Certified Annual Shareholder Report of a Management Investment Company — Form N-CSR Filing Table of Contents
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N-CSR — Certified Annual Shareholder Report of a Management Investment Company Document Table of Contents
Fund investment adviser: Charles
Schwab Investment Management, Inc. (CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab).
The Sector/Industry classifications
in this report use the Global Industry Classification Standard
(GICS) which was developed by and is the exclusive property of
Morgan Stanley Capital International Inc. (MSCI) and
Standard & Poor’s (S&P). GICS is a service
mark of MSCI and S&P and has been licensed for use by
Charles Schwab & Co., Inc. The Industry
classifications used in the schedules of Portfolio Holdings are
sub-categories
of Sector classifications.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Total Return for the Report
Period
Schwab®
Monthly Income Fund - Moderate Payout (Ticker Symbol: SWJRX)
15.76%
Benchmark: Moderate Payout Composite Index
14.27%
Fund Category: Morningstar Conservative Allocation
18.25%
Performance Details
pages 6-7
Schwab®
Monthly Income Fund - Enhanced Payout (Ticker Symbol:
SWKRX)1
12.60%
Benchmark: Enhanced Payout Composite Index
11.16%
Fund Category: Morningstar Conservative Allocation
18.25%
Performance Details
pages 8-9
Schwab®
Monthly Income Fund - Maximum Payout (Ticker Symbol: SWLRX)
9.18%
Benchmark: Maximum Payout Composite Index
8.03%
Fund Category: Morningstar Conservative Allocation
18.25%
Performance Details
pages 10-11
Minimum Initial
Investment2
$ 100
All fund and index figures on this page assume dividends and
distributions were reinvested. Index figures do not include
trading and management costs, which would lower performance.
Indices are unmanaged, and you cannot invest in them directly.
Fund expenses have been absorbed by CSIM and Schwab. Without
these reductions, the fund’s returns would have been lower.
These returns do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of
fund shares.
Source for category information: Morningstar, Inc.
The Moderate Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 40% S&P 500 Index and 60% Barclays
Capital U.S. Aggregate Bond Index.
The Enhanced Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 25% S&P 500 Index and 75% Barclays
Capital U.S. Aggregate Bond Index.
The Maximum Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 10% S&P 500 Index and 90% Barclays
Capital U.S. Aggregate Bond Index.
1
On June 16, 2009, the Schwab Retirement Income Fund merged into
the fund.
2
Please see prospectus for further detail and eligibility
requirements.
Randall W. Merk is President and CEO of Charles Schwab
Investment Management, Inc. and the funds covered in this report.
Dear
Shareholder,
In the past
year, volatile prices throughout the global financial
marketplace and a recessionary economy have been among the
numerous challenges affecting investment conditions and investor
sentiment. While portfolios may still be below peak values
reached in 2007, there has been some recovery from lows touched
when prices of many equity and fixed income securities declined
precipitously at the end of 2008 and the beginning of 2009.
Improvements in the financial markets and diminished concern
over the depth and duration of the economic recession have
helped strengthen investor confidence.
The Monthly
Income Funds posted positive returns for the reporting period,
with all three funds in the suite outperforming their respective
benchmarks. The Moderate Payout Fund returned 15.76%, the
Enhanced Payout Fund returned 12.60%, and the Maximum Payout
Fund returned 9.18%. For a more detailed examination of fund
performance and the investment environment, please see the fund
managers’ discussion and analysis in the following pages.
The Monthly
Income Funds are intended to meet the income needs of investors
by making monthly payments from net investment income rather
than investor capital. As intended, each payment made by the
funds in 2009 was made from net investment income. Investors
also received an additional
end-of-year
payment at the end of December. While reinvestment of monthly
payments is an option, the funds are designed with the
expectation that these payments will be made in cash rather than
be reinvested.
If you have
any questions about Schwab Funds, we are always available at
1-800-435-4000,
while additional resources may be found on Schwab.com.
Thank you
for investing with us.
Sincerely,
Investors
should consider carefully information contained in the
prospectus, including investment objectives, risks, charges and
expenses. You can request a prospectus by calling Schwab at
800-435-4000.
Please read the prospectus carefully before investing.
Investment
conditions in the global financial marketplace improved markedly
by the latter part of the reporting period. Although the overall
climate of economic recession persisted, investor confidence
strengthened as signs of improvement emerged. Domestic and
international equity indices, such as the S&P
500®
Index and the MSCI
EAFE®
Index, displayed meaningful gains since their March lows which
helped to reduce earlier losses and produce positive
12-month
returns. On the fixed income side, yields remained low on
government backed securities, but leading broad market municipal
and taxable bond indices were positive for the year.
Major
economic indicators, such as unemployment, Gross Domestic
Product (GDP), and consumer confidence, showed that a full
economic recovery had yet to materialize, despite some signs of
improvement. The U.S. unemployment rate increased from 7.7% in
January of 2009 to 10% in December, but monthly job losses
moderated substantially during the second half of the year.
GDP—the output of goods and services produced by labor and
property located in the United States—rose 2.2% in the
third quarter of 2009, after rising 0.7% in the prior quarter.
The third quarter GDP gain was primarily attributable to
increases in personal consumption expenditures, exports, private
inventory investment, federal government spending, and
residential fixed investment, according to the Bureau of
Economic Analysis. The Conference Board’s Consumer
Confidence Index rose to 52.9 in December from 50.6 one month
earlier, after dipping to a record low of 25.0 in February. The
Conference Board cited a more optimistic outlook for business
and labor market conditions as the reason for the rise.
The returns
of the S&P 500 Index, which is usually seen as a bellwether
for financial markets, were positive. For the
12-month
reporting period ending December 31, 2009, the S&P 500
Index returned 26.46%. In the index, Information Technology was
the strongest performing sector, followed by Materials and
Consumer Discretionary. Telecommunication Services was the
weakest sector, followed by Utilities and Energy. In general,
large-cap stocks outperformed small-cap as evidenced by the
Russell 1000 Index, which returned 28.43%, compared with the
Russell 2000 Index, which returned 27.17%. Looking at the broad
market, growth significantly outperformed value—the Russell
3000 Growth Index returned 37.01%, while the Russell 3000 Value
Index returned 19.76%. Internationally, emerging markets
generally outperformed developed markets—the MSCI Emerging
Markets Index returned 79.02%, while the MSCI EAFE Index
returned 32.46%.
In the fixed
income market, yields were low throughout the period for U.S.
Treasury securities, especially those with the shortest
maturities. The Barclays Capital U.S. Short Treasury: 9-12
Months returned 0.76%. The broad taxable bond market fared
better, benefiting from price recovery on mortgage-backed
securities and other assets that were out of favor with
investors during the darkest moments of the financial crisis.
The Barclays Capital U.S. Aggregate Bond Index returned 5.93%.
Returns were also positive in the tax free bond market—the
Barclays Capital General Muni Bond Index returned 12.91%. The
Federal Open Market Committee reaffirmed on December 16,2009 that it would continue to hold interest rates at a target
range of 0% to 0.25%.
Asset
Class Performance
Comparison
% returns during the report period
This graph compares the performance of various asset classes
during the report period. Final performance figures for the
period are in the key below.
26.46%
S&P
500®Index: measures U.S. large-cap stocks
27.17%
Russell
2000®Index: measures U.S. small-cap stocks
32.46%
MSCI
EAFE®Index: measures (in U.S. dollars) large-cap stocks in
Europe, Australasia and the Far East
5.93%
Barclays Capital U.S. Aggregate Bond Index: measures the
U.S. bond market
0.15%
Three-Month U.S. Treasury Bills (T-bills): measures
short-term U.S. Treasury obligations
These figures assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged and
you cannot invest in them directly. Remember that past
performance is not an indication of future results.
Nothing in this report represents a recommendation of a security
by the investment adviser.
Manager views and portfolio holdings may have changed since the
report date.
Daniel Kern, CFA, a managing director and portfolio
manager of the investment adviser, is responsible for the
day-to-day management of the funds. He was appointed portfolio
manager in 2008. Prior to joining the firm in 2003, Mr. Kern
worked for more than 13 years in the investment management
industry, with more than 6 of those years spent in
portfolio management.
The
Schwab Monthly Income Funds
(the
funds) are designed to provide monthly income throughout the
year while retaining the opportunity for growth to meet future
income needs. In accordance with guidelines stated in the
funds’ prospectus, the higher the targeted payout rate, the
lower the growth potential of a particular fund. The funds
invest in a range of Schwab Funds and Laudus
Funds—including equity funds, fixed income funds, and money
market funds—in accordance with their respective target
asset allocation. Because each Monthly Income Fund is a
fund-of-funds, its return will reflect a blend of the returns of
the underlying funds based on their relative weightings.
The
Schwab Monthly Income Fund – Moderate
Payout
(the fund) returned 15.76% for the period ending
12/31/09,
while the benchmark Moderate Payout Composite Index returned
14.27%; the benchmark is composed of a 40% allocation to the
S&P 500 Index and a 60% allocation to the Barclays Capital
U.S. Aggregate Bond Index. The fund is designed to offer
investors a targeted annual payout of 3-4% and an increase in
capital over the long term that is expected to be greater than
that of the Enhanced Payout Fund and the Maximum Payout Fund.*
The fund seeks to maintain a target blend of 40% equity and 60%
fixed income and money market securities.
The positive
performance of the fund was primarily attributable to a recovery
in equity and bond prices during the twelve month reporting
period. When looking at returns in the fund’s top equity
holdings by weight, the Schwab Global Real Estate Fund returned
40.55%, benefiting from the lift in prices on global real estate
securities. The Schwab Dividend Equity Fund had positive
returns, returning 17.91%, but did less well relative to the
S&P 500 Index, as dividend paying stocks, especially
financials, underperformed non-dividend stocks during the
period. On the fixed income side, a general market demand for
government backed assets continued to affect investment
conditions. However, certain non-government fixed income
securities, such as collateralized mortgage obligations,
asset-backed securities, and mortgage-backed securities
experienced price recovery. The Schwab Premier Income Fund was
the strongest performer in the fixed income allocation,
returning 14.34%, and led gains on both a total return and
relative basis. The Schwab Total Bond Market Fund and the Schwab
Short Term Bond Market Fund had positive total returns for the
period, returning 4.43% and 2.42%, respectively, but
underperformed on a relative basis.
