Rate 128% 105%
--------------------------------------------------------------------------------
Three-Year Beta 0.85++ 0.91
--------------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.55%
--------------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. (Schwab). 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 voluntary reduction by CSIM and Schwab, which is guaranteed
through at least 2/28/01 (excluding interest, taxes and certain non-routine
expenses). The actual expense ratio during the report period was 0.01%
higher due to certain non-routine expenses. Underlying funds also charge
fees and incur expenses.
++ Source: Morningstar. The peer group average is based on 892 small-cap funds
as tracked by Morningstar as of 10/31/00.
17
<PAGE> 22
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
[ASSET MIX PIE CHART]
<TABLE>
<S> <C>
Short-Term Investments 8.3
Small Cap Growth 20.3
Mid Cap 23.5
Micro Cap 11.2
Small Cap Value 16.5
Small Cap Blend 20.2
</TABLE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS 1
--------------------------------------------------------------------------------
<S> <C>
Managers Special Equity Fund 14.1%
--------------------------------------------------------------------------------
Melody 4500 Fund L.P. 7.2%
--------------------------------------------------------------------------------
Artisan Mid Cap Fund 7.1%
--------------------------------------------------------------------------------
Fremont U.S. Micro Cap Fund 6.5%
--------------------------------------------------------------------------------
State Street Research Aurora Fund,
Class A 6.0%
--------------------------------------------------------------------------------
John Hancock Small Cap Value
Fund, Class A 5.8%
--------------------------------------------------------------------------------
Longleaf Partners Small Cap Fund 3.9%
--------------------------------------------------------------------------------
MAS Small Cap Value Fund,
Institutional Class 3.5%
--------------------------------------------------------------------------------
Red Oak Technology Select Fund 3.4%
--------------------------------------------------------------------------------
Pin Oak Aggressive Stock Fund 3.4%
================================================================================
Total 60.9%
--------------------------------------------------------------------------------
</TABLE>
1 Nothing in this report represents a recommendation of a security by the
investment adviser. Portfolio holdings may have changed since the report
date.
18
<PAGE> 23
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED 10/31/00
<TABLE>
<CAPTION>
Since Inception
One Year (10/16/96)
--------------------------------------------------------------------------------
<S> <C> <C>
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO 1 18.61% 17.58%
--------------------------------------------------------------------------------
MSCI-EAFE(R) Index (2.90%) 7.66%
--------------------------------------------------------------------------------
Average Foreign Fund 2 4.25% 10.79%
--------------------------------------------------------------------------------
</TABLE>
1 A portion of the fund's expenses was reduced during the reporting period.
Without such reductions, the fund's average annual returns would have been
lower.
2 Source: Morningstar, Inc. The foreign fund category contains 732 funds as
of 10/31/00.
Past performance doesn't indicate future results.
19
<PAGE> 24
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
[HYPOTHETICAL INVESTMENT LINE GRAPH]
<TABLE>
<CAPTION>
Schwab MarketManager
International Portfolio MSCI-EAFE(R) ND Index
----------------------- ---------------------
<S> <C> <C>
10/16/96 10000 10000
10/31/96 9910 9836
11/30/96 10220 10228
12/31/96 10313 10096
1/31/97 10426 9742
2/28/97 10599 9902
3/31/97 10558 9938
4/30/97 10609 9991
5/31/97 11209 10641
6/30/97 11697 11227
7/31/97 11962 11409
8/31/97 11199 10557
9/30/97 11830 11148
10/31/97 11046 10291
11/30/97 10894 10186
12/31/97 11016 10274
1/31/98 11146 10744
2/28/98 11925 11434
3/31/98 12670 11786
4/30/98 12952 11879
5/31/98 13265 11821
6/30/98 13157 11911
7/31/98 13525 12031
8/31/98 11654 10540
9/30/98 11006 10217
10/31/98 11438 11281
11/30/98 12011 11859
12/31/98 12481 12327
1/31/99 12820 12290
2/28/99 12415 11998
3/31/99 12853 12498
4/30/99 13815 13004
5/31/99 13170 12335
6/30/99 14428 12816
7/31/99 14985 13196
8/31/99 15248 13245
9/30/99 15401 13379
10/31/99 16232 13881
11/30/99 18683 14362
12/31/99 21819 15652
1/31/00 21236 14658
2/29/00 24410 15052
3/31/00 23356 15636
4/30/00 21149 14814
5/31/00 20120 14452
6/30/00 21100 15018
7/31/00 20554 14388
8/31/00 21249 14513
9/30/00 20120 13806
10/31/00 19253 13481
</TABLE>
The above graph compares the growth of a hypothetical $10,000 investment in the
MarketManager International Portfolio, made at its inception, with a similar
investment in the Morgan Stanley Capital International Europe Australasia, Far
East (MSCI-EAFE)(R) Index. A detailed analysis of the performances of the
portfolio and index is provided in the Portfolio Discussion section later in
this report.
THE INFORMATION PRESENTED IS HISTORICAL AND DOES NOT REPRESENT FUTURE RESULTS.
TOTAL RETURNS ASSUME REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS. PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL
COST. Indices are unmanaged and do not reflect advisory fees and other expenses
associated with an investment in the portfolio. Investors cannot invest in an
index directly.
<TABLE>
<CAPTION>
ASSETS
--------------------------------------------------------------------------------
<S> <C>
Total net assets as of 10/31/99 ($M) $104
--------------------------------------------------------------------------------
Total net assets as of 10/31/00 ($M) $278
--------------------------------------------------------------------------------
Percentage growth from 10/31/99 to 10/31/00 167%
--------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 25
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
PORTFOLIO SNAPSHOT
The Schwab MarketManager International Portfolio offers broad diversification
across international stocks with the convenience of a single investment. The
portfolio can be used to fulfill all or part of the international equity
component of your asset allocation plan. The information below and on the
following page provides a snapshot of the portfolio's characteristics as of
October 31, 2000, and is not indicative of its composition after that date. The
terms used below are defined in the Glossary. A complete list of the securities
in the portfolio as of October 31, 2000 is provided in the Schedule of
Investments later in this report.
PORTFOLIO FACTS
<TABLE>
<CAPTION>
Schwab MarketManager Peer Group
International Portfolio* Average++
--------------------------------------------------------------------------------
<S> <C> <C>
Number of Holdings 19 166
--------------------------------------------------------------------------------
Median Market Cap ($M) $10,449 $22,343
--------------------------------------------------------------------------------
Price/Earnings (P/E) Ratio 36.0 34.1
--------------------------------------------------------------------------------
Price/Book (P/B) Ratio 7.1 6.4
--------------------------------------------------------------------------------
12-Month Yield 3.18% 0.77%
--------------------------------------------------------------------------------
Portfolio Turnover Rate 80% 92%
--------------------------------------------------------------------------------
Three-Year Beta 0.66++ 0.72
--------------------------------------------------------------------------------
Expense Ratio 0.50%+ 1.69%
--------------------------------------------------------------------------------
</TABLE>
* Compiled by Charles Schwab & Co., Inc. (Schwab). 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 foreign funds invest primarily in
individual securities.
+ Reflects a voluntary reduction by CSIM and Schwab, which is guaranteed
through at least 2/28/01 (excluding interest, taxes and certain non-routine
expenses). The actual expense ratio during the report period was 0.01%
higher due to non-routine expenses. Underlying funds also charge fees and
incur expenses.
++ Source: Morningstar. The peer group average is based on 732 foreign funds
as tracked by Morningstar as of 10/31/00.
