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Schwab Capital Trust – ‘N-CSR’ for 10/31/09

On:  Wednesday, 1/6/10, at 4:26pm ET   ·   Effective:  1/6/10   ·   For:  10/31/09   ·   Accession #:  950123-10-693   ·   File #:  811-07704

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 1/06/10  Schwab Capital Trust              N-CSR      10/31/09    4:17M                                    RR Donnelley/FALaudus International MarketMasters Fund Investor Shares (SWOIX) — Laudus International MarketMasters Fund (SWMIX)Laudus Small-Cap MarketMasters Fund Investor Shares (SWOSX) — Select Shares (SWMSX)Schwab Balanced Fund SWOBXSchwab Core Equity Fund SWANXSchwab Dividend Equity Fund SWDSXSchwab Financial Services Fund Investor Shares (SWFFX)Schwab Fundamental Emerging Markets Large Company Index Fund SFENXSchwab Fundamental International Large Company Index Fund SFNNXSchwab Fundamental International Small Company Index Fund SFILXSchwab Fundamental US Large Company Index Fund SFLNXSchwab Fundamental US Small Company Index Fund SFSNXSchwab Health Care Fund SWHFXSchwab Hedged Equity Fund SWHEXSchwab International Core Equity Fund SICNXSchwab International Index Fund SWISXSchwab Large-Cap Growth Fund SWLSXSchwab MarketTrack All Equity Portfolio SWEGXSchwab MarketTrack Balanced Portfolio SWBGXSchwab MarketTrack Conservative Portfolio SWCGXSchwab MarketTrack Growth Portfolio P Shares (SWPGX) — Schwab MarketTrack Growth Portfolio (SWHGX)Schwab Premier Equity Fund Select Shares (SWPSX)Schwab S&P 500 Index Fund SWPPXSchwab Small-Cap Equity Fund SWSCXSchwab Small-Cap Index Fund SWSSXSchwab Target 2010 Fund SWBRXSchwab Target 2015 Fund SWGRXSchwab Target 2020 Fund SWCRXSchwab Target 2025 Fund SWHRXSchwab Target 2030 Fund SWDRXSchwab Target 2035 Fund SWIRXSchwab Target 2040 Fund SWERXSchwab Total Stock Market Index Fund SWTSX

Certified Annual Shareholder Report of a Management Investment Company   —   Form N-CSR
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: N-CSR       Certified Annual Shareholder Report of a            HTML  11.76M 
                          Management Investment Company                          
 4: EX-99.906CERT  Miscellaneous Exhibit                            HTML      8K 
 3: EX-99.CERT  Miscellaneous Exhibit                               HTML     16K 
 2: EX-99.CODE ETH  Miscellaneous Exhibit                           HTML     44K 


N-CSR   —   Certified Annual Shareholder Report of a Management Investment Company
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Performance at a Glance
"From the President
"The Investment Environment
"Fund Management
"Schwab MarketTrack All Equity Portfolio(TM)
"Schwab Balanced Fund(TM)
"Schwab Target 2010 Fund
"Laudus Small-Cap MarketMasters Fund(TM)
"Schwab Fundamental US Large Company Index Fund
"Schwab Premier Equity Fund (R)
"Schwab S&P 500 Index Fund
"Schwab MarketTrack Growth Portfolio(TM)
"Schwab Target 2015 Fund
"Laudus International MarketMasters Fund(TM)
"Schwab Fundamental US Small-Mid Company Index Fund
"Schwab Core Equity Fund(TM)
"Schwab 1000 Index (R) Fund
"Schwab MarketTrack Balanced Portfolio(TM)
"Schwab Target 2020 Fund
"Schwab Fundamental International Large Company Index Fund
"Schwab Dividend Equity Fund(TM)
"Schwab Small-Cap Index Fund (R)
"Schwab MarketTrack Conservative Portfolio(TM)
"Schwab Target 2025 Fund
"Schwab Fundamental International Small-Mid Company Index Fund
"Schwab Large-Cap Growth Fund(TM)
"Schwab Total Stock Market Index Fund (R)
"Fund Expenses
"Financial Statements
"Financial Notes
"Report of Independent Registered Public Accounting Firm
"Investment Advisory Agreement Approval
"Approval of Investment Advisory and Sub-Advisory Agreements
"Trustees and Officers
"Glossary
"Schwab Target 2030 Fund
"Schwab Fundamental Emerging Markets Index Fund
"Schwab Small-Cap Equity Fund(TM)
"Schwab International Index Fund (R)
"Schwab Target 2035 Fund
"Schwab Hedged Equity Fund(TM)
"Schwab Target 2040 Fund
"Schwab Financial Services Fund(TM)
"Schwab Health Care Fund(TM)
"Schwab (R) International Core Equity Fund
"Fund

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  nvcsr  

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-7704
Schwab Capital Trust
(Exact name of registrant as specified in charter)
211 Main Street, San Francisco, California 94105
(Address of principal executive offices)           (Zip code)
Randall W. Merk
Schwab Capital Trust
211 Main Street, San Francisco, California 94105
(Name and address of agent for service)
Registrant’s telephone number, including area code: (415) 636-7000
Date of fiscal year end: October 31
Date of reporting period: October 31, 2009
 
 
Item 1: Report(s) to Shareholders.

 



 

Annual report dated October 31, 2009 enclosed.
 
Schwab MarketTrack Portfolios ®
 
 
Schwab MarketTrack
All Equity Portfoliotm
 
Schwab MarketTrack
Growth Portfoliotm
 
Schwab MarketTrack
Balanced Portfoliotm
 
Schwab MarketTrack
Conservative Portfoliotm
 
You could have received this
document faster via email.
 
Save paper. Sign up for electronic delivery
at www.schwab.com/edelivery.
 
(CHARLES SCHWAB LOGO)



 

 
This supplement is not part of the shareholder report.
 
SCHWAB CAPITAL TRUST
(the “Trust”)

SCHWAB MARKETTRACK PORTFOLIOS
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
(the “Portfolios”)

Supplement dated November 11, 2009 to the
Prospectus dated February 28, 2009,
as supplemented July 1, 2009
 
This supplement provides new and additional information beyond that contained in the Prospectus and should be read in conjunction with the Prospectus.
 