As of
12/31/09:
Statistics
Number of Holdings
10
Weighted Average Market Cap
($ x 1,000,000)
$41,541
Price/Earnings Ratio (P/E)
24.2
Price/Book Ratio (P/B)
1.6
Portfolio Turnover Rate
12%
Asset Class
Weightings % of Investments
Fixed-Income Funds
57.1%
Equity Funds - Domestic
23.3%
Equity Funds - International
16.0%
Short-Term Investments
3.6%
Total
100.0%
Top
Holdings % of Net
Assets1
Schwab Premier Income Fund
23.1%
Schwab Total Bond Market Fund
18.5%
Schwab Dividend Equity Fund
17.1%
Schwab Short-Term Bond Market Fund
11.0%
Schwab Global Real Estate Fund
9.8%
Total
79.5%
Manager views and portfolio holdings may have changed since the
report date.
*
The fund’s actual annual
payout could be higher or lower than the targeted annual payout
based on the interest rate environment and other market factors
occurring during that year.
1
This list is not a recommendation
of any security by the investment adviser.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Fund:
Schwab®
Monthly Income Fund - Moderate Payout (3/28/08)
15.76%
-0.32%
Benchmark: Moderate Payout Composite
Index3
14.27%
0.82%
Fund Category: Morningstar Conservative Allocation
18.25%
0.54%
Fund Expense
Ratios4:
Net 0.73%; Gross 1.56%
All figures on this page assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less
than one year are not annualized.
1
Fund expenses have been absorbed by
CSIM and Schwab. Without these reductions, the fund’s
returns would have been lower. These returns do not reflect the
deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.
2
Source for category information:
Morningstar, Inc.
3
The Moderate Payout Composite Index
is based on a comparable portfolio asset allocation and
calculated using the following portion allocations: 40% S&P
500 Index and 60% Barclays Capital U.S. Aggregate Bond Index.
4
As stated in the prospectus.
Includes expenses of the underlying funds in which the fund
invests. The annualized weighted average expense ratio of the
underlying funds was 0.73%. Net Expense: Expenses reduced by a
contractual fee waiver for so long as CSIM serves as the adviser
to the fund. Gross Expense: Does not reflect the effect of
contractual fee waivers. For actual ratios during the period,
refer to the financial highlights section in the financial
statements.
The
Schwab Monthly Income Funds
(the
funds) are designed to provide monthly income throughout the
year while retaining the opportunity for growth to meet future
income needs. In accordance with guidelines stated in the
funds’ prospectus, the higher the targeted payout rate, the
lower the growth potential of a particular fund. The funds
invest in a range of Schwab Funds and Laudus
Funds—including equity funds, fixed income funds, and money
market funds—in accordance with their respective target
asset allocation. Because each Monthly Income Fund is a
fund-of-funds, its return will reflect a blend of the returns of
the underlying funds based on their relative weightings.
The
Schwab Monthly Income Fund – Enhanced
Payout
(the fund) returned 12.60% for the period ending
12/31/09,
while the benchmark Enhanced Payout Composite Index returned
11.16%; the benchmark is composed of a 25% allocation to the
S&P 500 Index and a 75% allocation to the Barclays Capital
U.S. Aggregate Bond Index. The fund is designed to offer
investors a targeted annual payout of 4-5% and an increase in
capital over the long term that is expected to be less than that
of the Moderate Payout Fund and greater than that of the Maximum
Payout Fund.* The fund seeks to maintain a target blend of 25%
equity and 75% fixed income and money market securities.
The positive
performance of the fund was primarily attributable to a recovery
in equity and bond prices during the twelve month reporting
period. When looking at returns in the fund’s top equity
holdings by weight, the Schwab Global Real Estate Fund returned
40.55%, benefiting from the lift in prices on global real estate
securities. The Schwab Dividend Equity Fund had positive
returns, returning 17.91%, but did less well relative to the
S&P 500 Index, as dividend paying stocks, especially
financials, underperformed non-dividend stocks during the
period. On the fixed income side, a general market demand for
government backed assets continued to affect investment
conditions. However, certain non-government fixed income
securities, such as collateralized mortgage obligations,
asset-backed securities, and mortgage-backed securities
experienced price recovery. The Schwab Premier Income Fund was
the strongest performer in the fixed income allocation,
returning 14.34%, and led gains on both a total return and
relative basis. The Schwab Total Bond Market Fund and the Schwab
Short Term Bond Market Fund had positive total returns for the
period, returning 4.43% and 2.42%, respectively, but
underperformed on a relative basis.
As of
12/31/09:
Statistics
Number of Holdings
10
Weighted Average Market Cap
($ x 1,000,000)
$39,920
Price/Earnings Ratio (P/E)
22.2
Price/Book Ratio (P/B)
1.5
Portfolio Turnover Rate
31%
Asset Class
Weightings % of Investments
Fixed-Income Funds
69.6%
Equity Funds - Domestic
14.4%
Equity Funds - International
10.6%
Short-Term Investments
5.4%
Total
100.0%
Top
Holdings % of Net
Assets1
Schwab Premier Income Fund
28.9%
Schwab Total Bond Market Fund
23.9%
Schwab Short-Term Bond Market Fund
11.9%
Schwab Dividend Equity Fund
11.3%
Schwab Global Real Estate Fund
7.5%
Total
83.5%
Manager views and portfolio holdings may have changed since the
report date.
*
The fund’s actual annual
payout could be higher or lower than the targeted annual payout
based on the interest rate environment and other market factors
occurring during that year.
1
This list is not a recommendation
of any security by the investment adviser.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Fund:
Schwab®
Monthly Income Fund - Enhanced Payout (3/28/08)
12.60%
1.06%
Benchmark: Enhanced Payout Composite
Index3
11.16%
2.57%
Fund Category: Morningstar Conservative Allocation
18.25%
0.54%
Fund Expense
Ratios4:
Net 0.65%; Gross 1.28%
All figures on this page assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less
than one year are not annualized.
1
The fund’s routine expenses
have been absorbed by CSIM and Schwab. Without these reductions,
the fund’s returns would have been lower. These returns do
not reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares.
2
Source for category information:
Morningstar, Inc.
3
The Enhanced Payout Composite Index
is based on a comparable portfolio asset allocation and
calculated using the following portion allocations: 25% S&P
500 Index and 75% Barclays Capital U.S. Aggregate Bond Index.
4
As stated in the prospectus.
Includes expenses of the underlying funds in which the fund
invests. The annualized weighted average expense ratio of the
underlying funds was 0.65%. Net Expense: Expenses reduced by a
contractual fee waiver for so long as CSIM serves as the adviser
to the fund. Gross Expense: Does not reflect the effect of
contractual fee waivers. For actual ratios during the period,
refer to the financial highlights section in the financial
statements.
5
On June 16, 2009, the Schwab
Retirement Income Fund merged into the fund.
The
Schwab Monthly Income Funds
(the
funds) are designed to provide monthly income throughout the
year while retaining the opportunity for growth to meet future
income needs. In accordance with guidelines stated in the
funds’ prospectus, the higher the targeted payout rate, the
lower the growth potential of a particular fund. The funds
invest in a range of Schwab Funds and Laudus
Funds—including equity funds, fixed income funds, and money
market funds—in accordance with their respective target
asset allocation. Because each Monthly Income Fund is a
fund-of-funds, its return will reflect a blend of the returns of
the underlying funds based on their relative weightings.
The
Schwab Monthly Income Fund – Maximum
Payout
(the fund) returned 9.18% for the period ending
12/31/09,
while the benchmark Maximum Payout Composite Index returned
8.03%; the benchmark is composed of a 10% allocation to the
S&P 500 Index and a 90% allocation to the Barclays Capital
U.S. Aggregate Bond Index. The fund is designed to offer
investors a targeted annual payout of 5-6% and an increase in
capital over the long term that is expected to be less than that
of the Moderate Payout Fund and the Enhanced Payout Fund.* The
fund seeks to maintain a target blend of 10% equity and 90%
fixed income and money market securities.
The positive
performance of the fund was primarily attributable to a recovery
in equity and bond prices during the twelve month reporting
period. When looking at returns in the fund’s top equity
holdings by weight, the Schwab Dividend Equity Fund returned
17.91%, but did less well relative to the S&P 500 Index, as
dividend paying stocks, especially financials, underperformed
non-dividend stocks during the period. On the fixed income side,
a general market demand for government backed assets continued
to affect investment conditions. However, certain non-government
fixed income securities, such as collateralized mortgage
obligations, asset-backed securities, and mortgage-backed
securities experienced price recovery. The Schwab Premier Income
Fund was the strongest performer in the fixed income allocation,
returning 14.34%, and led gains on both a total return and
relative basis. The Schwab Total Bond Market Fund and the Schwab
Short Term Bond Market Fund had positive total returns for the
period, returning 4.43% and 2.42%, respectively, but
underperformed on a relative basis. International government
bond markets generally improved during the latter part of the
year. The Laudus Mondrian International Fixed Income Fund
returned 7.62%, outperforming its benchmark.
As of
12/31/09:
Statistics
Number of Holdings
8
Weighted Average Market Cap
($ x 1,000,000)
$34,000
Price/Earnings Ratio (P/E)
15.0
Price/Book Ratio (P/B)
1.1
Portfolio Turnover Rate
12%
Asset Class
Weightings % of Investments
Fixed-Income Funds
83.0%
Equity Funds - Domestic
4.9%
Equity Funds - International
4.8%
Short-Term Investments
7.3%
Total
100.0%
Top
Holdings % of Net
Assets1
Schwab Premier Income Fund
34.3%
Schwab Total Bond Market Fund
26.8%
Schwab Short-Term Bond Market Fund
14.9%
Laudus Mondrian International Fixed Income Fund
6.3%
Schwab Dividend Equity Fund
4.9%
Total
87.2%
Manager views and portfolio holdings may have changed since the
report date.