21
<PAGE> 26
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
ASSET MIX
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
[PIE CHART]
<TABLE>
<S> <C>
International Diversified Mutual Funds 90.3%
Asian Regional Mutual Funds 1.6%
Short-Term Investments 4.2%
European Regional Mutual Funds 3.9%
</TABLE>
<TABLE>
<CAPTION>
TOP FIVE COUNTRIES
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
--------------------------------------------------------------------------------
<S> <C>
United Kingdom 14.67%
--------------------------------------------------------------------------------
Japan 9.89%
--------------------------------------------------------------------------------
USA 8.40%
--------------------------------------------------------------------------------
Switzerland 5.99%
--------------------------------------------------------------------------------
France 5.89%
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
REGIONAL DIVERSIFICATION
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS
<S> <C>
Developed Europe 1 50.41%
--------------------------------------------------------------------------------
Developed Pacific 2 15.78%
--------------------------------------------------------------------------------
Short-Term Investments 12.85%
--------------------------------------------------------------------------------
United States 8.40%
--------------------------------------------------------------------------------
Canada 5.64%
--------------------------------------------------------------------------------
Emerging Markets 5.60%
--------------------------------------------------------------------------------
Other Countries 1.32%
--------------------------------------------------------------------------------
Total 100.0%
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOP TEN HOLDINGS
AS A PERCENTAGE OF PORTFOLIO INVESTMENTS 3
--------------------------------------------------------------------------------
<S> <C>
Artisan International Fund 20.9%
--------------------------------------------------------------------------------
Tweedy Browne Global Value Fund 15.3%
--------------------------------------------------------------------------------
Janus Overseas Fund 12.9%
--------------------------------------------------------------------------------
American Century International Discovery
Fund, Institutional Class 11.4%
--------------------------------------------------------------------------------
American Century International Growth
Fund, Institutional Class 6.1%
--------------------------------------------------------------------------------
Pilgrim International Small Cap Growth
Fund, Class Q 5.9%
--------------------------------------------------------------------------------
Oakmark International Fund 4.4%
--------------------------------------------------------------------------------
AIM European Development Fund, Class A 3.9%
--------------------------------------------------------------------------------
Longleaf Partners International Fund 3.0%
--------------------------------------------------------------------------------
Janus Worldwide Fund 2.4%
--------------------------------------------------------------------------------
Total 86.2%
--------------------------------------------------------------------------------
</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.
3 Nothing in this report represents a recommendation of a security by the
investment adviser. Portfolio holdings may have changed since the report
date.
22
<PAGE> 27
PORTFOLIO MANAGEMENT
PORTFOLIO MANAGEMENT TEAM:
JEFF MORTIMER, vice president and senior portfolio manager, is responsible for
the overall management of the MarketManager portfolios. Until February 29, 2000,
Cynthia Liu was the manager for the International and Small-Cap portfolios.
Cynthia co-managed the Growth and Balanced portfolios with Jeff. Prior to
joining CSIM in November 1997, Jeff was employed by Higgins Associates, where he
was Chief Investment Officer, managing and advising nearly $1 billion in assets.
Prior to that, Jeff was employed by Gannett Welsh & Kotler, a money management
firm.
23
<PAGE> 28
PORTFOLIO DISCUSSION
QUESTIONS TO THE
PORTFOLIO MANAGEMENT TEAM
GROWTH & BALANCED PORTFOLIOS
Q. HOW DID THE PORTFOLIOS PERFORM DURING THE REPORTING PERIOD?
A. The Growth and Balanced Portfolios produced total returns of 12.98% and
12.00%, respectively for the one year reporting period ended October 31, 2000.
As shown on the preceding pages, both portfolios achieved returns that were
greater than their respective composite indices for the period. 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. Two distinct performance periods characterize the fiscal year. From November
1999 through March 2000, large-cap growth dominated all other asset classes.
However, April through October 2000 was a completely different story, as
large-cap growth struggled relative to its domestic counterparts. International
funds followed a similar pattern, performing well towards the end of 1999, but
lagging other asset classes for the one-year report period.
<TABLE>
<CAPTION>
One Year
Return as of
Asset Class Index 10/31/00
--------------------------------------------------------------------------------
<S> <C> <C>
Large-Cap Stocks S&P 500(R) Index 6.09%
--------------------------------------------------------------------------------
Small-Cap Stocks Russell 2000(R) Index 17.41%
--------------------------------------------------------------------------------
International Stocks MSCI-EAFE(R) Index (2.90%)
--------------------------------------------------------------------------------
Bonds Lehman Aggregate 7.30%
Bond Index
--------------------------------------------------------------------------------
Cash Three-Month 6.13%
Treasury Bill
--------------------------------------------------------------------------------
</TABLE>
Q. WHICH UNDERLYING FUNDS PERFORMED PARTICULARLY WELL FOR THE PORTFOLIOS?
A. Those mutual funds which were able to participate in the market's strength
while still protecting shareholders in the more turbulent times served the
portfolios well. The highest performing funds included White Oak, Thornburg
Value and Oakmark International. On the fixed income side, PIMCO Total Return
posted strong returns. 1
1 Nothing in this report represents a recommendation of a security by the
investment adviser. Portfolio holdings may have changed since the report
date.
24
<PAGE> 29
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. In general, the portfolios were more defensive during the reporting period.
This strategy was accomplished by reducing exposure to the growth style of
investing, and by moving proceeds from sales into the value side of the
spectrum. We also reduced exposure to small-cap mutual funds, in favor of more
stable large-cap and mid-cap holdings. International fund and bond fund
exposures were also reduced modestly.
At the close of the reporting period, relative to their benchmarks, the
portfolios were near neutral weight in their equity mutual fund exposure,
underweighted in fixed income, and overweighted in cash. Within the equity
component of the asset allocation, the portfolios were slightly overweighted in
large-cap stock mutual funds and small-mid cap mutual funds, and underweighted
in international funds.
The charts below show the two portfolios' actual asset mixes for each month
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.
[SCHWAB MARKETMANAGER GROWTH PORTFOLIO CHART]
<TABLE>
<CAPTION>
International Small Cap Large Cap
Cash Bonds Equity Equity Equity
---- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
11/30/99 5.27 6.76 23.72 23.74 40.51
12/31/99 4.02 5.89 23.95 26.04 40.1
1/31/00 9.66 6.13 20.97 26.66 36.58
2/29/00 7.49 5.36 19.61 32.3 35.24
3/31/00 12.21 5.24 19.22 27.87 35.46
4/30/00 15.27 5.53 18.25 22.9 38.05
5/31/00 15.52 5.76 20.95 21.47 36.3
6/30/00 15 5.37 19.41 23.86 36.36
7/31/00 15.11 5.14 19.71 22.36 37.68
8/31/00 15.3 4.88 18.92 22.99 37.91
9/30/00 15.05 5.07 18.45 22.58 38.85
10/31/00 11.81 5.31 20.38 22.96 39.53
</TABLE>
[SCHWAB MARKETMANAGER BALANCED PORTFOLIO CHART]
<TABLE>
<CAPTION>
International Small Cap Large Cap
Cash Bonds Equity Equity Equity
---- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
11/30/99 6.01 26.96 16.09 20.53 30.41
12/31/99 4.83 25.77 16.81 21.66 30.93
1/31/00 6.29 29.02 16.08 18.34 30.27
2/29/00 5.33 26.99 15.02 24.26 28.4
3/31/00 9.58 27.01 12.42 19.71 31.28
4/30/00 8.09 28.05 10.94 17.35 35.57
5/31/00 8.96 28.7 11.61 16.79 33.94
6/30/00 5.33 27.87 12.8 21.53 32.47
7/31/00 6.18 28.23 12.39 20.96 32.24
8/31/00 5.43 27.35 13.02 21.69 32.51
9/30/00 4.69 28.21 12.55 21.04 33.5
10/31/00 4.1 28.77 13.08 19.58 34.47
</TABLE>
25
<PAGE> 30
PORTFOLIO DISCUSSION Continued
Q. CAN YOU SHARE A COUPLE EXAMPLES OF ANY NEW FUNDS THE PORTFOLIOS PURCHASED
DURING THE PERIOD, AND WHY? 1
A. Two funds purchased during the report period were Oakmark Select Fund and
Tweedy Brown Global Value. These funds were purchased in order to increase our
exposure to the value style, both domestically and internationally. The Oakmark
Select Fund is a large-cap domestic value fund that holds a concentrated
portfolio of about 25 names. The manager of this fund looks for stocks that are
trading below what he believes to be fair value. The Tweedy Brown Global Value
fund was added toward the end of the reporting period, and is used to offset
some of our exposure to our international funds that are more growth oriented,
such as Artisan International, and American Century International Growth.