The Portfolios seek to maintain a defined mix of asset classes over time by investing mainly in a combination of other Schwab Funds, mainly index funds. With respect to the portion of the Portfolios’ assets that were allocated to the large-cap segment of the stock market, the Portfolios invested in the Schwab Institutional Select S&P 500 Fund. On September 9, 2009, the Schwab Institutional Select S&P 500 Fund was reorganized into the Schwab S&P 500 Index Fund, a separate series of the Trust. Effective September 10, 2009, the Portfolios no longer invest in the Schwab Institutional Select S&P 500 Fund; instead, the portion of the Portfolios’ assets that are allocated to the large-cap segment of the stock market are invested in the Schwab S&P 500 Index Fund. The Schwab Institutional Select S&P 500 Fund and the Schwab S&P 500 Index Fund have substantially similar investment objectives and each Fund pursues its investment objective by investing primarily in stocks that are included in the S&P 500 Index.
 
Accordingly, the following changes are made to the “Asset Allocation” Sub-Section of each Portfolio’s “Strategy” Section:
 
•  The reference to the Schwab Institutional Select S&P 500 Fund as the Portfolio’s underlying fund that focuses on the large-cap segment of the stock market is deleted and replaced with the Schwab S&P 500 Index Fund.
 
Please retain this supplement for future reference
 
(CHARLES SCHWAB LOGO)
 
Charles Schwab & Co., Inc. Member SIPC
REG52514 — 00 (11/09) ©2009 All Rights Reserved



 

 
Schwab MarketTrack Portfolios ®
 
Annual Report
October 31, 2009
 
 
Schwab MarketTrack
All Equity Portfoliotm
 
Schwab MarketTrack
Growth Portfoliotm
 
Schwab MarketTrack
Balanced Portfoliotm
 
Schwab MarketTrack
Conservative Portfoliotm
 
 
(CHARLES SCHWAB LOGO)
 



 

 
 
This page is intentionally left blank.
 



 

 
Four portfolios that combine the power of
indexing with the benefits of asset allocation.
 
In This Report
 
     
  2
  3
  4
  5
  6
  8
  10
  12
  14
  15
  35
  48
  50
  52
  55
 
 
 
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.
 



 

 
Performance at a Glance
 
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 MarketTrack All Equity Portfoliotm (Ticker Symbol: SWEGX)   13.54%
Benchmark: All Equity Composite Index   15.72%
Fund Category: Morningstar Large-Cap Blend   11.75%
Performance Details   pages 6-7
 
Schwab MarketTrack Growth Portfoliotm    
Investor Shares (Ticker Symbol: SWHGX)
  12.95%
P Shares (Ticker Symbol: SWPGX)
  13.09%
Benchmark: Growth Composite Index   14.44%
Fund Category: Morningstar Large-Cap Blend   11.75%
Performance Details   pages 8-9
 
Schwab MarketTrack Balanced Portfoliotm (Ticker Symbol: SWBGX)   12.41%
Benchmark: Balanced Composite Index   14.47%
Fund Category: Morningstar Moderate Allocation   15.71%
Performance Details   pages 10-11
 
Schwab MarketTrack Conservative Portfoliotm (Ticker Symbol: SWCGX)   11.82%*
Benchmark: Conservative Composite Index   14.25%
Fund Category: Morningstar Conservative Allocation   15.81%
Performance Details   pages 12-13
 
Minimum Initial Investment1    
Investor Shares
  $    100
P Shares
  $100,000
 
 
 
 
The All Equity Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 70% Dow Jones U.S. Total Stock Market Index and 30% MSCI EAFE Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
The Growth Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 60% Dow Jones U.S. Total Stock Market Index, 20% MSCI EAFE Index, 15% Barclays Capital U.S. Aggregate Bond Index, and 5% Barclays Capital U.S. Treasury Bills: 1-3 Months Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
The Balanced Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 45% Dow Jones U.S. Total Stock Market Index, 15% MSCI EAFE Index, 35% Barclays Capital U.S. Aggregate Bond Index, and 5% Barclays Capital U.S. Treasury Bills: 1-3 Months Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
The Conservative Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 30% Dow Jones U.S. Total Stock Market Index, 10% MSCI EAFE Index, 55% Barclays Capital U.S. Aggregate Bond Index, and 5% Barclays Capital U.S. Treasury Bills: 1-3 Months Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
Source for category information: Morningstar, Inc.
 
Total return for the report period presented in the table differs from the return in the Financial Highlights. The total return presented in the above table is calculated based on the NAV at which shareholder transactions were processed. The total return presented in the Financial Highlights section of the report is calculated in the same manner, but also taking into account certain adjustments that are necessary under generally accepted accounting principles required in the annual and semiannual reports.
 
Please see prospectus for further details and eligibility requirements.
 
 
 
Schwab MarketTrack Portfolios


 

 
From the President
 

MERK PHOTO
 
Randall W. Merk is President and CEO of Charles Schwab Investment Management, Inc. and the funds covered in this report. He joined the firm in 2002 and has held a variety of executive positions at Schwab.

 
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, many have recovered substantially from lows touched as markets dropped in 2008 and early 2009. In particular, prices of many equity and fixed income securities declined precipitously toward the end of 2008 and the beginning of 2009. Since March of 2009, however, improvements in the financial markets and diminished concern over the depth and duration of the economic recession led to a broad-market recovery, with the prices of many equity securities rebounding from earlier lows.
 
During the reporting period, we made a number of improvements to the Schwab Funds family of mutual funds making it cheaper and easier for our clients to invest in Schwab Funds. On May 5, 2009, we lowered expenses on Schwab Equity Index Funds and consolidated share classes for Schwab equity and bond funds. Each Schwab equity and bond fund now offers one low fund expense to investors regardless of how much they invest, with a low $100 minimum investment. Our goal is to make investing easier and more affordable for our clients and the advisors who serve them.
 
For information on the investment environment and the performance of individual funds contained in this book, please see the fund managers’ discussion and analysis in the following pages of this report.
 
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,
 
-s- Randall W. Merk
 
 
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.
 
 
 
Schwab MarketTrack Portfolios 3


 

 
The Investment Environment
 
 
 
Investment conditions in the global financial market improved markedly in the second half of the reporting period, from the end of March through October, as concern over the economic recession and financial crisis ebbed. The first four months of the period, from November through February, were generally bearish; equity prices were driven down across the board as investors pulled back from the markets amidst poor macroeconomic data and pessimism over the markets’ ability to mount swift recoveries. Since March of 2009, however, both domestic and international markets experienced recovery, which helped to reduce earlier losses and produce positive 12-month returns in many cases. 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 period.
 