The Laudus Group of Funds includes the Laudus Rosenberg Funds,
Laudus Mondrian Funds and Laudus Growth Investors Fund, which
are part of Laudus Trust and distributed by ALPS Distributors,
Inc., and the Laudus MarketMasters Funds, which are part of
Schwab Capital Trust and distributed by Charles Schwab &
Co., Inc.
*
The fund’s actual annual
payout could be higher or lower than the targeted annual payout
based on the interest rate environment and other market factors
occurring during that year.
1
This list is not a recommendation
of any security by the investment adviser.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Fund:
Schwab®
Monthly Income Fund - Maximum Payout (3/28/08)
9.18%
2.19%
Benchmark: Maximum Payout Composite
Index3
8.03%
4.24%
Fund Category: Morningstar Conservative Allocation
18.25%
0.54%
Fund Expense
Ratios4:
Net 0.59%; Gross 0.91%
All figures on this page assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less
than one year are not annualized.
1
The fund’s routine expenses
have been absorbed by CSIM and Schwab. Without these reductions,
the fund’s returns would have been lower. These returns do
not reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares.
2
Source for category information:
Morningstar, Inc.
3
The Maximum Payout Composite Index
is based on a comparable portfolio asset allocation and
calculated using the following portion allocations: 10% S&P
500 Index and 90% Barclays Capital U.S. Aggregate Bond Index.
4
As stated in the prospectus.
Includes expenses of the underlying funds in which the fund
invests. The annualized weighted average expense ratio of the
underlying funds was 0.59%. Net Expense: Expenses reduced by a
contractual fee waiver for so long as CSIM serves as the adviser
to the fund. Gross Expense: Does not reflect the effect of
contractual fee waivers. For actual ratios during the period,
refer to the financial highlights section in the financial
statements.
As a fund shareholder, you incur two types of costs: transaction
costs, such as redemption fees; and, ongoing costs, such as
management fees, transfer agent and shareholder services fees,
and other fund expenses.
The expense examples below are intended to help you understand
your ongoing cost (in dollars) of investing in a fund and to
compare this cost with the ongoing cost of investing in other
mutual funds. These examples are based on an investment of
$1,000 invested for the period beginning July 1, 2009 and
held through December 31, 2009.
Actual Return lines in the table below provide
information about actual account values and actual expenses. You
may use this information, together with the amount you invested,
to estimate the expenses that you paid over the period. To do
so, simply divide your account value by $1,000 (for example, an
$8,600 account value
¸
$1,000 = 8.6), then multiply the result by the number given for
your fund or share class under the heading entitled
“Expenses Paid During Period”.
Hypothetical Return lines in the table below provide
information about hypothetical account values and hypothetical
expenses based on a fund’s or share class’ actual
expense ratio and an assumed return of 5% per year before
expenses. Because the return used is not an actual return, it
may not be used to estimate the actual ending account value or
expenses you paid for the period.
You may use this information to compare the ongoing costs of
investing in the fund and other funds. To do so, compare this 5%
hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only, and do not reflect any
transactional costs, such as redemption fees. If these
transactional costs were included, your costs would have been
higher.
Ending
Beginning
Account Value
Expenses Paid
Expense
Ratio1
Account Value
(Net of Expenses)
During
Period2
(Annualized)
at
7/1/09
at
12/31/09
7/1/09–12/31/09
Schwab Monthly Income Fund - Moderate Payout
Actual Return
0.00%
$
1,000
$
1,118.40
$
0.00
Hypothetical 5% Return
0.00%
$
1,000
$
1,025.21
$
0.00
Schwab Monthly Income Fund - Enhanced Payout
Actual Return
0.01%
$
1,000
$
1,089.20
$
0.05
Hypothetical 5% Return
0.01%
$
1,000
$
1,025.16
$
0.05
Schwab Monthly Income Fund - Maximum Payout
Actual Return
0.01%
$
1,000
$
1,063.40
$
0.05
Hypothetical 5% Return
0.01%
$
1,000
$
1,025.16
$
0.05
1
Based on the most recent six-month expense ratio; may differ
from the expense ratio provided in Financial Highlights, which
cover a twelve-month period. Prior to July 1, 2009, Schwab and
CSIM agreed to limit the “net operating expenses”
(excluding interest, taxes and certain non-routine expenses) of
each fund to 0.00% through
4/29/11.
Effective July 1, 2009, Schwab and CSIM have agreed to limit the
“net operating expenses” of each fund to 0.00% for so
long as CSIM serves as adviser to the funds. The agreement to
limit each fund’s net operating expenses is limited to the
fund’s direct operating expenses and therefore does not
apply to the indirect expenses incurred by the fund through its
investments in the underlying funds. Please refer to Note 4 of
the Financial Notes for more information.
2
Expenses for each fund or share class are equal to its
annualized expense ratio, multiplied by the average account
value over the period, multiplied by 184 days of the period, and
divided by 365 days of the fiscal year.
This section shows all the securities in the fund’s
portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with
the SEC for the first and third quarters of each fiscal year on
Form N-Q.
The fund’s
Form N-Q
is available on the SEC’s website at
http://www.sec.gov
and may be viewed and copied at the SEC’s Public Reference
Room in Washington, D.C. Call
1-800-SEC-0330
for information on the operation of the Public Reference Room.
The schedule of portfolio holdings filed on a fund’s most
recent
Form N-Q
is also available by visiting Schwab’s website at
www.schwab.com/schwabfunds.
Cost
Value
Holdings by Category
($ x 1,000)
($ x 1,000)
99
.9%
Other Investment Companies
14,279
13,983
99
.9%
Total Investments
14,279
13,983
0
.1%
Other Assets and Liabilities, Net
17
100
.0%
Total Net Assets
14,000
Number
Value
Security
of Shares
($ x 1,000)
Other Investment Companies 99.9% of net assets
Equity Funds 39.2%
Laudus International MarketMasters Fund, Select
Shares (a)
54,194
868
Laudus Rosenberg U.S. Large Capitalization Fund, Select
Shares (a)
103,754
863
Schwab Dividend Equity Fund (a)
204,172
2,395
Schwab Global Real Estate Fund (a)
233,339
1,365
5,491
Fixed-Income Funds 57.1%
Laudus Mondrian International Fixed Income Fund (a)
55,373
622
Schwab Premier Income Fund (a)
323,802
3,228
Schwab Short-Term Bond Market Fund (a)
172,854
1,545
Schwab Total Bond Market Fund (a)
289,573
2,592
7,987
Money Funds 3.6%
Schwab Value Advantage Money Fund, Institutional
Shares (a)
197,105
197
State Street Institutional Liquid Reserves Fund -
Institutional Class
308,340
308
505
Total Other Investment Companies
(Cost $14,279)
13,983
End of Investments.
(All dollar amounts are x 1,000)
At 12/31/09
the tax basis cost of the fund’s investments was $14,476
and the unrealized appreciation and depreciation were $36 and
($529), respectively, with a net unrealized depreciation of
($493).
This section shows all the securities in the fund’s
portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with
the SEC for the first and third quarters of each fiscal year on
Form N-Q.
The fund’s
Form N-Q
is available on the SEC’s website at
http://www.sec.gov
and may be viewed and copied at the SEC’s Public Reference
Room in Washington, D.C. Call
1-800-SEC-0330
for information on the operation of the Public Reference Room.
The schedule of portfolio holdings filed on a fund’s most
recent
Form N-Q
is also available by visiting Schwab’s website at
www.schwab.com/schwabfunds.
Cost
Value
Holdings by Category
($ x 1,000)
($ x 1,000)
99
.8%
Other Investment Companies
71,669
72,165
99
.8%
Total Investments
71,669
72,165
0
.2%
Other Assets and Liabilities, Net
152
100
.0%
Total Net Assets
72,317
Number
Value
Security
of Shares
($ x 1,000)
Other Investment Companies 99.8% of net assets
Equity Funds 24.9%
Laudus International MarketMasters Fund, Select
Shares (a)
137,903
2,208
Laudus Rosenberg U.S. Large Capitalization Fund, Select
Shares (a)
266,724
2,219
Schwab Dividend Equity Fund (a)
696,429
8,169
Schwab Global Real Estate Fund (a)
932,144
5,453
18,049
Fixed-Income Funds 69.5%
Laudus Mondrian International Fixed Income Fund (a)
310,560
3,487
Schwab Premier Income Fund (a)
2,095,669
20,894
Schwab Short-Term Bond Market Fund (a)
962,490
8,605
Schwab Total Bond Market Fund (a)
1,927,573
17,252
50,238
Money Funds 5.4%
Schwab Value Advantage Money Fund, Institutional
Shares (a)
2,118,156
2,118
State Street Institutional Liquid Reserves Fund -
Institutional Class
1,759,688
1,760
3,878
Total Other Investment Companies
(Cost $71,669)
72,165
End of Investments.
(All dollar amounts are x 1,000)
At 12/31/09
the tax basis cost of the fund’s investments was $71,954
and the unrealized appreciation and depreciation were $1,456,
and ($1,245), respectively, with a net unrealized appreciation
of $211.
For the current and prior report
periods. All numbers are x 1,000.
Operations
1/1/09-12/31/09
3/28/08*-12/31/08
Net investment income
$2,063
$408
Net realized losses
(1,820
)
(231
)
Net unrealized gains (losses)
+
6,313
(1,480
)
Increase (Decrease) in net assets from operations
6,556
(1,303
)
Distributions to Shareholders
Distributions from net investment income
2,041
400
Transactions in Fund
Shares1
1/1/09-12/31/09
3/28/08*-12/31/08
SHARES
VALUE
SHARES
VALUE
Shares sold
1,592
$14,625
1,888
$18,795
Issued in connection with merger
5,932
51,970
-
-
Shares reinvested
139
1,285
23
216
Shares redeemed
+
(1,099
)
(10,017
)
(776
)
(7,369
)
Net transactions in fund shares
6,564
$57,863
1,135
$11,642
Shares Outstanding and Net
Assets
1/1/09-12/31/09
3/28/08*-12/31/08
SHARES
NET ASSETS
SHARES
NET ASSETS
Beginning of period
1,135
$9,939
-
$-
Total increase
+
6,564
62,378
1,135
9,939
End of period
7,699
$72,317
1,135
$9,939
Net investment income not yet distributed
$33
$8
*
Commencement of operations.