SMALL CAP PORTFOLIO
Q. HOW DID THE PORTFOLIO PERFORM DURING THE REPORTING PERIOD?
A. The portfolio achieved a total return of 15.17% for the one year reporting
period ended October 31, 2000, compared to the average small-cap fund, which
returned 29.08% and the Russell 2000 Index which was up 17.41%. 2
Q. WHICH UNDERLYING FUNDS PERFORMED PARTICULARLY WELL FOR THE PORTFOLIO?
A. Funds which focused on the value side of the investment spectrum performed
the best on a relative and absolute basis during the report period. These funds
include State Street Research Aurora and Longleaf Partners Small Cap. 1
Q. HOW DID THE PORTFOLIO'S STRATEGY CHANGE DURING THE REPORTING PERIOD, AND HOW
WAS IT POSITIONED AT THE CLOSE OF THE PERIOD?
A. The portfolio was little changed during the period, although some additions
were made in the small-cap value asset class with proceeds from sales of more
sector specific mutual funds. The small-cap blend category was also reduced in
favor of value. At the close of the period, the portfolio had about 24% in
mid-cap, 20% in small-cap growth, 17% in small-cap value, with the remaining 39%
of assets in micro-cap, small-blend and cash.
Q. CAN YOU SHARE A COUPLE OF EXAMPLES OF NEW FUNDS PURCHASED DURING THE PERIOD,
AND WHY? 1
A. To increase our small-cap blend exposure (a combination of growth and value),
MAS Small Cap Value fund was added during the period. To increase exposure to
the mid-cap growth area, Artisan Mid Cap Fund was added, as this manager has
demonstrated an ability to perform well in diverse market conditions.
1 Nothing in this report represents a recommendation of a security by the
investment adviser. Portfolio holdings may have changed since the report
date.
2 Source: Morningstar, Inc. As of 10/31/00, the small-cap fund category
contained 892 funds.
26
<PAGE> 31
INTERNATIONAL PORTFOLIO
Q. HOW DID THE PORTFOLIO PERFORM DURING THE REPORTING PERIOD?
A. The portfolio achieved a total return of 18.61% for the one-year reporting
period ended October 31, 2000, comparing very favorably to the average foreign
stock fund, which returned 4.25% and the MSCI-EAFE(R) Index which was down
2.90%. 3
Q. WHICH SECTORS OR REGIONS PERFORMED WELL FOR THE PORTFOLIO?
A. Many sectors in the international markets had a difficult time over the past
twelve months, as generally the world followed the U.S. markets through their
difficult times. The relatively strongest region was Europe, while Japan
continued to be weak.
Q. WHAT IMPACT DID CURRENCY EXCHANGE RATES HAVE ON THE PERFORMANCE OF
INTERNATIONAL EQUITIES?
A. A strengthening dollar relative to foreign currencies generally hurts
portfolio returns. Over the reporting period, foreign currencies generally
weakened relative to the dollar, although the yen/dollar relationship continued
to be volatile over the period. The euro has weakened against the dollar since
its inception on January 1, 1999.
Q. HOW DID THE PORTFOLIO'S STRATEGY CHANGE DURING THE REPORTING PERIOD, AND HOW
WAS IT POSITIONED VERSUS THE MSCI-EAFE(R) INDEX AT THE CLOSE OF THE PERIOD?
A. During the reporting period, the portfolio's European weighting was increased
slightly, as profits were taken from some Asian holdings and reinvested in
Europe. We also sold off some of our international growth funds and replaced
them with some global value funds. During most of the reporting period, the
portfolio was overweighted in Europe and small company stocks relative to the
MSCI-EAFE(R) Index, with the Pacific region representing slightly less than its
target.
[SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO CHART]
<TABLE>
<CAPTION>
Developed Developed Emerging Other
Canada USA Europe Pacific Markets Countries Cash
------ --- ------ ------- ------- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Oct-99 4.21 2.31 40.41 34.57 5.55 1.42 11.53
Nov-99 4.4 3.12 41.14 35.28 6.61 1.25 8.2
Dec-99 4.78 4.4 42.83 30.35 7.96 1 8.68
Jan-00 4.4 4.23 44.72 26.15 8.6 1.34 10.56
Feb-00 4.25 5.19 48.91 22.16 8.55 0.79 10.15
Mar-00 4.72 5.03 49 22.84 8.41 0.84 9.16
Apr-00 4.41 4.27 50.83 20.31 7.76 0.9 11.52
May-00 4.46 5.21 50.78 20.5 7.31 1.11 10.63
Jun-00 4.35 4.75 50.82 19.37 8.01 0.89 11.81
Jul-00 4.99 5.44 51.75 17.63 7.93 0.51 11.75
Aug-00 6.15 6.15 50.7 17.79 7.21 0.68 11.32
Sep-00 5.6 9.16 50.79 15.17 6.34 1.1 11.84
Oct-00 5.64 8.4 50.41 15.78 5.6 1.32 12.85
</TABLE>
3 Source: Morningstar, Inc. As of 10/31/00, the Foreign Stock Fund category
contained 732 funds.
27
<PAGE> 32
GLOSSARY
ASSET ALLOCATION -- The division of holdings among different types of assets,
such as domestic stocks, international stocks, bonds and cash-equivalent
securities.
BETA -- A measure of a stock's volatility relative to the overall stock market.
The beta of the S&P 500(R) 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 net assets, 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.
28
<PAGE> 33
TOTAL RETURN -- The overall performance of an investment over a given period,
including any expenses, any income or distributions paid out and any capital
gain or loss (increases or decreases in portfolio value).
TURNOVER RATE -- A measure 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
market value.