Major economic indicators, such as Gross Domestic Product (GDP) and unemployment, continued to demonstrate that a consistent recovery has yet to materialize across many measures of the economy. GDP—the output of goods and services produced by labor and property located in the United States—rose 2.8% in the third quarter of 2009, after declining 0.7% in the prior quarter. The third quarter GDP gain was primarily attributable to increases in personal consumption expenditures, exports, private inventory investment, and government spending, according to the Bureau of Economic Analysis. The U.S. unemployment rate increased from 6.7% in November of 2008 to 10.2% in October of 2009. Sales of existing homes were a bright spot toward the end of the period, rising 9.4% in September, fueled by tax credits for new home buyers and favorable prices.
 
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 October 31, 2009, the S&P 500 Index returned 9.80%. In the index, Information Technology was the strongest performing sector, followed by Consumer Discretionary and Materials. Financials was the weakest sector, followed by Utilities and Industrials. In general, large-cap stocks outperformed small-cap as evidenced by the Russell 1000 Index, which returned 11.20%, compared with the Russell 2000 Index, which returned 6.46%. Looking at the broad market, growth outperformed value; the Russell 3000 Growth Index returned 17.04%, while the Russell 3000 Value Index returned 4.56%. Internationally, the MSCI EAFE Index returned 28.41%, while the MSCI Emerging Markets Index (Net)* returned 64.13%.
 
On the fixed income side, 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 1.75%. 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 13.79%. Returns were also positive in the tax free bond market—the Barclays Capital General Muni Bond Index returned 13.60%. The Federal Open Market Committee reaffirmed on November 4, 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.
 
(LEGEND)    9.80%   S&P 500® Index: measures U.S. large-cap stocks
 
(LEGEND)  6.46%   Russell 2000® Index: measures U.S. small-cap stocks
 
(LEGEND)  28.41%   MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
 
(LEGEND)    13.79%   Barclays Capital U.S. Aggregate Bond Index: measures the U.S. bond market
 
(LEGEND)    0.21%   Three-Month U.S. Treasury Bills (T-bills): measures short-term U.S. Treasury obligations
(LINE GRAPH)
 
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.
 
Data source: Charles Schwab & Co., Inc.
 
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.
 
*The MSCI Emerging Markets Index (Net) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. This series approximates the minimum possible dividend reinvestment.

 
 
 
Schwab MarketTrack Portfolios


 

 
Portfolio Management
 
     
     
(PHOTO)   Jeffrey Mortimer, CFA, Chief Investment officer, Charles Schwab Investment Management, Inc., is responsible for the overall management of the portfolios. Prior to joining the firm in October 1997, he worked for more than 8 years in asset management.
     
(PHOTO)   Daniel Kern, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the portfolios. He was appointed portfolio manager in 2008. Prior to joining the firm in 2003, he worked for more than 13 years in the investment management industry, with more than 6 of those years spent in portfolio management.
     
(PHOTO)   Caroline Lee, a managing director and portfolio manager of the investment adviser, co-manages the portfolios. Prior to joining the firm in November 2005, she worked in asset management for over 4 years overseeing subadvisor relationships in the pension group of a major corporation. She has also had 3 years of previous experience in investment management at another financial services firm.
 
 
 
Schwab MarketTrack Portfolios 5


 

 
Schwab MarketTrack All Equity Portfoliotm
 
 
The Schwab MarketTrack Portfolios incorporate a mix of different asset classes, and each invests mainly in a combination of other Schwab Funds most of which are managed using indexing strategies. Each portfolio pursues a different investment goal. Accordingly, portfolio returns over a given period will reflect a blend of returns of the underlying asset classes, and will depend on their relative weightings in each portfolio.
 
The Schwab MarketTrack All Equity Portfolio returned 13.54% during the period, compared to the benchmark All Equity Composite Index, which returned 15.72%. The portfolio focuses on long-term stock growth, while remaining close to the target allocations of 45% in large-cap, 30% in international and 25% in small-cap stocks. On a total return basis, international equity securities were strong performers during the period. In general, prices on equity securities improved markedly during the period as both the domestic and international markets improved from March 2009 through October 2009. The portfolio’s underperformance relative to the benchmark (composed of 70% Dow Jones U.S. Total Stock Market Index and 30% MSCI EAFE Index) was primarily driven by the Schwab International Index Fund, which lagged the MSCI EAFE Index. Returns for the Schwab S&P 500 Index Fund also detracted slightly from performance when compared to the Dow Jones U.S. Total Stock Market Index. The Schwab Small-Cap Index Fund added value as it outperformed the Dow Jones U.S. Total Stock Market Index.

 
As of 10/31/09:
 
 Statistics
 
Number of Holdings 4
Weighted Average Market
  Cap ($ x 1,000,000) $53,770
Price/Earnings Ratio (P/E) 55.1
Price/Book Ratio (P/B) 2.0
Portfolio Turnover Rate 10%
 
 
 Asset Class Weightings % of Investments
 
Large-Cap Stocks 45.1%
International Stocks 30.2%
Small-Cap Stocks 24.6%
Short-Term Investments 0.1%
Total 100.0%
 
 
 Top Holdings % Net Assets1
 
Schwab S&P 500 Index Fund 45.2%
Schwab International Index Fund 30.2%
Schwab Small-Cap Index Fund 24.6%
Total 100.0%
 
 
Manager views and portfolio holdings may have changed since the report date.
 
Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.
 
1  This list is not a recommendation of any security by the investment adviser.

 
 
 
Schwab MarketTrack Portfolios


 

 
 Schwab MarketTrack All Equity Portfoliotm

 
Performance Summary as of 10/31/09
 
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.
 
October 31, 1999October 31, 2009
Performance of a Hypothetical
$10,000 Investment1
 
(LINE GRAPH)
 
 Average Annual Total Returns1,2
                         
Portfolio and Inception Date   1 Year   5 Years   10 Years
 
Portfolio: Schwab MarketTrack All Equity Portfoliotm (5/19/98)     13.54%       1.67%       0.65%  
Benchmark: All Equity Composite Index     15.72%       2.25%       0.67%  
Fund Category: Morningstar Large-Cap Blend     11.75%       0.45%       -0.10%  
 
Portfolio Expense Ratios3: Net 0.64%; Gross 0.68%
 
 Style Assessment4
 
(STYLE BOX)
 
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 All Equity Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 70% Dow Jones U.S. Total Stock Market Index and 30% MSCI EAFE Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
2  Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.
 
3  As stated in the prospectus. Includes expenses of the underlying funds in which the Portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.14%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as 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 of the financial statements.
 
4  Source: Morningstar, Inc. This style assessment is the result of evaluating the portfolio based on a ten-factor model for value and growth characteristics. The portfolio’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the portfolio’s holdings as of 10/31/09, which may have changed since then, and is not a precise indication of risk or performance—past, present, or future.
 