1
Effective June 16, 2009, all of the assets and liabilities of
the Schwab Retirement Income Fund were transferred to the Schwab
Monthly Income Fund - Enhanced Payout. (See financial note 9)
This section shows all the securities in the fund’s
portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with
the SEC for the first and third quarters of each fiscal year on
Form N-Q.
The fund’s
Form N-Q
is available on the SEC’s website at
http://www.sec.gov
and may be viewed and copied at the SEC’s Public Reference
Room in Washington, D.C. Call
1-800-SEC-0330
for information on the operation of the Public Reference Room.
The schedule of portfolio holdings filed on a fund’s most
recent
Form N-Q
is also available by visiting Schwab’s website at
www.schwab.com/schwabfunds.
Cost
Value
Holdings by Category
($ x 1,000)
($ x 1,000)
99
.3%
Other Investment Companies
52,650
52,001
99
.3%
Total Investments
52,650
52,001
0
.7%
Other Assets and Liabilities, Net
357
100
.0%
Total Net Assets
52,358
Number
Value
Security
of Shares
($ x 1,000)
Other Investment Companies 99.3% of net assets
Equity Funds 9.7%
Schwab Dividend Equity Fund (a)
220,751
2,590
Schwab Global Real Estate Fund (a)
428,910
2,509
5,099
Fixed-Income Funds 82.3%
Laudus Mondrian International Fixed Income Fund (a)
294,591
3,308
Schwab Premier Income Fund (a)
1,799,877
17,945
Schwab Short-Term Bond Market Fund (a)
873,536
7,809
Schwab Total Bond Market Fund (a)
1,569,698
14,049
43,111
Money Funds 7.3%
Schwab Value Advantage Money Fund, Institutional
Shares (a)
1,944,813
1,945
State Street Institutional Liquid Reserves Fund -
Institutional Class
1,846,028
1,846
3,791
Total Other Investment Companies
(Cost $52,650)
52,001
End of Investments.
(All dollar amounts are x 1,000)
At 12/31/09
the tax basis cost of the fund’s investments was $53,031
and the unrealized appreciation and depreciation were $79 and
($1,109), respectively, with a net unrealized depreciation of
($1,030).
Each of the
funds discussed in this report is a series of Schwab Capital
Trust (the “trust”), a no-load, open-end management
investment company. The trust is organized as a Massachusetts
business trust and is registered under the Investment Company
Act of 1940, as amended (the “1940 Act”). The list
below shows all the funds in the trust including the funds
discussed in this report, which are highlighted:
Schwab Capital Trust (organized May 7, 1993) Schwab Monthly Income
Fund-Moderate Payout
Schwab Monthly Income Fund-Enhanced Payout
Schwab Monthly Income Fund-Maximum Payout Schwab Target 2010 Fund
Schwab Target 2015 Fund
Schwab Target 2020 Fund
Schwab Target 2025 Fund
Schwab Target 2030 Fund
Schwab Target 2035 Fund
Schwab Target 2040 Fund
Schwab S&P 500 Index Fund
Schwab Small-Cap Index Fund
Schwab Total Stock Market Index Fund
Schwab International Index Fund
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Laudus Small-Cap MarketMasters Fund
Laudus International MarketMasters Fund
Schwab Balanced Fund
Schwab Premier Equity Fund
Schwab Core Equity Fund
Schwab Dividend Equity Fund
Schwab Large-Cap Growth Fund
Schwab Small-Cap Equity Fund
Schwab Hedged Equity Fund
Schwab Financial Services Fund
Schwab Health Care Fund
Schwab International Core Equity Fund
Schwab Fundamental US Large Company Index Fund
Schwab Fundamental US Small-Mid Company Index Fund
Schwab Fundamental International Large Company Index Fund
Schwab Fundamental International Small-Mid Company Index Fund
Schwab Fundamental Emerging Markets Index Fund
The Schwab
Monthly Income Funds are “fund of funds”. Each of the
funds seek to achieve its investment objective by investing in a
combination of other Schwab Funds and Laudus Funds (underlying
funds), and other unaffiliated, third-party mutual funds, in
accordance with its target portfolio allocation. In addition,
the funds may purchase individual securities to achieve their
investment objectives. Each fund bears its share of the
allocable expenses of the underlying funds in which they invest.
The funds
offer one share class. Shares are bought and sold at net asset
value, or closing NAV, which is the price for all outstanding
shares. Each share has a par value of 1/1,000 of a cent, and the
trustees may authorize the issuance of as many shares as
necessary.
Each fund
maintains its own account for purposes of holding assets and
accounting, and is considered a separate entity for tax
purposes. Within its account, each fund may also keep certain
assets in segregated accounts, as required by securities laws.
2. Significant
Accounting Policies:
The
following is a summary of the significant accounting policies
the funds use in the preparation of their financial statements.
The accounting policies are in conformity with accounting
principles generally accepted in the United States of America.
For more information about the underlying funds’ operations
and policies, please refer to those funds’ semiannual and
annual reports which are filed with the Securities Exchange
Commission (SEC).
(a) Security
Valuation:
The funds
value the investments in underlying funds every business day.
The funds use the following policies to value these investments:
•
Underlying
funds:
valued at their respective net asset values as determined by
those funds, in accordance with the 1940 Act for a given day.
In
accordance with the authoritative guidance on fair value
measurements and disclosures under GAAP, the funds disclose the
fair value of their investments in a hierarchy that prioritizes
the inputs to valuation techniques used to measure the fair
value. The hierarchy gives the highest priority to valuations
based upon unadjusted quoted prices in active markets for
identical assets
or
liabilities (level 1 measurement) and the lowest priority
to valuations based upon unobservable inputs that are
significant to the valuation (level 3 measurements).
Effective
June 15, 2009, the funds adopted the authoritative guidance
under GAAP on determining fair value when the volume and level
of activity for the asset or liability have significantly
decreased and identifying transactions that are not orderly.
Accordingly, if the funds determine that either the volume
and/or level
of activity for an asset or liability has significantly
decreased (from normal conditions for that asset or liability)
or price quotations or observable inputs are not associated with
orderly transactions, increased analysis and management judgment
will be required to estimate fair value.
The guidance
establishes three levels of the fair value hierarchy as follows:
•
Level 1 —
quoted prices in active markets for identical
securities — Investments whose values are based on
quoted market prices in active markets, and whose values are
therefore classified as Level 1 prices, include active
listed equities. The funds do not adjust the quoted price for
such instruments, even in situations where the funds hold a
large position and a sale could reasonably impact the quoted
prices.
•
Level 2 —
other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit
risk, etc.) — Investments that trade in markets that
are not considered to be active, but whose values are based on
quoted market prices, dealer quotations or valuations provided
by alternative pricing sources supported by observable inputs
are classified as Level 2 prices. These generally include
certain U.S. government and sovereign obligations, most
government agency securities, investment-grade corporate bonds,
certain mortgage products, less liquid listed equities, and
state, municipal and provincial obligations. In addition,
international securities whose markets close hours before the
funds value their holdings may require fair valuations due to
significant movement in the U.S. markets occurring after the
daily close of the foreign markets. The Board of Trustees has
approved a vendor that would calculate fair valuations of
international securities based on a number of factors that
appear to correlate to the movements in the U.S. markets. As
investments whose values are classified as Level 2 prices
include positions that are not traded in active markets
and/or are
subject to transfer restrictions, valuations may be adjusted to
reflect illiquidity
and/or
nontransferability, which are generally based on available
market information.
•
Level 3 —
significant unobservable inputs (including the funds’ own
assumptions in determining the fair value of
investments) — Investments whose values are classified
as Level 3 prices have significant unobservable inputs, as
they may trade infrequently or not at all. When observable
prices are not available for these securities, the fund uses one
or more valuation techniques for which sufficient and reliable
data is available. The inputs used by the funds in estimating
the value of Level 3 prices may include the original
transaction price, quoted prices for similar securities or
assets in active markets, completed or pending third-party
transactions in the underlying investment or comparable issuers,
and changes in financial ratios or cash flows. Level 3
prices may also be adjusted to reflect illiquidity
and/or
non-transferability, with the amount of such discount estimated
by the funds in the absence of market information. Assumptions
used by the funds due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the
funds’ results of operations.
The inputs
or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those
securities. The following is a summary of the inputs used to
value the funds’ investments as of December 31, 2009:
Security
transactions are recorded as of the date the order to buy or
sell the security is executed. Realized gains and losses from
security transactions are based on the identified costs of the
securities involved.
(c) Investment
Income:
Interest
income is recorded as it accrues. Dividends and distributions
from portfolio securities and underlying funds are recorded on
the date they are effective (the ex-dividend date), although the
funds record certain foreign security dividends on the day they
learn of the ex-dividend date. Any distributions from underlying
funds are recorded in accordance with the character of the
distributions as designated by the underlying funds.
(d) Expenses:
Expenses
that are specific to a fund are charged directly to the fund.
Expenses that are common to all funds within the trust generally
are allocated among the funds in proportion to their average
daily net assets.
(e) Distributions
to Shareholders:
The funds
make distributions from net investment income, if any, to
shareholders once a month. The funds make distributions from net
realized capital gains, if any, once a year.
(f) Accounting
Estimates:
The
accounting policies described in this report conform to
accounting principles generally accepted in the United States of
America. Notwithstanding this, shareholders should understand
that in order to follow these principles, fund management has to
make estimates and assumptions that affect the information
reported in the financial statements. It’s possible that
once the results are known, they may turn out to be different
from these estimates.
(g) Federal
Income Taxes:
The funds
intend to meet federal income and excise tax requirements for
regulated investment companies. Accordingly, the funds
distribute substantially all of their net investment income and
realized net capital gains (if any) to their respective
shareholders each year. As long as a fund meets the tax
requirements, it is not required to pay federal income tax.