29
<PAGE> 34
SCHWAB MARKETMANAGER GROWTH PORTFOLIO
SCHEDULE OF INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
INVESTMENT FUNDS -- 91.3%
ASIAN FUNDS -- 0.4%
Scudder Japan Fund 82,201 $ 1,008
---------
BOND FUNDS -- 8.4%
American Century Intermediate
Term Treasury Fund 513,177 5,260
American Century Long Term
Treasury Fund 124,634 1,248
American Century Target
2020 Fund 32,669 1,168
PIMCO Total Return Fund,
Institutional Class 544,307 5,498
Schwab YieldPlus Fund(TM),
Select Shares 778,769 7,733
---------
20,907
---------
INTERNATIONAL STOCK FUNDS -- 20.0%
American Century International
Discovery Fund, Institutional Class 128,509 2,081
American Century International
Growth Fund, Institutional Class 1,136,057 14,644
Artisan International Fund 580,658 14,964
Dreyfus Founders Passport Fund+ 94,161 1,694
Janus Worldwide Fund+ 105,259 7,447
Oakmark International Fund 169,668 2,560
Tweedy Browne Global Value Fund+ 270,810 6,090
---------
49,480
---------
LARGE-CAP FUNDS -- 38.9%
Accessor Value Fund, Advisor Shares 105,960 2,245
Dodge & Cox Stock Fund 34,190 3,460
Heritage Capital Appreciation
Fund, Class A 218,846 6,940
Janus Olympus Fund+ 190,830 9,637
Janus Twenty Fund 39,473 2,805
Longleaf Partners Fund 20,840 468
Managers Capital Appreciation Fund+ 53,997 2,919
Oakmark Select Fund, Class I 589,734 12,980
Rydex Series Trust Nova Fund 190,878 7,215
Rydex Series Trust OTC Fund 87,664 2,110
T. Rowe Price Value Fund+ 524,717 10,185
White Oak Growth Stock Fund+ 458,418 35,321
---------
96,285
---------
SECTOR FUNDS -- 4.0%
Firsthand Technology Value Fund+ 48,959 5,331
Franklin Biotechnology Discovery
Fund, Class A+ 36,164 3,028
Heritage Technology Fund, Class A+ 93,953 1,637
---------
9,996
---------
SMALL-CAP / MID-CAP FUNDS -- 19.6%
Berger Small Cap Value Fund,
Institutional Class 94,544 2,390
Hambrecht & Quist IPO &
Emerging Company Fund 55,813 562
Kopp Emerging Growth Fund,
Class A+ 246,412 6,446
Loomis Sayles Small Cap
Growth Fund+ 57,705 1,404
MAS Small Cap Value Fund,
Institutional Class+ 122,554 2,547
Melody 4500 Fund L.P.+** 232,023 2,731
Neuberger Berman
Millennium Fund+ 190,311 5,399
Robertson Stephens Emerging
Growth Fund, Class A+ 20,840 1,142
Robertson Stephens Mid Cap
Opportunities Fund+ 215,614 3,348
Thornburg Value Fund, Class A 224,620 7,408
Thornburg Value Fund,
Institutional Class 341,778 11,313
VAN Wagoner Emerging
Growth Fund+ 67,086 3,488
Weitz Series Hickory Fund 17,111 459
---------
48,637
---------
TOTAL INVESTMENT FUNDS
(Cost $211,446) 226,313
---------
</TABLE>
30
<PAGE> 35
<TABLE>
<CAPTION>
Number of Value
Shares/Par (000s) (000s)
----------------- ----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 8.5%
Bank One Grand Cayman
Time Deposit
6.03%*, 11/01/00 $ 3,821 $ 3,821
Rydex U.S. Government
Money Market Fund, 5.78%* 13,226,878 13,227
Wachovia Bank NA Time Deposit
6.03%*, 11/01/00 4,000 4,000
---------
TOTAL SHORT-TERM INVESTMENTS
(Cost $21,048) 21,048
---------
TOTAL INVESTMENTS -- 99.8%
(Cost $232,494) 247,361
---------
OTHER ASSETS AND LIABILITIES, NET -- 0.2%
Other assets 4,616
Liabilities (4,199)
---------
417
---------
TOTAL NET ASSETS -- 100.0% $247,778
=========
</TABLE>
See accompanying Notes to Schedules of Investments and Notes to Financial
Statements.
31
<PAGE> 36
SCHWAB MARKETMANAGER BALANCED PORTFOLIO
SCHEDULE OF INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
INVESTMENT FUNDS -- 97.6%
ASIAN FUNDS -- 0.4%
Scudder Japan Fund 51,939 $ 637
---------
BOND FUNDS -- 30.5%
American Century Intermediate
Term Treasury Fund 633,869 6,497
American Century Long Term
Treasury Fund 235,022 2,353
Federated U.S. Government
Securities Fund, 2-5 Years,
Institutional Shares 652,940 6,875
MainStay High Yield Corporate
Bond Fund, Class A 1,037,164 6,908
PIMCO Total Return Fund,
Institutional Class 2,113,182 21,343
Schwab YieldPlus Fund(TM),
Select Shares 259,589 2,578
---------
46,554
---------
INTERNATIONAL STOCK FUNDS -- 12.6%
American Century International
Discovery Fund, Institutional Class 24,912 403
Artisan International Fund 300,014 7,731
Dreyfus Founders Passport Fund+ 70,621 1,271
Janus Worldwide Fund+ 75,694 5,355
Oakmark International Fund 52,443 791
Tweedy Browne Global Value Fund+ 166,836 3,752
---------
19,303
---------
LARGE-CAP FUNDS -- 34.4%
Accessor Value Fund, Advisor Shares 44,988 953
Dodge & Cox Stock Fund 20,131 2,037
Heritage Capital Appreciation
Fund, Class A 46,453 1,473
Janus Olympus Fund+ 78,756 3,977
Janus Twenty Fund 9,407 669
Longleaf Partners Fund 26,813 602
Managers Capital Appreciation Fund+ 20,037 1,083
Marsico Focus Fund 104,904 $ 2,138
Oakmark Select Fund, Class I 489,546 10,776
Rydex Series Trust Nova Fund 95,390 3,606
T. Rowe Price Value Fund+ 483,170 9,378
White Oak Growth Stock Fund+ 205,772 15,855
---------
52,547
---------
SECTOR FUNDS -- 2.2%
Firsthand Technology Value Fund+ 16,388 1,785
Franklin Biotechnology Discovery
Fund, Class A+ 17,871 1,496
---------
3,281
---------
SMALL-CAP / MID-CAP FUNDS -- 17.5%
Hambrecht & Quist IPO & Emerging
Company Fund 35,728 360
Kopp Emerging Growth
Fund, Class A+ 116,022 3,035
Loomis Sayles Small Cap
Growth Fund+ 37,338 909
MAS Small Cap Value Fund,
Institutional Class+ 63,025 1,310
Melody 4500 Fund L.P.+** 400,000 4,708
Neuberger Berman
Millennium Fund+ 42,948 1,218
Robertson Stephens Emerging
Growth Fund, Class A+ 6,230 341
Robertson Stephens Mid Cap
Opportunities Fund+ 137,939 2,142
Thornburg Value Fund, Class A 80,355 2,650
Thornburg Value Fund,
Institutional Class 269,831 8,931
VAN Wagoner Emerging
Growth Fund+ 9,572 498
Weitz Series Hickory Fund 20,699 555
---------
26,657
---------
TOTAL INVESTMENT FUNDS
(Cost $140,696) 148,979
---------
</TABLE>
32
<PAGE> 37
<TABLE>
<CAPTION>
Number of Value
Shares/Par (000s) (000s)
---------------- ----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 2.4%
Rydex U.S. Government
Money Market Fund, 5.78%* 1,551,155 $ 1,551
Wachovia Bank NA Time Deposit
6.03%*, 11/01/00 $ 2,023 2,023
-----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $3,574) 3,574
-----------
TOTAL INVESTMENTS -- 100.0%
(Cost $144,270) 152,553
-----------
OTHER ASSETS AND LIABILITIES, NET -- 0.0%
Other assets 2,139
Liabilities (2,078)
-----------
61
-----------
TOTAL NET ASSETS -- 100.0% $ 152,614
===========
</TABLE>
See accompanying Notes to Schedules of Investments and Notes to Financial
Statements.