 
 
Schwab MarketTrack Portfolios 7


 

 
Schwab MarketTrack Growth Portfoliotm
 
 
The Schwab MarketTrack Portfolios incorporate a mix of different asset classes, and each invests mainly in a combination of other Schwab Funds most of which are managed using indexing strategies. Each portfolio pursues a different investment goal. Accordingly, portfolio returns over a given period will reflect a blend of returns of the underlying asset classes, and will depend on their relative weightings in each portfolio.
 
The Schwab MarketTrack Growth Portfolio returned 12.95% during the period, compared to the benchmark Growth Composite Index, which returned 14.44%. The portfolio focuses on stock investments, while including some bonds and cash investments, remaining close to the target allocations of 80% stocks, 15% bonds, and 5% cash. On a total return basis, international equity securities were strong performers during the period. In general, prices on equity securities improved markedly during the period as both the domestic and international markets improved from March 2009 through October 2009. The portfolio’s underperformance relative to the benchmark (composed of 60% Dow Jones U.S. Total Stock Market Index, 20% MSCI EAFE Index, 15% Barclays Capital U.S. Aggregate Bond Index, and 5% Morningstar 3 Month T-Bill Index) was primarily driven by the Schwab International Index Fund, which lagged the MSCI EAFE Index, and the Schwab Total Bond Market Fund, which lagged the Barclays Capital U.S. Aggregate Bond Index. Returns for the Schwab S&P 500 Index Fund also detracted slightly from performance when compared to the Dow Jones U.S. Total Stock Market Index. The Schwab Small-Cap Index Fund added value as it outperformed the Dow Jones U.S. Total Stock Market Index.

 
As of 10/31/09:
 
 Statistics
 
Number of Holdings 6
Weighted Average Market
  Cap ($ x 1,000,000) $54,718
Price/Earnings Ratio (P/E) 59.7
Price/Book Ratio (P/B) 2.0
Portfolio Turnover Rate 23%
 
 
 Asset Class Weightings % of Investments
 
Large-Cap Stocks 40.2%
International Stocks 20.0%
Small-Cap Stocks 19.5%
Bonds 15.4%
Short-Term Investments 4.9%
Total 100.0%
 
 
 Top Holdings % Net Assets1
 
Schwab S&P 500 Index Fund 40.2%
Schwab International Index Fund 20.0%
Schwab Small-Cap Index Fund 19.6%
Schwab Total Bond Market Fund 15.4%
Schwab Value Advantage Money
  Fund, Institutional Shares 3.9%
Total 99.1%
 
 
Manager views and portfolio holdings may have changed since the report date.
 
Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.
 
1  This list is not a recommendation of any security by the investment adviser.

 
 
 
Schwab MarketTrack Portfolios


 

 
 Schwab MarketTrack Growth Portfoliotm

 
Performance Summary as of 10/31/09
 
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.
 
October 31, 1999October 31, 2009
Performance of a Hypothetical
$10,000 Investment in Investor Shares1
 
(LINE GRAPH)
 
April 6, 2006October 31, 2009
Performance of a Hypothetical
$100,000 Investment in P Shares1
 
(LINE GRAPH)
 
 Average Annual Total Returns1,2
                                 
Portfolio Class and Inception Date   1 Year   5 Years   10 Years   Since Inception
 
Investor Shares (11/20/95)
    12.95%       1.98%       1.58%       5.47%  
P Shares (4/6/06)
    13.09%       n/a       n/a       -2.47%  
Benchmark: Growth Composite Index     14.44%       2.77%       1.77%       (11/20/95) 5.92%  
                              (4/6/06) -1.77%  
Fund Category: Morningstar Large-Cap Blend     11.75%       0.45%       -0.10%       (11/20/95) 5.53%  
                              (4/6/06) -4.64%  
 
Portfolio Expense Ratios3: Investor Shares: Net 0.69%; Gross 0.72% / P Shares: Net 0.54%; Gross 0.57%
 
 Style Assessment4
 
(STYLE BOX)
 
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 Growth Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 60% Dow Jones U.S. Total Stock Market Index, 20% MSCI EAFE Index, 15% Barclays Capital U.S. Aggregate Bond Index, and 5% Barclays Capital U.S. Treasury Bills: 1-3 Months Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
2  Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.
 
3  As stated in the prospectus. Includes expenses of the underlying funds in which the Portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.19%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as 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 of the financial statements.
 
4  Source: Morningstar, Inc. This style assessment is the result of evaluating the portfolio based on a ten-factor model for value and growth characteristics. The portfolio’s market capitalization placement is determined by the geometric mean of its holdings’ market capitalizations. The assessment reflects the portfolio’s holdings as of 10/31/09, which may have changed since then, and is not a precise indication of risk or performance—past, present, or future.
 
 
 
Schwab MarketTrack Portfolios 9


 

 
Schwab MarketTrack Balanced Portfoliotm
 
 
The Schwab MarketTrack Portfolios incorporate a mix of different asset classes, and each invests mainly in a combination of other Schwab Funds most of which are managed using indexing strategies. Each portfolio pursues a different investment goal. Accordingly, portfolio returns over a given period will reflect a blend of returns of the underlying asset classes, and will depend on their relative weightings in each portfolio.
 
The Schwab MarketTrack Balanced Portfolio returned 12.41%, compared to the benchmark Balanced Composite Index, which returned 14.47%. The portfolio focuses on both stock and bond investments, while remaining close to the target allocations of 60% stocks, 35% bonds, and 5% cash. On a total return basis, international equity securities were strong performers during the period. In general, prices on equity securities improved markedly during the period as both the domestic and international markets improved from March 2009 through October 2009. The portfolio’s underperformance relative to the benchmark (composed of 45% Dow Jones U.S. Total Stock Market Index, 15% MSCI EAFE Index, 35% Barclays Capital U.S. Aggregate Bond Index, and 5% Morningstar 3 Month T-Bill Index) was primarily driven by the Schwab International Index Fund, which lagged the MSCI EAFE Index, and the Schwab Total Bond Market Fund, which lagged the Barclays Capital U.S. Aggregate Bond Index. Returns for the Schwab S&P 500 Index Fund also detracted slightly from performance when compared to the Dow Jones U.S. Total Stock Market Index. The Schwab Small-Cap Index Fund added value as it outperformed the Dow Jones U.S. Total Stock Market Index.