Under the
funds’ organizational documents, the officers and trustees
are indemnified against certain liabilities arising out of the
performance of their duties to the funds. In addition, in the
normal course of business the funds enter into contracts with
their vendors and others that provide general indemnifications.
The funds’ maximum exposure under these arrangements is
unknown as this would involve future claims that may be made
against the funds. However, based on experience, the funds
expect the risk of loss to be remote.
3. Risk
Factors:
Investing in
the funds may involve certain risks, as discussed in the
funds’ prospectus, including, but not limited to, those
described below:
Market
Risk.
Stock
and bond markets rise and fall daily. As with any investment
whose performance is tied to these markets, the value of your
investment in the funds will fluctuate, which means that you
could lose money on your investment.
Structural
Risk.
The
funds’ monthly income payments will be made from fund
assets and will reduce the amount of assets available for
investment by a fund. Even if a fund’s capital grows over
time, such growth may be insufficient to enable the fund to
maintain the amount of its targeted annual payout and targeted
monthly income payments. A fund’s investment losses may
reduce the amount of future cash income payments you will
receive from the fund. The dollar amount of a fund’s
monthly income payments could vary substantially from one year
to the next and over time depending on several factors,
including the performance of the financial markets in which the
fund invests, the allocation of fund assets across different
asset classes and investments, the performance of the
fund’s investment strategies, and the amount and timing of
prior distributions by the fund. It is also possible for your
income payments to go down substantially from one year to the
next and over time depending on the timing of your investments
in the fund. Any redemptions you make will proportionately
reduce the amount of future cash income payments you will
receive from a fund. There is no guarantee that a fund will make
monthly income payments to its shareholders or, if made, that a
fund’s monthly income payments to shareholders will remain
at a fixed amount.
Underlying
fund investment risk.
The
value of the investment in the funds is based primarily on the
prices of the underlying funds that the funds purchase. In turn,
the price of each underlying fund is based on the value of its
securities. Before investing in the funds, investors should
assess the risks associated with the underlying funds in which
the funds may invest and the types of investments made by those
underlying funds. These risks include any combination of the
risks described below, although a fund’s exposure to a
particular risk will be proportionate to the fund’s overall
asset allocation and underlying fund allocation.
•
Equity
risk.
The
prices of equity securities rise and fall daily. These price
movements may result from factors affecting individual
companies, industries or the securities market as a whole. In
addition, equity markets tend to move in cycles, which may cause
stock prices to fall over short or extended periods of time.
•
Large-,
mid- and small-cap risk.
Stocks
of different market capitalizations tend to go in and out of
favor based on market and economic conditions. Historically,
small- and mid-cap stocks tend to be more volatile than
large-cap stocks, and small-cap stocks have been riskier than
large- and mid-cap stocks. During a period when stocks of a
particular market capitalization fall behind other types of
investments — bonds or stocks of another
capitalization range, for instance — an underlying
fund’s performance could be reduced to the extent its
portfolio is holding stocks of the particular capitalization.
•
Fixed
income risk.
Interest
rates rise and fall over time, which will affect an underlying
fund’s yield and share price. The credit quality of a
portfolio investment could also cause an underlying fund’s
share price to fall. An underlying fund could lose money if the
issuer or guarantor of a portfolio investment or the
counterparty to a derivatives contract fails to make timely
principal or interest payments or otherwise honor its
obligations. Fixed income securities may be paid off earlier or
later than expected. Either situation could cause an underlying
fund to hold securities paying lower-than-market rates of
interest, which could hurt the fund’s yield or share price.
Below investment-grade bonds (junk bonds) involve greater credit
risk, are more volatile, involve greater risk of price declines
and may be more susceptible to economic downturns than
investment-grade securities.
Direct
Investment Risk.
Each
fund may invest a portion of its assets directly in equity and
fixed income securities, cash equivalents, including money
market securities, futures and securities of nonproprietary
mutual funds. A fund’s direct investment in these
securities is subject to the same or similar risks as those
described for an underlying fund’s investment in the same
security.
Please refer
to the funds’ prospectus for a complete description of the
principal risks of investing in the funds and the underlying
funds.
4. Affiliates
and Affiliated Transactions:
(All
dollar amounts are x 1,000)
Charles
Schwab Investment Management, Inc. (“CSIM” or the
“investment adviser”), a wholly owned subsidiary of
The Charles Schwab Corporation, serves as each fund’s
investment adviser and administrator pursuant to an Investment
Advisory and Administration Agreement (“Advisory
Agreement”) between it and the trust.
Charles
Schwab & Co., Inc. (“Schwab”) is an
affiliate of the investment adviser and was the trust’s
transfer agent and shareholder services agent until
June 30, 2009. Effective July 1, 2009, the trust has
appointed Boston Financial Data Services, Inc.
(“BFDS”) as transfer agent of the funds. Prior to
July 1, 2009, BFDS served as the funds’
sub-transfer
agent.
The
underlying funds pay fees to the investment adviser for advisory
and administrative services. Prior to July 1, 2009, the
underlying funds paid Schwab for transfer agent and shareholder
services. Effective July 1, 2009, the trust adopted a
Shareholder Servicing Plan (the “Plan”) on behalf of
the funds. The Plan enables the funds to bear expenses relating
to the provision by financial intermediaries, including Schwab,
of certain account maintenance, customer liaison and shareholder
services to current shareholders of the funds. The funds are not
subject to any fees under the Plan. Schwab and CSIM have agreed
with the funds to limit (“expense limitation”) the
total expenses charged, excluding interest, taxes and certain
non-routine expenses of the funds to 0.00% for so long as CSIM
serves as the adviser to the funds, which may only be amended or
terminated with the approval of the funds’ Board of
Trustees.
The
agreement to limit the funds’ total expenses charged is
limited to each fund’s direct operating expenses and,
therefore, does not apply to acquired fund fees and expenses,
which are indirect expenses incurred by a fund through its
investments in the underlying funds.
4. Affiliates
and Affiliated Transactions (continued):
(All
dollar amounts are x 1,000)
The funds
may engage in certain transactions involving related parties. As
of December 31, 2009, the percentages of shares of other
related funds owned by each Monthly Income Fund are:
4. Affiliates
and Affiliated Transactions (continued):
(All
dollar amounts are x 1,000)
Schwab
Monthly Income Fund — Maximum Payout:
Realized
Distributions
Balance
of
Balance
Market
Gain
(Loss)
Received*
Shares
Held
Gross
Gross
of Shares
Held
Value
at
1/1/2009
to
1/1/2009
to
Underlying Fund
at
12/31/08
Additions
Sales
at
12/31/2009
12/31/2009
12/31/2009
12/31/2009
Schwab Dividend Equity Fund
72,419
156,879
(8,547
)
220,751
$2,590
($17
)
$31
Schwab Global Real Estate Fund
168,176
303,136
(42,402
)
428,910
2,509
(113
)
131
Laudus Mondrian International Fixed Income Fund
185,300
135,159
(25,868
)
294,591
3,308
(7
)
112
Schwab Premier Income Fund
1,124,038
836,365
(160,526
)
1,799,877
17,945
(112
)
982
Schwab Short-Term Bond Market Fund
513,958
427,843
(68,265
)
873,536
7,809
(47
)
147
Schwab Total Bond Market Fund
929,377
759,494
(119,173
)
1,569,698
14,049
(66
)
384
Schwab Value Advantage Money Fund, Institutional Shares
2,096,713
338,100
(490,000
)
1,944,813
1,945
—
8
Total
$50,155
($362
)
$1,795
*
Distributions received include distributions from net investment
income and from capital gains from the underlying funds.
**
Effective March 26, 2009, all of the assets and liabilities
of the Laudus Rosenberg U.S. Large Capitalization Growth Fund
were transferred to the Laudus Rosenberg U.S. Large
Capitalization Fund.
Pursuant to
an exemptive order issued by the SEC, the funds may enter into
interfund borrowing and lending transactions with other Schwab
Funds. All loans are for temporary or emergency purposes only.
The interest rate charged on the loan is the average of the
overnight repurchase agreement rate and the short-term bank loan
rate. The interfund lending facility is subject to the oversight
and periodic review of the Board of Trustees of the Schwab
Funds. The funds had no interfund borrowing or lending activity
during the period.
5.
Board of Trustees:
Trustees may
include people who are officers
and/or
directors of the investment adviser or Schwab. Federal
securities law limits the percentage of such “interested
persons” who may serve on a trust’s board, and the
trust was in compliance with these limitations throughout the
report period. The trust did not pay any of these persons for
their service as trustees, but the trust did pay non-interested
persons (independent trustees), as noted in the funds’
Statement of Operations.
6. Borrowing
from Banks:
The funds
may borrow money from banks and custodians. The funds covered in
this report have custodian overdraft facilities, a committed
line of credit of $150 million with State Street Bank and
Trust Company, an uncommitted line of credit of
$100 million with Bank of America, N.A. and an uncommitted
line of credit of $50 million with Brown Brothers Harriman.
The funds pay interest on the amounts they borrow at rates that
are negotiated periodically. The funds also pay an annual fee to
State Street Bank and Trust Company for the committed line of
credit.
There was no
borrowing from the lines of credit for the funds during the
period. However, certain funds utilized their overdraft facility
and incurred interest expense, which is disclosed in the
Statement of Operations, if any. The interest expense is
determined based on a negotiated rate above the current Federal
Funds rate.
For the
period ended December 31, 2009, purchases and sales of
securities (excluding short-term obligations) were as follows:
Purchases
of Securities
Sales/Maturities
of Securities
Schwab Monthly Income Fund — Moderate Payout
$6,673
$1,155
Schwab Monthly Income Fund — Enhanced Payout
16,684
12,612
Schwab Monthly Income Fund — Maximum Payout
24,010
4,270
8.