33
<PAGE> 38
SCHWAB MARKETMANAGER SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
INVESTMENT FUNDS -- 95.5%
SECTOR FUNDS -- 11.1%
Dresdner RCM Global Health
Care Fund+ 163,484 $ 4,036
Firsthand Technology Value Fund+ 22,511 2,451
Franklin Biotechnology Discovery
Fund, Class A+ 67,304 5,635
Red Oak Technology Select Fund+ 170,696 5,778
----------
17,900
----------
SMALL-CAP/MID-CAP FUNDS -- 84.4%
AIM Mid Cap Equity Fund, Class A+ 181,422 5,000
Artisan Mid Cap Fund+ 397,234 11,897
Forward Hoover Small Cap
Equity Fund+ 101,283 1,420
Fremont U.S. Micro Cap Fund 313,398 10,969
John Hancock Small Cap
Value Fund, Class A+ 445,062 9,823
Kopp Emerging Growth
Fund, Class A+ 153,802 4,023
Longleaf Partners Small Cap Fund 307,025 6,549
Managers Special Equity Fund 247,464 23,695
MAS Small Cap Value Fund,
Institutional Class+ 279,274 5,803
Melody 4500 Fund L.P.+** 1,025,543 12,071
MFS Mid Cap Growth Fund+ 177,976 3,312
PBHG Small Cap Value Fund 194,923 3,859
Pin Oak Aggressive Stock Fund 82,738 5,746
State Street Research Aurora
Fund, Class A+ 351,703 10,133
Turner Micro Cap Growth Fund+ 126,707 5,348
Turner Small Cap Growth Fund 116,835 4,746
Value Line Special Situations Fund 128,281 3,671
VAN Wagoner Emerging
Growth Fund+ 103,238 5,368
VAN Wagoner Micro Cap Fund+ 62,082 2,532
Weitz Series Hickory Fund 15,322 411
----------
136,376
----------
TOTAL INVESTMENT FUNDS
(Cost $141,429) 154,276
----------
</TABLE>
<TABLE>
<CAPTION>
Par Value
(000s) (000s)
--------- ----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 8.6%
Bank One Grand Cayman
Time Deposit
6.03%*, 11/01/00 $3,000 $ 3,000
Chase Manhattan Bank NY
Time Deposit
6.03%*, 11/01/00 1,892 1,892
Citibank Nassau TCA
Time Deposit
6.03%*, 11/01/00 3,000 3,000
HSBC Holdings PLC Grand Cayman
Time Deposit
6.03%*, 11/01/00 3,000 3,000
Wachovia Bank Time Deposit
6.03%*, 11/01/00 3,000 3,000
----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $13,892) 13,892
----------
TOTAL INVESTMENTS -- 104.1%
(Cost $155,321) 168,168
----------
OTHER ASSETS AND LIABILITIES, NET -- (4.1%)
Other assets 84
Liabilities (6,652)
----------
(6,568)
----------
TOTAL NET ASSETS -- 100.0% $ 161,600
==========
</TABLE>
See accompanying Notes to Schedules of Investments and Notes to Financial
Statements.
34
<PAGE> 39
SCHWAB MARKETMANAGER INTERNATIONAL PORTFOLIO
SCHEDULE OF INVESTMENTS
October 31, 2000
<TABLE>
<CAPTION>
Number Value
of Shares (000s)
--------- ----------
<S> <C> <C>
INVESTMENT FUNDS -- 96.7%
ASIAN FUNDS -- 1.6%
Colonial Newport Tiger
Fund, Class A+ 197,407 $ 2,304
Scudder Japan Fund 184,575 2,263
----------
4,567
----------
EUROPEAN FUNDS -- 4.0%
AIM European Development
Fund, Class A+ 466,870 11,018
----------
INTERNATIONAL STOCK FUNDS -- 91.1%
American Century International
Discovery Fund, Institutional Class 1,972,040 31,927
American Century International
Growth Fund, Institutional Class 1,327,603 17,113
Artisan International Fund 2,274,048 58,602
Dreyfus Founders Passport Fund+ 312,468 5,621
First Eagle SoGen Overseas Fund+ 40,953 590
Janus Overseas Fund+ 1,083,896 36,246
Janus Worldwide Fund+ 95,014 6,722
Longleaf Partners
International Fund+ 569,853 8,326
Masters Select International
Fund+ 364,915 6,539
Montgomery Global Long
Short Fund 213,870 5,965
Oakmark International Fund 809,290 12,212
Oppenheimer International
Growth Fund, Class A+ 89,913 1,927
Pilgrim International Small Cap
Growth Fund, Class Q 429,430 16,396
Thornburg Global Value
Fund, Class A 116,805 1,893
Tweedy Browne Global
Value Fund+ 1,912,690 43,016
----------
253,095
----------
TOTAL INVESTMENT FUNDS
(Cost $271,837) 268,680
----------
</TABLE>
<TABLE>
<CAPTION>
Par Value
(000s) (000s)
--------- ----------
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 4.2%
Bank One Grand Cayman
Time Deposit
6.03%*, 11/01/00 $ 5,000 $ 5,000
HSBC Holdings PLC Grand Cayman
Time Deposit
6.03%*, 11/01/00 1,822 1,822
Wachovia Bank NA Time Deposit
6.03%*, 11/01/00 5,000 5,000
----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $11,822) 11,822
----------
TOTAL INVESTMENTS -- 100.9%
(Cost $283,659) 280,502
----------
OTHER ASSETS AND LIABILITIES, NET -- (0.9%)
Other assets 426
Liabilities (2,997)
----------
(2,571)
----------
TOTAL NET ASSETS -- 100.0% $ 277,931
==========
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS
October 31, 2000
+ Non-income producing security.
* Interest rate represents the yield on report date.
** See Note 3 of Notes to Financial Statements.
L.P. -- Limited Partnership.
PLC -- Public Limited Company.
See accompanying Notes to Schedules of Investments and Notes to Financial
Statements.
35
<PAGE> 40
STATEMENTS OF ASSETS AND LIABILITIES (in thousands, except for net asset value
per share)
October 31, 2000
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(R)
-----------------------------------------------------------
Growth Balanced Small Cap International
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (Cost: $232,494, $144,270, $155,321,
and $283,659, respectively) $ 247,361 $ 152,553 $ 168,168 $ 280,502
Receivables:
Investments sold 4,000 2,000 -- --
Fund shares sold 578 108 71 386
Dividends 15 15 -- --
Interest 1 -- 2 2
Prepaid expenses 22 16 11 38
--------- --------- --------- ---------
Total assets 251,977 154,692 168,252 280,928
--------- --------- --------- ---------
LIABILITIES
Payables:
Investments purchased 4,000 2,000 6,500 2,750
Fund shares redeemed 106 12 83 124
Investment advisory and administration fees 13 8 7 15
Accrued expenses 80 58 62 108
--------- --------- --------- ---------
Total liabilities 4,199 2,078 6,652 2,997
--------- --------- --------- ---------
Net assets applicable to outstanding shares $ 247,778 $ 152,614 $ 161,600 $ 277,931
========= ========= ========= =========
NET ASSETS CONSIST OF:
Paid-in capital $ 208,220 $ 130,549 $ 141,092 $ 266,946
Undistributed net investment income 2,040 2,832 1,595 356
Accumulated net realized gain on investments sold 22,651 10,950 6,066 13,786
Net unrealized appreciation (depreciation)
on investments 14,867 8,283 12,847 (3,157)
--------- --------- --------- ---------
$ 247,778 $ 152,614 $ 161,600 $ 277,931
========= ========= ========= =========
PRICING OF SHARES:
Outstanding shares, $0.00001 par value (unlimited
shares authorized) 17,840 11,354 13,175 17,902
Net asset value, offering and redemption price per share $ 13.89 $ 13.44 $ 12.27 $ 15.53
</TABLE>
See accompanying Notes to Financial Statements.