 
As of 10/31/09:
 
 Statistics
 
Number of Holdings 6
Weighted Average Market
  Cap ($ x 1,000,000) $54,361
Price/Earnings Ratio (P/E) 59.2
Price/Book Ratio (P/B) 2.0
Portfolio Turnover Rate 30%
 
 
 Asset Class Weightings % of Investments
 
Bonds 36.0%
Large-Cap Stocks 29.8%
Small-Cap Stocks 14.9%
International Stocks 14.9%
Short-Term Investments 4.4%
Total 100.0%
 
 
 Top Holdings % Net Assets1
 
Schwab Total Bond Market Fund 35.8%
Schwab S&P 500 Index Fund 29.6%
Schwab Small-Cap Index Fund 14.8%
Schwab International Index Fund 14.8%
Schwab Value Advantage Money
  Fund, Institutional Shares 3.4%
Total 98.4%
 
 
Manager views and portfolio holdings may have changed since the report date.
 
Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.
 
1  This list is not a recommendation of any security by the investment adviser.

 
 
 
10 Schwab MarketTrack Portfolios


 

 
 Schwab MarketTrack Balanced Portfoliotm

 
Performance Summary as of 10/31/09
 
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.
 
October 31, 1999October 31, 2009
Performance of a Hypothetical
$10,000 Investment1
 
(LINE GRAPH)
 
 Average Annual Total Returns1,2
                         
Portfolio and Inception Date   1 Year   5 Years   10 Years
 
Portfolio: Schwab MarketTrack Balanced Portfoliotm (11/20/95)     12.41%       2.20%       2.45%  
Benchmark: Balanced Composite Index     14.47%       3.48%       3.03%  
Fund Category: Morningstar Moderate Allocation     15.71%       2.07%       2.50%  
 
Portfolio Expense Ratios3: Net 0.77%; Gross 0.78%
 
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 Balanced Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 45% Dow Jones U.S. Total Stock Market Index, 15% MSCI EAFE Index, 35% Barclays Capital U.S. Aggregate Bond Index, and 5% Barclays Capital U.S. Treasury Bills: 1-3 Months Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
2  Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.
 
3  As stated in the prospectus. Includes expenses of the underlying funds in which the Portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.27%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as 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 of the financial statements.
 
 
 
Schwab MarketTrack Portfolios 11


 

 
Schwab MarketTrack Conservative Portfoliotm
 
 
The Schwab MarketTrack Portfolios incorporate a mix of different asset classes, and each invests mainly in a combination of other Schwab Funds most of which are managed using indexing strategies. Each portfolio pursues a different investment goal. Accordingly, portfolio returns over a given period will reflect a blend of returns of the underlying asset classes, and will depend on their relative weightings in each portfolio.
 
The Schwab MarketTrack Conservative Portfolio returned 11.82% during the period, compared to the benchmark Conservative Composite Index, which returned 14.25%. The portfolio focuses on bond investments, but also includes equity investments, remaining close to the target allocations of 55% bonds, 40% stocks, and 5% cash. On a total return basis, international equity securities were strong performers during the period. In general, prices on equity securities improved markedly during the period as both the domestic and international markets improved from March 2009 through October 2009. The portfolio’s underperformance relative to the benchmark (composed of 30% Dow Jones U.S. Total Stock Market Index, 10% MSCI EAFE Index, 55% Barclays Capital U.S. Aggregate Bond Index, and 5% Morningstar 3 Month T-Bill Index) was primarily driven by the Schwab International Index Fund, which lagged the MSCI EAFE Index, and the Schwab Total Bond Market Fund, which lagged the Barclays Capital U.S. Aggregate Bond Index. Returns for the Schwab S&P 500 Index Fund also detracted slightly from performance when compared to the Dow Jones U.S. Total Stock Market Index. The Schwab Small-Cap Index Fund added value as it outperformed the Dow Jones U.S. Total Stock Market Index.

 
As of 10/31/09:
 
 Statistics
 
Number of Holdings 6
Weighted Average Market
  Cap ($ x 1,000,000) $54,494
Price/Earnings Ratio (P/E) 59.3
Price/Book Ratio (P/B) 2.0
Portfolio Turnover Rate 25%
 
 
 Asset Class Weightings % of Investments
 
Bonds 56.0%
Large-Cap Stocks 19.8%
International Stocks 9.9%
Small-Cap Stocks 9.8%
Short-Term Investments 4.5%
Total 100.0%
 
 
 Top Holdings % Net Assets1
 
Schwab Total Bond Market Fund 55.9%
Schwab S&P 500 Index Fund 19.7%
Schwab International Index Fund 9.9%
Schwab Small-Cap Index Fund 9.8%
Schwab Value Advantage Money
  Fund, Institutional Shares 4.3%
Citibank, London Time Deposit 0.2%
Total 99.8%
 
 
Manager views and portfolio holdings may have changed since the report date.
 
Small-company stocks are subject to greater volatility than other asset categories. Foreign securities can involve risks such as political and economic instability and currency risk.
 
1  This list is not a recommendation of any security by the investment adviser.

 
 
 
12 Schwab MarketTrack Portfolios


 

 
 Schwab MarketTrack Conservative Portfoliotm

 
Performance Summary as of 10/31/09
 
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.
 
October 31, 1999October 31, 2009
Performance of a Hypothetical
$10,000 Investment1
 
(LINE GRAPH)
 
 Average Annual Total Returns1,2
                         
Portfolio and Inception Date   1 Year   5 Years   10 Years
 
Portfolio: Schwab MarketTrack Conservative Portfoliotm (11/20/95)     11.82%*       2.33%       3.23%  
Benchmark: Conservative Composite Index     14.25%       4.09%       4.18%  
Fund Category: Morningstar Conservative Allocation     15.81%       2.70%       3.18%  
 
Portfolio Expense Ratios3: Net 0.86%; Gross 0.90%
 
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.
 
Total return for the report period presented in the table differs from the return in the Financial Highlights. The total return presented in the above table is calculated based on the NAV at which shareholder transactions were processed. The total return presented in the Financial Highlights section of the report is calculated in the same manner, but also taking into account certain adjustments that are necessary under generally accepted accounting principles required in the annual and semiannual reports.
 
1  The Conservative Composite Index is based on a comparable portfolio asset allocation and calculated using the following portion allocations: 30% Dow Jones U.S. Total Stock Market Index, 10% MSCI EAFE Index, 55% Barclays Capital U.S. Aggregate Bond Index, and 5% Barclays Capital U.S. Treasury Bills: 1-3 Months Index. The index is maintained by Charles Schwab Investment Management, Inc.
 