Federal Income Taxes:
(All
dollar amounts are x 1,000)
As of
December 31, 2009, the components of distributable earnings
on a tax-basis were as follows:
Schwab
Monthly
Schwab
Monthly
Schwab
Monthly
Income
Fund
Income
Fund
Income
Fund
Moderate
Payout
Enhanced
Payout
Maximum
Payout
Undistributed ordinary income
$7
$33
$20
Undistributed long-term capital gains
—
—
—
Unrealized appreciation
36
1,456
79
Unrealized depreciation
(529
)
(1,245
)
(1,109
)
Net unrealized appreciation/(depreciation)
($493
)
$211
($1,030
)
The primary
difference between book-basis and tax-basis unrealized
appreciation or unrealized depreciation of investments is the
tax deferral of losses on wash sales. Capital loss carry
forwards may be used to offset future realized capital gains for
federal income tax purposes. As of December 31, 2009, the
funds had capital loss carry forwards available to offset net
capital gains before the expiration dates:
The
tax-basis components of distributions paid during the current
and prior periods were:
Schwab
Monthly
Schwab
Monthly
Schwab
Monthly
Income
Fund
Income
Fund
Income
Fund
Moderate
Payout
Enhanced
Payout
Maximum
Payout
Current period distributions
Ordinary Income
$443
$2,041
$1,790
Long-term capital gains
—
—
—
Return of capital
—
—
—
Prior period distributions
Ordinary income
$268
$400
$1,112
Long-term capital gains
—
—
—
Return of capital
—
—
—
Distributions
paid to shareholders are based on net investment income and net
realized gains determined on a tax basis, which may differ from
net investment income and net realized gains for financial
reporting purposes. These differences are due primarily to
differing treatment for items such as
non-U.S.
currency gains and losses, short-term capital gains and losses;
capital losses related to wash sales, unrealized appreciation of
certain investments in
non-U.S.
securities; paydowns on fixed-income
8.
Federal Income Taxes (continued):
(All
dollar amounts are x 1,000)
securities;
and income on certain investments. The fiscal year in which
amounts are distributed may differ from the year in which the
net investment income and net realized gains are recorded by the
funds for financial reporting purposes. The funds may also
designate a portion of the amount paid to redeeming shareholders
as a distribution for tax purposes.
The
permanent book and tax basis differences may result in
reclassifications between capital account and other accounts as
required. The adjustments have no impact on net assets or the
results of operations. As of December 31, 2009, the funds
made the following reclassifications:
Schwab
Monthly
Schwab
Monthly
Schwab
Monthly
Income
Fund
Income
Fund
Income
Fund
Moderate
Payout
Enhanced
Payout
Maximum
Payout
Capital Shares
$—
$6,767
$—
Undistributed net investment income
—
3
2
Net realized capital gains (losses)
—
(6,770
)
(2
)
As of
December 31, 2009, management has reviewed the tax
positions for open periods (for federal purposes, three years
from the date of filing and for state purposes, four years from
the date of filing) as applicable to the funds, and has
determined that no provision for income tax is required in the
funds’ financial statements. The funds recognize interest
and penalties, if any, related to unrecognized tax benefits as
income tax expense in the Statement of Operations. During the
period ended December 31, 2009, the funds did not incur any
interest or penalties. The funds are not subject to examination
by U.S. federal and state tax authorities for tax years before
2008.
9. Reorganization:
(All
dollar amounts are x 1,000)
Under a plan
of reorganization adopted by the Trust, all of the assets and
liabilities of the Schwab Retirement Income Fund were
transferred to the Schwab Monthly Income Fund-Enhanced Payout.
The purpose of the transaction was to combine two funds managed
by CSIM with comparable investment objectives and strategies.
The reorganization, which qualified as a tax-free exchange for
federal income tax purposes, was completed at the close of
business on June 16, 2009 with capital losses acquired of
$6,627. The following is a summary of shares outstanding, net
assets, net asset value per share issued and unrealized
appreciation/ depreciation immediately before and after the
reorganization.
Before
Reorganization
After
Reorganization
Schwab
Monthly
Schwab
Schwab
Monthly
Income
Fund —
Retirement
Income
Fund —
Enhanced
Payout
Income
Fund
Enhanced
Payout
Shares
1,177
6,061
7,109
Net Assets
$10,313
$51,970
$62,284
Net Asset Value
$8.76
$8.57
$8.76
Net unrealized appreciation/(depreciation)
($1,370
)
($4,337
)
($5,707
)
Market value of investments
$10,274
$51,875
$62,149
Cost of investments
$11,644
$56,212
$67,856
Assuming the
acquisition had been completed on January 1, 2009, the
beginning of the annual reporting period of Schwab Monthly
Income Funds, Schwab Monthly Income Fund — Enhanced
Payout’s pro forma results of operations for the year
ended December 31, 2009, are as follows:
Net investment income
$2,768
Net realized/unrealized gain (loss) on investments
$4,432
Net increase (decrease) in net assets resulting from operations
9. Reorganization
(continued):
(All
dollar amounts are x 1,000)
Because the
combined investment portfolios have been managed as a single
integrated portfolio since the acquisition was completed, it is
not practicable to separate the amounts of revenue and earnings
of Schwab Retirement Income Fund that have been included in
Schwab Monthly Income Fund — Enhanced Payout’s
Statement of Operations since June 16, 2009.
10.
Subsequent Events:
As of
February 16, 2010, the date the financial statements were
available to be issued, no subsequent events or transactions had
occurred that would have materially impacted the financial
statements as presented.
In our
opinion, the accompanying statements of assets and liabilities,
including the portfolio holdings, 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 Monthly Income Fund—Moderate
Payout, Schwab Monthly Income Fund—Enhanced Payout, and
Schwab Monthly Income Fund—Maximum Payout (three of the
portfolios constituting Schwab Capital Trust, hereafter referred
to as the “Funds”) at December 31, 2009, the
results of each of their operations for the year then ended, the
changes in each of their net assets and the financial highlights
for each of the periods presented, in conformity with 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 the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of
securities at December 31, 2009 by correspondence with the
custodian and brokers, provide a reasonable basis for our
opinion.
For the
fiscal year ended December 31, 2009, the funds designate
the following amounts of the dividend distributions as qualified
dividends for the purpose of the maximum rate under
section 1(h)(ii) of the international Revenue Code.
Shareholders will be notified in January 2010 via IRS
form 1099 of the amounts for use in preparing their 2009
income tax return.
At a special
meeting of shareholders of the trust held on December 14,2009, shareholders approved the following
proposal: to elect nine trustees to serve on the Board
of Trustees of the trust. The individuals listed in the table
below were elected as trustees for each fund. All trustees
served as trustees of the trust prior to the special meeting.
The tables
below give information about the trustees and officers for
Schwab Capital Trust which includes the funds covered in this
report. The “Fund Complex” includes the Charles
Schwab Family of Funds, Schwab Capital Trust, Schwab
Investments, Schwab Annuity Portfolios, Schwab Strategic Trust,
Laudus Trust and Laudus Institutional Trust. The
Fund Complex includes 85 funds.
The address
for all trustees and officers is 211 Main Street, San Francisco,
CA94105. You can find more information about the trustees and
officers in the Statement of Additional Information, which is
available free by calling
1-800-435-4000.
Independent
Trustees
Name, Year of Birth,
Number of
and Position(s) with
Portfolios in
the trust; (Terms of
Fund Complex
office, and length of
Principal Occupations
Overseen by
Time
Served1)
During the Past Five Years
the Trustee
Other Directorships
Mariann Byerwalter 1960
Trustee
(Trustee of Schwab Capital Trust since 2000.)
Chairman of JDN Corporate Advisory LLC.
77
Board 1—Director, Redwood Trust, Inc.
John F. Cogan 1947
Trustee
(Trustee of Schwab Capital Trust since 2008.)
Senior Fellow: The Hoover Institution at Stanford University;
Stanford Institute for Economic Policy Research; Professor of
Public Policy, Stanford University.
77
Board 1—Director, Gilead Sciences, Inc. Board 2—Director, Venture Lending and Leasing, Inc.
William A. Hasler 1941
Trustee
(Trustee of Schwab Capital Trust since 2000.)
Dean Emeritus, Haas School of Business, University of
California, Berkeley; Until February 2004, Co-Chief Executive
Officer, Aphton Corp. (bio-pharmaceuticals); Prior to August
1998, Dean of the Haas School of Business, University of
California, Berkeley (higher education).
77
Board 1—Director, Mission West Properties Board 2—Director, TOUSA Board 3—Director, Harris-Stratex Networks Board 4—Director, Globalstar, Inc. Board 5—Director, Ditech Networks
Gerald B. Smith 1950
Trustee
(Trustee of Schwab Capital Trust since 2000.)
Chairman, Chief Executive Officer and Founder of Smith Graham
& Co. (investment advisors).
77
Board 1—Lead Independent Director, Board of Cooper
Industries Board 2—Director and Chairman of the Audit Committee
of Oneok Partners LP Board 3—Director, Oneok, Inc.
Donald R. Stephens 1938
Trustee
(Trustee of Schwab Capital Trust since 1989.)
Managing Partner, D.R. Stephens & Company (investments);
Prior to 1996, Chairman and Chief Executive Officer of North
American Trust (real estate investment trust).
77
None
Joseph H. Wender 1944
Trustee
(Trustee of Schwab Capital Trust since 2008.)
Senior Consultant, Goldman Sachs & Co., Inc. (2008 –
present); Senior Director, Chairman of the Finance Committee,
GSC Group, until December 2007; General Partner, Goldman Sachs
& Co., Inc. until June 2005.
77
Board 1—Director and Chairman of the Audit
Committee, Isis Pharmaceuticals
Michael W. Wilsey 1943
Trustee
(Trustee of Schwab Capital Trust since 1989.)
Chairman, Chief Executive Officer, Wilsey Bennett, Inc. (real
estate investment and management, and other investments).
Charles R.
Schwab2 1937
Chairman and Trustee
(Chairman and Trustee of Schwab Capital Trust since 1989.)
Founded Charles Schwab & Co., Inc. in 1971 and became
Chairman in 1978. Since 1986, Chairman and Director, The Charles
Schwab Corporation. Since 1989, Director, Charles Schwab
Investment Management, Inc., and appointed as Chairman in 1991.