36
<PAGE> 41
STATEMENTS OF OPERATIONS (in thousands)
For the year ended October 31, 2000
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(R)
-----------------------------------------------------------
Growth Balanced Small Cap International
-------- -------- --------- -------------
<S> <C> <C> <C> <C>
Investment income:
Dividends $ 5,642 $ 5,168 $ 5,045 $ 4,920
Interest 1,078 270 379 587
-------- -------- -------- --------
Total investment income 6,720 5,438 5,424 5,507
-------- -------- -------- --------
Expenses:
Investment advisory and administration fees 1,277 797 870 1,217
Transfer agency and shareholder service fees 591 369 403 563
Custodian fees 33 25 24 24
Portfolio accounting fees 35 23 50 34
Registration fees 52 26 24 82
Professional fees 49 49 49 44
Shareholder reports 37 8 35 25
Trustees' fees 5 5 5 6
Proxy fees 22 13 18 20
Other expenses 10 10 7 10
-------- -------- -------- --------
2,111 1,325 1,485 2,025
Less: expenses reduced (see Note 5) (907) (574) (661) (879)
-------- -------- -------- --------
Net expenses incurred by fund 1,204 751 824 1,146
-------- -------- -------- --------
Net investment income 5,516 4,687 4,600 4,361
-------- -------- -------- --------
Net realized gain on investments:
Net realized gain on investments sold 18,987 9,178 8,847 9,316
Net realized gain received from underlying funds 3,943 1,914 2,975 4,569
-------- -------- -------- --------
Net realized gain on investments 22,930 11,092 11,822 13,885
-------- -------- -------- --------
Net unrealized appreciation (depreciation) on investments (7,276) (1,307) 124 (20,879)
-------- -------- -------- --------
Net gain (loss) on investments 15,654 9,785 11,946 (6,994)
-------- -------- -------- --------
Increase (decrease) in net assets resulting from operations $ 21,170 $ 14,472 $ 16,546 $ (2,633)
======== ======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
37
<PAGE> 42
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
For the years ended October 31,
<TABLE>
<CAPTION>
Schwab MarketManager Portfolios(R)
--------------------------------------------------------------------------
Growth Balanced Small Cap
---------------------- ---------------------- ----------------------
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income $ 5,516 $ 2,077 $ 4,687 $ 2,373 $ 4,600 $ 2,795
Net realized gain on investments 18,987 19,916 9,178 10,077 8,847 5,707
Net realized gain received from
underlying funds 3,943 2,831 1,914 1,397 2,975 4,813
Net unrealized appreciation
(depreciation) on investments (7,276) 15,237 (1,307) 6,255 124 20,277
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets
resulting from operations 21,170 40,061 14,472 20,102 16,546 33,592
--------- --------- --------- --------- --------- ---------
Dividends and distributions:
Dividends to shareholders from net
investment income (4,282) (2,077) (3,255) (2,373) (4,600) (673)
Dividends in excess of net investment income -- (625) -- (118) (550) --
Distributions to shareholders from
net capital gains (23,031) (3,029) (11,788) -- -- --
--------- --------- --------- --------- --------- ---------
Total dividends and distributions
to shareholders (27,313) (5,731) (15,043) (2,491) (5,150) (673)
--------- --------- --------- --------- --------- ---------
Capital share transactions:
Proceeds from shares sold 120,360 40,223 50,033 38,953 68,745 20,774
Net asset value of shares issued in
reinvestment of dividends 26,775 5,639 14,451 2,389 4,884 642
Early withdrawal fees (see Note 8) -- -- -- -- -- --
Payments for shares redeemed (73,816) (51,444) (33,080) (29,966) (46,423) (59,884)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net assets from
capital share transactions 73,319 (5,582) 31,404 11,376 27,206 (38,468)
--------- --------- --------- --------- --------- ---------
Total increase (decrease) in net assets 67,176 28,748 30,833 28,987 38,602 (5,549)
Net assets:
Beginning of period 180,602 151,854 121,781 92,794 122,998 128,547
--------- --------- --------- --------- --------- ---------
End of period (including undistributed
net investment income (loss) of
$2,040, $806, $2,832, $1,400, $1,595,
$2,145, $356, $(143), respectively) $ 247,778 $ 180,602 $ 152,614 $ 121,781 $ 161,600 $ 122,998
========= ========= ========= ========= ========= =========
Number of fund shares:
Sold 8,223 3,089 3,633 3,085 5,280 2,046
Reinvested 1,830 457 1,059 196 387 68
Redeemed (5,062) (3,980) (2,401) (2,386) (3,636) (6,075)
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in
shares outstanding 4,991 (434) 2,291 895 2,031 (3,961)
Shares outstanding:
Beginning of period 12,849 13,283 9,063 8,168 11,144 15,105
--------- --------- --------- --------- --------- ---------
End of period 17,840 12,849 11,354 9,063 13,175 11,144
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
-----------------------
International
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operations:
Net investment income $ 4,361 $ 775
Net realized gain on investments 9,316 13,982
Net realized gain received from
underlying funds 4,569 1,240
Net unrealized appreciation
(depreciation) on investments (20,879) 13,138
---------- ---------
Increase (decrease) in net assets
resulting from operations (2,633) 29,135
---------- ---------
Dividends and distributions:
Dividends to shareholders from net
investment income (3,862) (775)
Dividends in excess of net investment income --
(143)
Distributions to shareholders from
net capital gains (14,371) --
---------- ---------
Total dividends and distributions
to shareholders (18,233) (918)
---------- ---------
Capital share transactions:
Proceeds from shares sold 271,197 47,140
Net asset value of shares issued in
reinvestment of dividends 17,401 879
Early withdrawal fees (see Note 8) 156 --
Payments for shares redeemed (93,761) (46,236)
---------- ---------
Increase (decrease) in net assets from
capital share transactions 194,993 1,783
---------- ---------
Total increase (decrease) in net assets 174,127 30,000
Net assets:
Beginning of period 103,804 73,804
---------- ---------
End of period (including undistributed
net investment income (loss) of
$2,040, $806, $2,832, $1,400, $1,595,
$2,145, $356, $(143), respectively) $ 277,931 $ 103,804
========== =========
Number of fund shares:
Sold 15,325 3,661
Reinvested 995 78
Redeemed (5,415) (3,716)
---------- ---------
Net increase (decrease) in
shares outstanding 10,905 23
Shares outstanding:
Beginning of period 6,997 6,974
---------- ---------
End of period 17,902 6,997
========== =========
</TABLE>
See accompanying Notes to Financial Statements.
38
<PAGE> 43
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
11/1/99 - 11/1/98 - 11/1/97 - 11/18/96* -
SCHWAB MARKETMANAGER GROWTH PORTFOLIO 10/31/00 10/31/99 10/31/98 10/31/97
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
-------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 14.06 11.43 11.60 10.00
------------------------------------------------------
Income from investment operations:
Net investment income 0.38 0.16 0.32 0.08
Net realized and unrealized gain
on investments 1.55 2.91 0.11 1.66
------------------------------------------------------
Total income from investment operations 1.93 3.07 0.43 1.74
------------------------------------------------------
Less distributions:
Dividends from net investment income (0.33) (0.16) (0.29) (0.14)
Dividends in excess of net investment income -- (0.05) -- --
Distributions from capital gains (1.77) (0.23) (0.31) --
------------------------------------------------------
Total distributions (2.10) (0.44) (0.60) (0.14)
------------------------------------------------------
Net asset value at end of period 13.89 14.06 11.43 11.60
======================================================
Total return (%) 12.98 27.38 3.87 17.60 1
RATIOS/SUPPLEMENTAL DATA (%)
-------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 3 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.38 0.43 0.67 0.77 2
Ratio of net investment income to average net assets 2.34 1.23 2.66 2.07 2
Portfolio turnover rate 179 284 384 192
Net assets, end of period ($ x 1,000,000) 248 181 152 124
</TABLE>
* Commencement of operations.
1 Not annualized.
2 Annualized.
3 Would have been 0.51% if certain non-routine expenses (proxy fees) had been
included.