2  Portfolio expenses have been partially absorbed by CSIM and Schwab. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares.
 
3  As stated in the prospectus. Includes expenses of the underlying funds in which the Portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.36%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as 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 of the financial statements.
 
 
 
Schwab MarketTrack Portfolios 13


 

 
Fund Expenses (Unaudited)
 
 Examples for a $1,000 Investment
 
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 six-months beginning May 1, 2009 and held through October 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 5/1/09   at 10/31/09   5/1/09–10/3109
 
 
Schwab MarketTrack All Equity Portfoliotm                                
Actual Return
    0.50%     $ 1,000     $ 1,226.00     $ 2.81  
Hypothetical 5% Return
    0.50%     $ 1,000     $ 1,022.68     $ 2.55  
 
Schwab MarketTrack Growth Portfoliotm                                
Investor Shares                                
Actual Return
    0.50%     $ 1,000     $ 1,184.50     $ 2.75  
Hypothetical 5% Return
    0.50%     $ 1,000     $ 1,022.68     $ 2.55  
P Shares                                
Actual Return
    0.35%     $ 1,000     $ 1,185.50     $ 1.93  
Hypothetical 5% Return
    0.35%     $ 1,000     $ 1,023.44     $ 1.79  
 
Schwab MarketTrack Balanced Portfoliotm                                
Actual Return
    0.50%     $ 1,000     $ 1,151.40     $ 2.71  
Hypothetical 5% Return
    0.50%     $ 1,000     $ 1,022.68     $ 2.55  
 
Schwab MarketTrack Conservative Portfoliotm                                
Actual Return
    0.50%     $ 1,000     $ 1,117.10     $ 2.67  
Hypothetical 5% Return
    0.50%     $ 1,000     $ 1,022.68     $ 2.55  

 
1  Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights; does not include expenses of underlying funds in which the portfolios invest.
 
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 the 184 days of the period, and divided by the 365 days of the fiscal year.

 
 
 
14 Schwab MarketTrack Portfolios


 

 
Schwab MarketTrack All Equity Portfoliotm
 
Financial Statements
 
Financial Highlights
 
                                         
    11/1/08–
  11/1/07–
  11/1/06–
  11/1/05–
  11/1/04–
    10/31/09   10/31/08   10/31/07   10/31/06   10/31/05
 
                                         
Per-Share Data ($)
                                       
Net asset value at beginning of period
    9.44       15.58       13.63       11.55       10.44  
   
Income (loss) from investment operations:
                                       
Net investment income (loss)
    0.30       0.20       0.21       0.11       0.12  
Net realized and unrealized gains (losses)
    0.83       (6.11 )     2.01       2.10       1.11  
   
Total from investment operations
    1.13       (5.91 )     2.22       2.21       1.23  
Less distributions:
                                       
Distributions from net investment income
    (0.23 )     (0.22 )     (0.27 )     (0.13 )     (0.12 )
Distributions from net realized gains
    (0.52 )     (0.01 )                  
   
Total distributions
    (0.75 )     (0.23 )     (0.27 )     (0.13 )     (0.12 )
   
Net asset value at end of period
    9.82       9.44       15.58       13.63       11.55  
   
Total return (%)
    13.54       (38.46 )     16.55       19.31       11.81  
                                         
Ratios/Supplemental Data (%)
                                       
Ratios to average net assets:
                                       
Net operating expenses1
    0.50       0.50       0.50       0.50       0.50  
Gross operating expenses1
    0.67       0.73       0.72       0.74       0.75  
Net investment income (loss)
    3.46       1.46       1.24       0.89       1.07  
Portfolio turnover rate
    10       10       0 2     8       49  
Net assets, end of period ($ x 1,000,000)
    461       429       682       527       463  

1 The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.
2 Less than 1%.
 
 
 
See financial notes 15


 

 
 Schwab MarketTrack All Equity Portfolio
 

 
Portfolio Holdings as of October 31, 2009
 
 
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)
 
  100 .0%   Other Investment Companies     494,223       460,832  
  0 .1%   Short-Term Investment     572       572  
 
 
  100 .1%   Total Investments     494,795       461,404  
  (0 .1)%   Other Assets and Liabilities, Net             (450 )
 
 
  100 .0%   Total Net Assets             460,954  
 
                 
    Number
  Value
Security   of Shares   ($ x 1,000)
 
 Other Investment Companies 100.0% of net assets
 
Equity Funds 100.0%
Schwab International Index Fund (a)
    8,562,505       139,226  
Schwab S&P 500 Index Fund (a)
    12,790,339       208,227  
Schwab Small-Cap Index Fund (a)
    7,488,666       113,379  
                 
Total Other Investment Companies
(Cost $494,223)
    460,832  
         
                 
                 
Security
  Face Amount
  Value
    Rate, Maturity Date   ($ x 1,000)   ($ x 1,000)
 
 Short-Term Investment 0.1% of net assets
 
Commercial Paper & Other Obligations 0.1%
Wells Fargo, San Francisco Time Deposit
0.03%, 11/02/09
    572       572  
                 
Total Short-Term Investment
(Cost $572)
    572  
         
 
End of Investments.
 
(All dollar amounts are x 1,000)
 
At 10/31/09, the tax basis cost of the fund’s investments was $520,324 and the unrealized appreciation and depreciation were $0 and ($58,920), respectively, with a net unrealized depreciation of ($58,920).
 
(a) Issuer is affiliated with the fund’s adviser.
 
 
 
16 See financial notes


 

 
 Schwab MarketTrack All Equity Portfolio
 

Statement of
Assets and Liabilities
As of October 31, 2009. All numbers are x 1,000 except NAV.
 
             
             
 
Assets
Investments in affiliated underlying funds, at value (cost $494,223)
        $460,832  
Investments in unaffiliated issuers, at value (cost $572)
  +     572  
     
     
Total investments, at value (cost $494,795)
        461,404  
Receivables:
           
Fund shares sold
        278  
Prepaid expenses
  +     7  
     
     
Total assets
        461,689  
             
 
Liabilities
Payables:
           
Investment adviser and administrator fees
        49  
Shareholder services fees to affiliate
        6  
Fund shares redeemed
        611  
Accrued expenses
  +     69  
     
     
Total liabilities
        735  
             
 
Net Assets
Total assets
        461,689  
Total liabilities
      735  
     
     
Net assets
        $460,954  
Net Assets by Source
           
Capital received from investors
        555,883  
Net investment income not yet distributed
        567  
Net realized capital losses
        (62,105 )
Net unrealized capital losses
        (33,391 )
 
Net Asset Value (NAV)
 
                     
        Shares
         
Net Assets   ¸   Outstanding   =   NAV  
 
$460,954
      46,940         $9.82  
 
 
 
 
See financial notes 17


 

 
 Schwab MarketTrack All Equity Portfolio
 

Statement of
Operations
For November 1, 2008 through October 31, 2009. All numbers are x 1,000.
 