Since 1996, Chairman and Chief Executive Officer, Schwab (SIS)
Holdings Inc. I and Schwab International Holdings, Inc. Since
1999, Director and Chief Executive Officer, Schwab Holdings,
Inc. Since 2003, Chairman, Charles Schwab Bank, N. A.; Through
June 2007, Director, U.S. Trust Company, N. A., U.S. Trust
Corporation, United States Trust Company of New York. Until
October 2008, Chief Executive Officer, The Charles Schwab
Corporation, and the Charles Schwab & Co., Inc.
77
None
Walter W. Bettinger
II2 1960
Trustee
(Trustee of Schwab Capital Trust since 2008.)
As of October 2008, President and Chief Executive Officer,
Charles Schwab & Co., Inc., principal underwriter to the
Funds, and The Charles Schwab Corporation. Since October 2008,
Director, The Charles Schwab Corporation. Since May 2008,
Director, Charles Schwab & Co., Inc. and Schwab Holdings,
Inc. Since 2006, Director, Charles Schwab Bank. From 2004
through 2007, Executive Vice President and President, Schwab
Investor Services. From 2004 through 2005, Executive Vice
President and Chief Operating Officer, Individual Investor
Enterprise, and from 2002 through 2004, Executive Vice
President, Corporate Services. Until October 2008, President and
Chief Operating Officer, Charles Schwab & Co., Inc. and The
Charles Schwab Corporation.
85
None
Officers of
the Trust
Name, Year of Birth, and Position(s)
with the trust; (Terms of office, and
length of Time
Served3)
Principal Occupations During the Past Five Years
Randall W. Merk 1954
President and Chief Executive Officer
(Officer of Schwab Capital Trust since 2007.)
Executive Vice President and President, Investment Management
Services, Charles Schwab & Co., Inc. (August 2004 –
present); Executive Vice President, Charles Schwab & Co.,
Inc. (2002 – present); Director, President and Chief
Executive Officer, Charles Schwab Investment Management, Inc.
(August 2007 – present); Director, Charles Schwab Asset
Management (Ireland) Limited and Charles Schwab Worldwide Funds
PLC (Sept. 2002 – present); President and Chief Executive
Officer, Schwab Strategic Trust (Oct. 2009 – present);
Trustee (June 2006 – Dec. 2009), President and Chief
Executive Officer (July 2007 – March 2008), Laudus Trust
and Laudus Institutional Trust; President and Chief Executive
Officer, Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc.
and Excelsior Funds Trust (June 2006 – June 2007).
George Pereira 1964
Treasurer and Principal Financial Officer
(Officer of Schwab Capital Trust since 2004.)
Senior Vice President and Chief Financial Officer, Charles
Schwab Investment Management, Inc. (November 2004 –
present); Treasurer and Chief Financial Officer, Laudus Trust
and Laudus Institutional Trust (2006 – present); Treasurer
and Principal Financial Officer, Schwab Strategic Trust (Oct.
2009 – present); Director, Charles Schwab Worldwide Fund,
PLC and Charles Schwab Asset Management (Ireland) Limited (Sept.
2002 – present); Treasurer, Chief Financial Officer and
Chief Accounting Officer, Excelsior Funds Inc., Excelsior
Tax-Exempt Funds, Inc., and Excelsior Funds Trust (June 2006
– June 2007).
Jeffrey Mortimer 1963
Senior Vice President and Chief Investment Officer
(Officer of Schwab Capital Trust since 2004.)
Senior Vice President and Chief Investment Officer, Charles
Schwab Investment Management, Inc. (2004 – present);
President and Chief Executive Officer (2008 – present) and
Chief Investment Officer (2006 – present), Laudus Trust and
Laudus Institutional Trust; Senior Vice President and Chief
Investment Officer, Schwab Strategic Trust (Oct. 2009 –
present).
Koji E. Felton 1961
Secretary and Chief Legal Officer
(Officer of Schwab Capital Trust since 1998.)
Senior Vice President, Chief Counsel and Corporate Secretary,
Charles Schwab Investment Management, Inc. (July 2000 –
present); Senior Vice President and Deputy General Counsel,
Charles Schwab & Co., Inc. (June 1998 – present);
Secretary and Chief Legal Officer, Schwab Strategic Trust (Oct.
2009 – present); Chief Legal Officer and Secretary,
Excelsior Funds Inc., Excelsior Tax-Exempt Funds, Inc., and
Excelsior Funds Trust (June 2006 – June 2007); Chief Legal
Officer, Laudus Trust and Laudus Institutional Trust (Aug. 2006
– Dec. 2006).
Catherine MacGregor 1964
Vice President
(Officer of Schwab Capital Trust since 2005.)
Vice President, Charles Schwab & Co., Inc., Charles Schwab
Investment Management, Inc. (July 2005 – present); Vice
President (Dec. 2005 – present), Chief Legal Officer and
Clerk (March 2007 – present) of Laudus Trust and Laudus
Institutional Trust. Since 2009, Vice President of Schwab
Strategic Trust (Oct. 2009 – present).
Michael Haydel 1972
Vice President (Officer of Schwab Capital Trust since 2006.)
Trustees remain in office until
they resign, retire or are removed by shareholder vote. The
Schwab Funds retirement policy requires that independent
trustees elected after January 1, 2000 retire at
age 72 or after 20 years of service as a trustee,
whichever comes first. Independent trustees elected prior to
January 1, 2000 will retire on the following schedule:
Messrs. Stephens and Wilsey will retire on
December 31, 2010.
2
Messrs. Schwab and Bettinger
are Interested Trustees because they are employees of Schwab
and/or the
investment adviser. In addition to their employment with Schwab
and/or the
investment adviser, Messrs. Schwab and Bettinger also own
stock of The Charles Schwab Corporation.
3
The President, Treasurer and
Secretary hold office until their respective successors are
chosen and qualified or until he or she sooner dies, resigns, is
removed or becomes disqualified. Each of the other officers
serves at the pleasure of the Board.
asset allocation The practice of dividing a
portfolio among different asset classes, with each asset class
assigned a particular percentage.
asset class A group of securities with similar
structure and basic characteristics. Stocks, bonds and cash are
the three main examples of asset classes.
beta A historical measure of an investment’s
volatility relative to a market index (usually the S&P
500{R}). The index is defined as having a beta of 1.00.
Investments with a beta higher than 1.00 have been more volatile
than the index; those with a beta of less than 1.00 have been
less volatile.
bond A security representing a loan from the
investor to the issuer. A bond typically pays interest at a
fixed rate (the “coupon rate”) until a specified date
(the “maturity date”), at which time the issuer
returns the money borrowed (“principal” or “face
value”) to the bondholder. Because of their structure,
bonds are sometimes called “fixed income securities”
or “debt securities.”
An individual bond is subject to the credit risk of the issuer.
Changes in interest rates can affect a bond’s market value
prior to call or maturity. There is no guarantee that a
bond’s yield to call or maturity will provide a positive
return over the rate of inflation.
bond fund A bond fund is subject to the same credit,
interest rate, and inflation risks as bonds. In addition, a bond
fund incurs ongoing fees and expenses. A bond fund’s net
asset value will fluctuate with the price of the underlying
bonds and the portfolio turnover activity; return of principal
is not guaranteed.
cap, capitalization See “market cap.”
capital gain, capital loss the difference between
the amount paid for an investment and its value at a later time.
If the investment has been sold, the capital gain or loss is
considered a realized gain or loss. If the investment is still
held, the gain or loss is still “on paper” and is
considered unrealized.
earnings growth rate For a mutual fund, the average
yearly rate at which the earnings of the companies in the
fund’s portfolio have grown, measured over the past five
years.
earnings per share (EPS) A company’s earnings,
or net income, for the past 12 months, divided by the
number of shares outstanding.
expense ratio The amount that is taken from a mutual
fund’s assets each year to cover the fund’s operating
expenses. An expense ratio of 0.50% means that a fund’s
expenses amount to half of one percent of its average net assets
a year.
market cap, market capitalization The value of a
company as determined by the total value of all shares of its
stock outstanding.
median market cap The midpoint of the range of
market caps of the stocks held by a fund. There are different
ways of calculating median market cap. With a simple median,
half of the stocks in the fund’s portfolio would be larger
than the median, and half would be smaller. With a weighted
median (the type that is calculated for these funds), half of
the fund’s assets are invested in stocks that are larger
than the median market cap, and half in stocks that are smaller.
net asset value (NAV) The value of one share of a
mutual fund. NAV is calculated by taking the fund’s total
assets, subtracting liabilities, and dividing by the number of
shares outstanding.
outstanding shares, shares outstanding When speaking
of a company or mutual fund, indicates all shares currently held
by investors.
price-to-book
ratio (P/B) The market price of a company’s
stock compared with its “book value.” A mutual
fund’s P/B is the weighted average of the P/B of all stocks
in the fund’s portfolio.
price-to-earnings
ratio (P/E) The market price of a company’s
stock compared with earnings over the past year. A mutual
fund’s P/E is the weighted average of the P/E of all stocks
in the fund’s portfolio.
return on equity (ROE) The average yearly rate of
return for each dollar of investors’ money, measured over
the past five years.
stock A share of ownership, or equity, in the
issuing company.
total return The percentage that an investor would
have earned or lost on an investment in the fund assuming
dividends and distributions were reinvested.
weighted average For mutual funds, an average that
gives the same weight to each security as the security
represents in the fund’s portfolio.
yield The income paid out by an investment,
expressed as a percentage of the investment’s market value.
PRIVACY
NOTICE
THIS IS NOT PART OF THE SHAREHOLDER REPORT
A
Commitment to Your Privacy
Your
Privacy Is Not for Sale
We do not
and will not sell your personal information to anyone, for any
reason.
We are
committed to protecting the privacy of information we maintain
about you. Below are details about our commitment, including the
types of information we collect and how we use and share that
information. This Privacy Notice applies to you only if you are
an individual who invests directly in the funds by placing
orders through the funds’ transfer agent. If you place
orders through your brokerage account at Charles
Schwab & Co., Inc. or an account with another
broker-dealer, investment advisor, 401(k) plan, employee
benefit plan, administrator, bank or other financial
intermediary, you are covered by the privacy policies of that
financial institution and should consult those policies.