See accompanying Notes to Financial Statements.
39
<PAGE> 44
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
11/1/99 - 11/1/98 - 11/1/97 - 11/18/96* -
SCHWAB MARKETMANAGER BALANCED PORTFOLIO 10/31/00 10/31/99 10/31/98 10/31/97
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER-SHARE DATA ($)
Net asset value at beginning of period 13.44 11.36 11.38 10.00
-----------------------------------------------------
Income from investment operations:
Net investment income 0.45 0.27 0.36 0.17
Net realized and unrealized gain
on investments 1.18 2.11 0.18 1.34
-----------------------------------------------------
Total income from investment operations 1.63 2.38 0.54 1.51
-----------------------------------------------------
Less distributions:
Dividends from net investment income (0.35) (0.28) (0.34) (0.13)
Dividends in excess of net investment income -- (0.02) -- --
Distributions from capital gains (1.28) -- (0.22) --
-----------------------------------------------------
Total distributions (1.63) (0.30) (0.56) (0.13)
-----------------------------------------------------
Net asset value at end of period 13.44 13.44 11.36 11.38
=====================================================
Total return (%) 12.00 21.28 4.89 15.27 1
RATIOS/SUPPLEMENTAL DATA (%)
-------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 3 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.39 0.45 0.69 0.95 2
Ratio of net investment income to average net assets 3.18 2.20 3.21 3.03 2
Portfolio turnover rate 114 244 353 171
Net assets, end of period ($ x 1,000,000) 153 122 93 61
</TABLE>
* Commencement of operations.
1 Not annualized.
2 Annualized.
3 Would have been 0.51% if certain non-routine expenses (proxy fees) had been
included.
See accompanying Notes to Financial Statements.
40
<PAGE> 45
<TABLE>
<CAPTION>
11/1/99 - 11/1/98 - 11/1/97 - 9/16/97* -
Schwab MarketManager Small Cap Portfolio 10/31/00 10/31/99 10/31/98 10/31/97
-------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period 11.04 8.51 9.93 10.00
----------------------------------------------------
Income from investment operations:
Net investment income 0.39 0.24 0.21 0.02
Net realized and unrealized gain (loss)
on investments 1.30 2.34 (1.36) (0.09)
----------------------------------------------------
Total income (loss) from investment operations 1.69 2.58 (1.15) (0.07)
----------------------------------------------------
Less distributions:
Dividends from net investment income (0.39) (0.05) (0.21) --
Dividends in excess of net investment income (0.07) -- (0.03) --
Distributions from capital gains -- -- (0.03) --
----------------------------------------------------
Total distributions (0.46) (0.05) (0.27) --
----------------------------------------------------
Net asset value at end of period 12.27 11.04 8.51 9.93
====================================================
Total return (%) 15.17 30.38 (11.84) (0.70) 1
RATIOS/SUPPLEMENTAL DATA (%)
-------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 3 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.41 0.51 0.69 0.75 2
Ratio of net investment income to average net assets 2.86 2.23 2.65 1.29 2
Portfolio turnover rate 128 145 166 10
Net assets, end of period ($ x 1,000,000) 162 123 129 207
</TABLE>
* Commencement of operations.
1 Not annualized.
2 Annualized.
3 Would have been 0.51% if certain non-routine expenses (proxy fees) had been
included.
See accompanying Notes to Financial Statements.
41
<PAGE> 46
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
11/1/99 - 11/1/98 - 11/1/97 - 11/1/96 - 10/16/96*-
Schwab MarketManager International Portfolio 10/31/00 10/31/99 10/31/98 10/31/97 10/31/96
--------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period 14.84 10.58 10.86 9.91 10.00
------------------------------------------------------------------
Income from investment operations:
Net investment income 0.53 0.11 0.34 0.17 --
Net realized and unrealized gain (loss)
on investments 2.49 4.28 0.02 0.95 (0.09)
------------------------------------------------------------------
Total income (loss) from investment operations 3.02 4.39 0.36 1.12 (0.09)
------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.49) (0.11) (0.33) (0.17) --
Dividends in excess of net investment income -- (0.02) (0.01) -- --
Distributions from capital gains (1.84) -- (0.30) -- --
------------------------------------------------------------------
Total distributions (2.33) (0.13) (0.64) (0.17) --
------------------------------------------------------------------
Net asset value at end of period 15.53 14.84 10.58 10.86 9.91
==================================================================
Total return (%) 18.61 41.92 3.55 11.47 (0.90) 1
RATIOS/SUPPLEMENTAL DATA (%)
--------------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to average net assets 0.50 3 0.50 0.50 0.50 0.50 2
Expense reductions reflected in above ratio 0.39 0.47 0.70 0.80 2.91 2
Ratio of net investment income to average net assets 1.94 0.94 2.96 1.40 0.52 2
Portfolio turnover rate 80 249 236 179 --
Net assets, end of period ($ x 1,000,000) 278 104 74 81 59
</TABLE>
* Commencement of operations.
1 Not annualized.
2 Annualized.
3 Would have been 0.51% if certain non-routine expenses (proxy fees) had been
included.
See accompanying Notes to Financial Statements.
42
<PAGE> 47
NOTES TO FINANCIAL STATEMENTS
For the year ended October 31, 2000
(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 management investment 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,
Institutional Select(TM) Small-Cap Value Index Fund, Communications Focus Fund,
Financial Services Focus Fund, Health Care Focus Fund and Technology Focus 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. The funds' 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. Short-term
securities with 60 days or less to maturity are stated at amortized cost, which
approximates market value.
Security transactions, investment income and realized gains (losses) -- Security
transactions are accounted for on a trade-date basis (date the order to buy or
sell is executed). Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income, (including accretion of
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.
43
<PAGE> 48
NOTES TO FINANCIAL STATEMENTS (continued)
For Federal income tax purposes, the cost of securities owned at October 31,
2000 and the net realized gains or losses on securities sold for the period then
ended was different from the amounts reported for financial reporting purposes
as shown below. The aggregate gross unrealized appreciation and depreciation at
October 31, 2000 for the Funds is as follows:
<TABLE>
<CAPTION>
Net Unrealized
Federal Appreciation Appreciated Depreciated
Portfolio Tax Cost (Depreciation) Securities Securities
--------- -------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Schwab MarketManager Growth Portfolio $234,712 $ 12,649 $20,515 $ (7,866)
Schwab MarketManager Balanced Portfolio 145,360 7,193 11,365 (4,172)
Schwab MarketManager Small Cap Portfolio 155,926 12,242 15,972 (3,730)
Schwab MarketManager International Portfolio 283,951 (3,449) 18,716 (22,165)
</TABLE>
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. As of October 31, 2000, there were no reclassifications.
3. TRANSACTIONS WITH LIMITED PARTNERSHIPS
As of October 31, 2000, the MarketManager Growth Portfolio, the MarketManager
Balanced Portfolio and the MarketManager Small Cap Portfolio owned 14.0%, 24.1%,
and 61.8% 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.
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. The investment adviser has reduced a portion of its fee for the year
ended October 31, 2000 (see Note 5).
Prior to February 28, 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.
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, 2000 (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, 2000, the trust made no direct payments to its officers
or trustees who are "interested persons" within the meaning of the 1940 Act. The
funds incurred fees aggregating $21 related to the trust's unaffiliated
trustees.
44
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS (continued)
Other affiliated parties and transactions -- Pursuant to an Exemptive Order
issued by the SEC, the funds may invest in other SchwabFunds(R). As of October
31, 2000 the Schwab MarketManager Growth Portfolio and the Schwab MarketManager
Balanced Portfolio owned 3.3% and 1.1%, respectively of the Schwab YieldPlus
Fund(TM).
5. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT ADVISER AND SCHWAB
The investment adviser and Schwab guarantee that through at least February 28,
2001, each fund's total operating expenses will not exceed 0.50% of the fund's
average daily net assets, after waivers and reimbursements. Schwab has agreed to
waive its transfer agency and shareholder service fees through at least February
28, 2001. For the purpose of this guarantee, operating expenses do not include
interest, taxes, and certain non-routine expenses. The actual operating expense
ratio for the year ended October 31, 2000 did include non-routine expenses.
For the year ended October 31, 2000, the total of such fees and expenses reduced
by the investment adviser was $316, $205, $258, and $316 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 $591, $369, $403, and $563 for the
Schwab MarketManager Growth, Schwab MarketManager Balanced, Schwab MarketManager
Small Cap, and Schwab MarketManager International Portfolios, respectively.
6. BORROWING AGREEMENTS
The funds may obtain temporary bank loans through the trust to use for meeting
shareholder redemptions or for extraordinary or emergency purposes. The trust
has line of credit arrangements with PNC Bank, N.A., Bank of America, N.A. and
The Bank of New York. The funds pay interest on the amounts they borrow at rates
that are negotiated periodically. As of the end of the report period there were
no borrowings outstanding.
7. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations and U.S. Government securities, for the year ended October 31, 2000,
were as follows:
<TABLE>
<CAPTION>
Proceeds of
Sales and
Portfolio Purchases Maturities
--------- --------- -----------
<S> <C> <C>
Schwab MarketManager Growth Portfolio $419,416 $375,615
Schwab MarketManager Balanced Portfolio 184,200 157,892
Schwab MarketManager Small Cap Portfolio 224,960 196,179
Schwab MarketManager International Portfolio 351,151 170,836
</TABLE>
8. EARLY WITHDRAWAL FEES
The early withdrawal fees are retained by the fund and are treated as a
contribution to capital.
<TABLE>
<CAPTION>
Early withdrawal Early withdrawal
fees on redemption fees as of
Portfolio proceeds* 10/31/00
--------- ------------------ ----------------
<S> <C> <C>
Schwab MarketManager International Portfolio 1.50% $156
</TABLE>
* Attributable to shares purchased and held less than 180 days. Prior to May
1, 2000, no early withdrawal fees were charged.
45
<PAGE> 50
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 collectively referred to
as the "funds") at October 31, 2000, and the results of each of their operations
for the year then ended, the changes in each of their net assets for each of the
two years in the period then ended and the financial highlights for each of the
periods presented, in conformity with accounting principles generally accepted
in the United States of America. 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 auditing standards
generally accepted in the United States of America, 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, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
San Francisco, CA
December 12, 2000
46
<PAGE> 51
PROXY VOTING RESULTS (UNAUDITED)
SHAREHOLDERS OF THE FUNDS COVERED IN THIS REPORT APPROVED ALL PROPOSALS
DESCRIBED IN THE MOST RECENT SCHWABFUNDS(R) PROXY SOLICITATION. A special
meeting of the shareholders of Schwab Capital Trust was held on June 1, 2000.
The number of votes necessary to conduct the meeting and approve each proposal
was obtained. The results of the votes of shareholders are listed below by
proposal.
<TABLE>
<CAPTION>
FOR WITHHELD
---------------------------------------------------------------------------------------
<S> <C> <C>
PROPOSAL 1
ELECTION OF TRUSTEES
Charles R. Schwab 289,830,691 68,146,593
Mariann Byerwalter 289,803,100 68,174,184
Jeremiah H. Chafkin 290,116,655 67,860,629
Donald F. Dorward 289,894,704 68,082,580
William A. Hasler 289,963,656 68,013,628
Robert G. Holmes 290,075,539 67,901,745
Steven L. Scheid 290,226,860 67,750,424
Gerald B. Smith 290,102,267 67,875,017
Donald R. Stephens 290,162,159 67,815,125
Michael W. Wilsey 290,227,986 67,749,298
</TABLE>
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED 1
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPOSAL 2c1
TO APPROVE CHANGES TO RESTRICTIONS REGARDING BORROWING.
Schwab MarketManager International Portfolio 4,957,733 156,947 659,481
PROPOSAL 2c2
TO APPROVE CHANGES TO RESTRICTIONS REGARDING LENDING.
Schwab MarketManager International Portfolio 4,968,682 147,518 657,961
PROPOSAL 2c3
TO APPROVE CHANGES TO RESTRICTIONS REGARDING SENIOR SECURITIES.
Schwab MarketManager International Portfolio 4,967,075 146,000 661,086
PROPOSAL 2d
TO APPROVE CHANGES TO RESTRICTIONS REGARDING DIVERSIFICATION.
Schwab MarketManager International Portfolio 4,986,114 131,474 656,573
</TABLE>
1 Includes broker non-votes.
47
<PAGE> 52
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED 1
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPOSAL 2i
TO APPROVE CHANGES TO RESTRICTIONS
REGARDING INDUSTRY CONCENTRATION.
Schwab MarketManager International Portfolio 4,966,707 150,897 656,557
PROPOSAL 2j
TO APPROVE CHANGES TO RESTRICTIONS REGARDING COMMODITIES,
FUTURES, AND REAL ESTATE.
Schwab MarketManager International Portfolio 4,949,170 168,838 656,153
PROPOSAL 2k
TO APPROVE CHANGES TO RESTRICTIONS REGARDING UNDERWRITING OF
SECURITIES.
Schwab MarketManager International Portfolio 4,980,827 134,253 659,081
</TABLE>
1 Includes broker non-votes.
48
<PAGE> 53
NOTES
<PAGE> 54
NOTES
<PAGE> 55
CONTACT SCHWAB
The SchwabFunds(R) Family includes a variety of funds to help meet your
investment needs. You can diversify your portfolio in a single step with our
asset allocation funds. Or you can customize your portfolio with a combination
of our stock funds as well as our taxable and tax-advantaged bond and money
market funds.
Please call 1-800-435-4000 for a free prospectus and brochure for any of these
SchwabFunds.
This report must be preceded or accompanied by a current prospectus.
METHODS FOR PLACING ORDERS
The following information 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.
INTERNET
www.schwab.com
SCHWAB BY PHONE(TM)
Use our automated voice service or speak to a representative. Call
1-800-435-4000, day or night (for TDD service, call 1-800-345-2550).
TELEBROKER(R)
Automated touch-tone phone service at
1-800-272-4922
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.
THE SCHWABFUNDS FAMILY
EQUITY INDEX FUNDS
Schwab S&P 500 Fund
Schwab 1000 Fund(R)
Schwab Small-Cap Index Fund(R)
Schwab Total Stock Market Index Fund(TM)
Schwab International Index Fund(R)
QUANTITATIVE/SECTOR FUNDS
Schwab Analytics Fund(R)
Schwab Focus Funds
Communications Focus Fund
Financial Services Focus Fund
Health Care Focus Fund
Technology Focus Fund
ASSET ALLOCATION FUNDS
Schwab MarketTrack Portfolios(R)
All Equity Portfolio
Growth Portfolio
Balanced Portfolio
Conservative Portfolio
Schwab MarketManager Portfolios(R)
Growth Portfolio
Balanced Portfolio
Small Cap Portfolio
International Portfolio
BOND FUNDS
Schwab Short-Term Bond Market Index Fund
Schwab Total Bond Market Index Fund
Schwab YieldPlus Fund(TM)
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab California Short/Intermediate Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
SCHWAB MONEY 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.(R)
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> 56
SCHWABFUNDS(R)
INVESTMENT ADVISER
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
P.O. Box 7575, San Francisco, CA 94104-7575
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C) 2000 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
Printed on recycled paper. MKT3812-3 (12/00)