             
             
 
Investment Income
Dividends received from affiliated underlying funds
        $15,936  
Interest
  +     2  
     
     
Total investment income
        15,938  
             
 
Net Realized Gains and Losses
Net realized losses on sales of affiliated underlying funds
        (27,611 )
Net realized gains on unaffiliated investments
        1  
Net realized losses on futures contracts
  +     (1,333 )
     
     
Net realized losses
        (28,943 )
             
 
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds
        65,941  
Net unrealized gains on futures contracts
  +     1,146  
     
     
Net unrealized gains
        67,087  
             
 
Expenses
Investment adviser and administrator fees
        1,451  
Transfer agent and shareholder services fees
        1,019  
Shareholder reports
        122  
Professional fees
        39  
Registration fees
        32  
Portfolio accounting fees
        22  
Custodian fees
        12  
Trustees’ fees
        10  
Other expense
  +     18  
     
     
Total expenses
        2,725  
Expense reduction by adviser and Schwab
      710  
     
     
Net expenses
        2,015  
             
 
Increase (Decrease) in Net Assets from Operations
Total investment income
        15,938  
Net expenses
      2,015  
     
     
Net investment income
        13,923  
Net realized losses
        (28,943 )
Net unrealized gains
  +     67,087  
     
     
Increase in net assets from operations
        $52,067  
 
 
 
 
18 See financial notes


 

 
 Schwab MarketTrack All Equity Portfolio
 

Statements of
Changes in Net Assets
For the current and prior report periods. All numbers are x 1,000.
 
                     
                     
 
Operations
                     
        11/01/08-10/31/09     11/01/07-10/31/08  
Net investment income
        $13,923       $8,840  
Net realized gains (losses)
        (28,943 )     4,479  
Net unrealized gains (losses)
  +     67,087       (285,270 )
     
     
Increase (Decrease) in net assets from operations
        52,067       (271,951 )
                     
 
Distributions to Shareholders
Distributions from net investment income
        10,448       9,700  
Distributions from net realized gains
  +     23,862       437  
     
     
Total distributions
        $34,310       $10,137  
                                     
                                     
 
Transactions in Fund Shares
                                     
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     VALUE     SHARES     VALUE  
Shares sold
        8,708       $74,119       11,241       $147,763  
Shares reinvested
        3,934       32,337       666       9,651  
Shares redeemed
  +     (11,183 )     (92,389 )     (10,225 )     (128,596 )
     
     
Net transactions in fund shares
        1,459       $14,067       $1,682       $28,818  
                                     
 
Shares Outstanding and Net Assets
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     NET ASSETS     SHARES     NET ASSETS  
Beginning of period
        45,481       $429,130       43,799       $682,400  
Total increase or decrease
  +     1,459       31,824       1,682       (253,270 )
     
     
End of period
        46,940       $460,954       45,481       $429,130  
     
     
Net investment income not yet distributed/Distributions in excess of net investment income
                $567               ($2,911 )
 
 
 
 
See financial notes 19


 

 
Schwab MarketTrack Growth Portfoliotm
 
Financial Statements
 
Financial Highlights
 
                                         
    11/1/08–
  11/1/07–
  11/1/06–
  11/1/05–
  11/1/04–
 Investor Shares   10/31/09   10/31/08   10/31/07   10/31/06   10/31/05
 
                                         
Per-Share Data ($)
                                       
Net asset value at beginning of period
    13.71       21.09       19.16       16.81       15.57  
   
Income (loss) from investment operations:
                                       
Net investment income (loss)
    0.39       0.37       0.40       0.30       0.27  
Net realized and unrealized gains (losses)
    1.25       (6.94 )     2.16       2.33       1.20  
   
Total from investment operations
    1.64       (6.57 )     2.56       2.63       1.47  
Less distributions:
                                       
Distributions from net investment income
    (0.40 )     (0.41 )     (0.46 )     (0.28 )     (0.23 )
Distributions from net realized gains
    (0.44 )     (0.40 )     (0.17 )            
   
Total distributions
    (0.84 )     (0.81 )     (0.63 )     (0.28 )     (0.23 )
   
Net asset value at end of period
    14.51       13.71       21.09       19.16       16.81  
   
Total return (%)
    12.95       (32.27 )     13.69       15.83       9.48  
                                         
Ratios/Supplemental Data (%)
                                       
Ratios to average net assets:
                                       
Net operating expenses1
    0.50       0.50       0.50       0.50       0.50  
Gross operating expenses1
    0.66       0.71       0.70       0.71       0.72  
Net investment income (loss)
    3.03       1.99       1.94       1.74       1.58  
Portfolio turnover rate
    23       10       4       7       33  
Net assets, end of period ($ x 1,000,000)
    507       454       686       602       657  
 
                                 
    11/1/08–
  11/1/07–
  11/1/06–
  4/6/062
 P Shares   10/31/09   10/31/08   10/31/07   10/31/06
 
                                 
Per-Share Data ($)
                               
Net asset value at beginning of period
    13.72       21.10       19.18       18.32  
   
Income (loss) from investment operations:
                               
Net investment income (loss)
    0.43       0.37       0.42       0.10  
Net realized and unrealized gains (losses)
    1.22       (6.91 )     2.16       0.76  
   
Total from investment operations
    1.65       (6.54 )     2.58       0.86  
Less distributions:
                               
Distributions from net investment income
    (0.42 )     (0.44 )     (0.49 )      
Distributions from net realized gains
    (0.44 )     (0.40 )     (0.17 )      
   
Total distributions
    (0.86 )     (0.84 )     (0.66 )      
   
Net asset value at end of period
    14.51       13.72       21.10       19.18  
   
Total return (%)
    13.09       (32.14 )     13.83       4.69 3
                                 
Ratios/Supplemental Data (%)
                               
Ratios to average net assets:
                               
Net operating expenses1
    0.35       0.35       0.35       0.35 4
Gross operating expenses1
    0.51       0.56       0.55       0.56 4
Net investment income (loss)
    3.31       2.10       2.07       0.95 4
Portfolio turnover rate
    23       10       4       7 3
Net assets, end of period ($ x 1,000,000)
    84       94       138       119  

1 The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.
2 Commencement of operations.
3 Not annualized.
4 Annualized.
 