How We
Collect Information About You
We collect
personal information about you in a number of ways.
•
APPLICATION
AND REGISTRATION INFORMATION.
We collect
personal information from you when you open an account or
utilize one of our services. We may also collect information
about you from third parties such as consumer reporting agencies
to verify your identity. The information we collect may include
personal information, including your Social Security number, as
well as details about your interests, investments and investment
experience.
•
TRANSACTION
AND EXPERIENCE INFORMATION.
Once your
account has been opened, we collect and maintain personal
information about your account activity, including your
transactions, balances, positions and history. This information
allows us to administer your account and provide the services
you have requested.
When you
visit our websites, we may use devices known as
“cookies,” graphic interchange format files (GIFs), or
other similar web tools to enhance your web experience. These
tools help us to recognize you, maintain your web session, and
provide a more personalized experience. To learn more, please
click the Privacy link on our website.
How We
Share and Use Your Information
We provide
access to information about you to our affiliated companies,
outside companies and other third parties in certain limited
circumstances, including:
•
to help us
process transactions for your account;
•
when we use
other companies to provide services for us, such as printing and
mailing your account statements;
•
when we
believe that disclosure is required or permitted under law (for
example, to cooperate with regulators or law enforcement,
resolve consumer disputes, perform credit/authentication checks,
or for risk control)
State
Laws
We will
comply with state laws that apply to the disclosure or use of
information about you.
Safeguarding
Your Information — Security Is a Partnership
We take
precautions to ensure the information we collect about you is
protected and is accessed only by authorized individuals or
organizations.
Companies we
use to provide support services are not allowed to use
information about our shareholders for their own purposes and
are contractually obligated to maintain strict confidentiality.
We limit their use of information to the performance of the
specific services we have requested.
We restrict
access to personal information by our employees and agents. Our
employees are trained about privacy and are required to
safeguard personal information.
We maintain
physical, electronic and procedural safeguards that comply with
federal standards to guard your nonpublic personal information.
Contact
Us
To provide
us with updated information, report suspected fraud or identity
theft, or for any other questions, please call the number below.
Schwab
Funds®
offers you an extensive family of mutual funds, each one based
on a clearly defined investment approach and using disciplined
management strategies. The list at right shows all currently
available Schwab Funds.
Whether you
are an experienced investor or just starting out, Schwab Funds
can help you achieve your financial goals. An investor should
consider a fund’s investment objectives, risks, charges and
expenses carefully before investing or sending money. This and
other important information can be found in the fund’s
prospectus. Please call
1-800-435-4000
for a prospectus and brochure for any Schwab Fund. Please read
the prospectus carefully before you invest. This report must be
preceded or accompanied by a current prospectus.
Proxy
Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures used
to determine how to vote proxies on behalf of the funds is
available without charge, upon request, by visiting
Schwab’s website at www.schwab.com, the SEC’s website
at
http://www.sec.gov,
or by contacting Schwab Funds at
1-800-435-4000.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period
ended June 30 is available, without charge, by visiting
Schwab’s website at
www.schwab.com/schwabfunds
or the SEC’s website at
http://www.sec.gov.
The
Schwab Funds
Family®
Stock
Funds
Schwab Premier
Equity Fund®
Schwab Core
Equity Fundtm
Schwab Dividend
Equity Fundtm
Schwab Large-Cap
Growth Fundtm
Schwab Small-Cap
Equity Fundtm
Schwab Hedge
Equity Fundtm
Schwab Financial
Services Fundtm
Schwab Health
Care Fundtm
Schwab®
International Core Equity Fund
Schwab Fundamental
US Large* Company Index Fund
Schwab Fundamental
US Small-Mid* Company Index Fund
Schwab Fundamental
International* Large Company Index Fund
Schwab Fundamental
International* Small-Mid Company Index Fund
Schwab Fundamental
Emerging Markets* Index Fund
Schwab Global Real
Estate Fundtm
Schwab S&P 500
Index Fund
Schwab 1000
Index® Fund
Schwab Small-Cap
Index Fund®
Schwab Total Stock
Market
Index Fund®
Schwab
International
Index Fund®
Asset Allocation
Funds
Schwab
Balanced Fundtm
Schwab MarketTrack
All Equity
Portfoliotm
Schwab MarketTrack
Growth
Portfoliotm
Schwab MarketTrack
Balanced
Portfoliotm
Schwab MarketTrack
Conservative
Portfoliotm
Schwab Target
2010 Fund
Schwab Target
2015 Fund
Schwab Target
2020 Fund
Schwab Target
2025 Fund
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Schwab Money
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SCHWAB is a
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FUNDAMENTAL INDEX, FUNDAMENTAL US LARGE, FUNDAMENTAL US
SMALL-MID, FUNDAMENTAL INTERNATIONAL AND FUNDAMENTAL EMERGING
MARKETS are trademarks of Research Affiliates LLC.
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.
Registrant has adopted a code of ethics that applies to its principal executive officer,
principal financial officer, and any other persons who perform a similar function, regardless
of whether these individuals are employed by Registrant or a third party.
(c)
During the period covered by the report, no amendments were made to the provisions of this
code of ethics.
(d)
During the period covered by the report, Registrant did not grant any waivers, including
implicit waivers, from the provisions of this code of ethics.
(f)(1)
Registrant has filed this code of ethics as an exhibit pursuant to Item 12(a)(1) of Form
N-CSR.
Item 3: Audit Committee Financial Expert.
Registrant’s
Board of Trustees has determined that William Hasler and Mariann Byerwalter, currently serving on its audit committee, are “audit committee financial
experts,” as such term is defined in Item 3 of Form N-CSR. Each of these members of
Registrant’s audit committee is “independent” under the standards set forth in Item 3 of
Form N-CSR.
The
designation of each of Mr. Hasler and Ms. Byerwalter as an “audit
committee financial expert” pursuant to Item 3 of Form N-CSR does not (i) impose upon such
individual any duties, obligations, or liability that are greater than the duties,
obligations and liability imposed upon such individual as a member of Registrant’s audit
committee or Board of Trustees in the absence of such designation; and (ii) affect the
duties, obligations or liability of any other member of Registrant’s audit committee or
Board of Trustees.
Item 4: Principal Accountant Fees and Services.
(a) Below are the aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for the audit of Registrant’s annual financial
statements or services that are normally provided by the accountant in connection with statutory
and regulatory filings or engagements.
(b) Below are the aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountant that are reasonably related to the performance of the
audit of Registrant’s financial statements and are not reported under paragraph (a) above.
Audit-Related Fees
For services rendered to Registrant:
2009: $94,555 2008: $86,911
Nature of these services: tax provision review and procedures performed related to
Registrant’s service provider conversion.
In each of the last two fiscal years there were no “Audit-Related Fees” required to be
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
(c) Below are the aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
Tax Fees
For services rendered to Registrant:
2009: $103,222 2008: $95,808
Nature of these services: preparation and review of tax returns.
In each of the last two fiscal years there were no “Tax Fees” required to be approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
(d) Below are the aggregate fees billed in each of the last two fiscal years for products and
services provided by the principal accountant, other than the services reported in paragraphs (a)
through (c) above.
All Other Fees
For services rendered to Registrant:
2009: $13,258 2008: $14,285
Nature of these services:
review of the methodology of allocation of Charles
Schwab & Co., Inc. (“Schwab”) expenses for purposes of Section 15(c) of the Investment
Company Act of 1940.
In each of the last two fiscal years there were no “All Other Fees” required to be approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
(e)(1) Registrant’s audit committee does not have pre-approval policies and procedures as described
in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
(2) The percentage of services described in paragraph (c) of this Item that were approved by the
audit committee in 2005 pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X was 10.6%
and the dollar amount was $10,901. This $10,901 equals 1.2% of the total fees paid by Registrant
to its principal accountant in 2005. None of the services described in paragraphs (b) and (d) of
this Item were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) Below are the aggregate non-audit fees billed in each of the last two fiscal years by
Registrant’s principal accountant for services rendered to Registrant, to Registrant’s investment
adviser, and to any entity controlling, controlled by, or under common control with Registrant’s
investment adviser that provides ongoing services to Registrant.
2009: $239,151 2008: $197,005
(h) During the past fiscal year, all non-audit services provided by Registrant’s principal
accountant to either Registrant’s investment adviser or to any entity controlling, controlled
by, or under common control with Registrant’s investment adviser that provides ongoing
services to Registrant were pre-approved. Included in the audit committee’s pre-approval was
the review and consideration as to whether the provision of these non-audit services is
compatible with maintaining the principal accountant’s independence.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment
Companies.
Not applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9: Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated
Purchasers.
Not applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11: Controls and Procedures.
(a)
Based on their evaluation of Registrant’s disclosure controls and procedures, as of a date
within 90 days of the filing date, Registrant’s Chief Executive Officer, Randall W. Merk and
Registrant’s Principal Financial Officer, George Pereira, have concluded that Registrant’s
disclosure controls and procedures are: (i) reasonably designed to ensure that information
required to be disclosed in this report is appropriately communicated to Registrant’s officers
to allow timely decisions regarding disclosures required in this report; (ii) reasonably
designed to ensure that information required to be disclosed in this report is recorded,
processed, summarized and reported in a timely manner; and (iii) are effective in achieving
the goals described in (i) and (ii) above.
(b)
During the second fiscal quarter of the period covered by this report, there have been no
changes in Registrant’s internal control over financial reporting that the above officers
believe to have materially affected, or to be reasonably likely to materially affect,
Registrant’s internal control over financial reporting.
Item 12: Exhibits.
(a)
(1)
Registrant’s code of ethics (that is the subject of the disclosure required by Item
2(a)) is attached.
(2)
Separate certifications for Registrant’s principal executive officer and principal
financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached.
A certification for Registrant’s principal executive officer and principal financial
officer, as required by Rule 30a-2(b) under the 1940 Act, is attached. This certification is
being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. section
1350 and is not being filed as part of the Form N-CSR with the Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.