 
 
20 See financial notes


 

 
 Schwab MarketTrack Growth Portfolio
 

 
Portfolio Holdings as of October 31, 2009
 
 
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 .1%   Other Investment Companies     544,928       585,551  
  1 .0%   Short-Term Investment     5,928       5,928  
 
 
  100 .1%   Total Investments     550,856       591,479  
  (0 .1)%   Other Assets and Liabilities, Net             (624 )
 
 
  100 .0%   Total Net Assets             590,855  
 
                 
    Number
  Value
Security   of Shares   ($ x 1,000)
 
 Other Investment Companies 99.1% of net assets
 
Equity Funds 79.7%
Schwab International Index Fund (a)
    7,252,275       117,922  
Schwab S&P 500 Index Fund (a)
    14,588,652       237,503  
Schwab Small-Cap Index Fund (a)
    7,630,640       115,528  
                 
              470,953  
 
Fixed-Income Funds 15.5%
Schwab Total Bond Market Fund (a)
    10,103,612       91,337  
 
Money Funds 3.9%
Schwab Value Advantage Money Fund, Institutional Shares (a)
    23,260,416       23,261  
                 
Total Other Investment Companies
(Cost $544,928)
    585,551  
         
                 
                 
Security
  Face Amount
  Value
    Rate, Maturity Date   ($ x 1,000)   ($ x 1,000)
 
 Short-Term Investment 1.0% of net assets
 
Commercial Paper & Other Obligations 1.0%
Wells Fargo, San Francisco Time Deposit
0.03%, 11/02/09
    5,928       5,928  
                 
Total Short-Term Investment
(Cost $5,928)
    5,928  
         
 
End of Investments.
 
(All dollar amounts are x 1,000)
 
At 10/31/09, the tax basis cost of the fund’s investments was $555,084 and the unrealized appreciation and depreciation were $39,581 and ($3,186), respectively, with a net unrealized appreciation of $36,395.
 
(a) Issuer is affiliated with the fund’s adviser.
 
 
 
See financial notes 21


 

 
 Schwab MarketTrack Growth Portfolio
 

Statement of
Assets and Liabilities
As of October 31, 2009. All numbers are x 1,000 except NAV.
 
             
             
 
Assets
Investments in affiliated underlying funds, at value (cost $544,928)
        $585,551  
Investments in unaffiliated issuers, at value (cost $5,928)
  +     5,928  
     
     
Total investments, at value (cost $550,856)
        591,479  
Receivables:
           
Fund shares sold
        440  
Dividends
        278  
Prepaid expenses
  +     9  
     
     
Total assets
        592,206  
             
 
Liabilities
Payables:
           
Investments bought
        281  
Investment adviser and administrator fees
        41  
Shareholder services fees to affiliate
        4  
Fund shares redeemed
        953  
Accrued expenses
  +     72  
     
     
Total liabilities
        1,351  
             
 
Net Assets
Total assets
        592,206  
Total liabilities
      1,351  
     
     
Net assets
        $590,855  
Net Assets by Source
           
Capital received from investors
        584,307  
Net investment income not yet distributed
        4,242  
Net realized capital losses
        (38,317 )
Net unrealized capital gains
        40,623  
 
Net Asset Value (NAV) by Share Class
 
                         
            Shares
         
Share Class   Net Assets   ¸   Outstanding   =   NAV  
 
Investor Shares
  $507,195       34,945         $14.51  
P Shares
  $83,660       5,764         $14.51  
 
 
 
 
22 See financial notes


 

 
 Schwab MarketTrack Growth Portfolio
 

Statement of
Operations
For November 1, 2008 through October 31, 2009. All numbers are x 1,000.
 
             
             
 
Investment Income
Dividends received from affiliated underlying funds and stocks
        $17,606  
Dividends received from unaffiliated issuers
        947  
Interest
  +     1  
     
     
Total investment income
        18,554  
             
 
Net Realized Gains and Losses
Net realized losses on sales of affiliated underlying funds and stocks
        (23,347 )
Net realized losses on unaffiliated investments
  +     (7,739 )
     
     
Net realized losses
        (31,086 )
             
 
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds and stocks
        96,202  
Net unrealized losses on unaffiliated investments
  +     (17,890 )
     
     
Net unrealized gains
        78,312  
             
 
Expenses
Investment adviser and administrator fees
        1,887  
Transfer agent and shareholder service fees:
           
Investor Shares
        1,112  
P Shares
        85  
Shareholder reports
        91  
Professional fees
        40  
Registration fees
        31  
Portfolio accounting fees
        26  
Custodian fees
        14  
Trustees’ fees
        11  
Interest expense
        1  
Other expenses
  +     20  
     
     
Total expenses
        3,318  
Expense reduction by adviser and Schwab
      827  
     
     
Net expenses
        2,491  
             
 
Increase (Decrease) in Net Assets from Operations
Total investment income
        18,554  
Net expenses
      2,491  
     
     
Net investment income
        16,063  
Net realized losses
        (31,086 )
Net unrealized gains
  +     78,312  
     
     
Increase in net assets from operations
        63,289  
 
 
 
 
See financial notes 23


 

 
 Schwab MarketTrack Growth Portfolio
 

Statements of
Changes in Net Assets
For the current and prior report periods. All numbers are x 1,000.
 
                     
                     
 
Operations
                     
        11/01/08-10/31/09     11/01/07-10/31/08  
Net investment income
        $16,063       $14,619  
Net realized gains (losses)
        (31,086 )     15,981  
Net unrealized gains (losses)
  +     78,312       (295,758 )
     
     
Increase (Decrease) in net assets from operations
        63,289       (265,158 )
                     
 
Distributions to Shareholders
Distributions from net investment income
                   
Investor Shares
        13,232       13,372  
P Shares
  +     2,792       3,067  
     
     
Total distributions from net investment income
        16,024       16,439  
                     
                     
Distributions from net realized gains
Investor Shares
        14,726       13,018  
P Shares
  +     2,924       2,778  
     
     
Total distributions from net realized gains
        17,650       15,796  
                     
Total distributions
        $33,674       $32,235  
                                     
                                     
 
Transactions in Fund Shares
                                     
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     VALUE     SHARES     VALUE  
                                     
                                     
Shares Sold
Investor Shares
        6,665       $86,068       5,270       $93,615  
P Shares
  +     674       8,706       1,702       31,974  
     
     
Total shares sold
        7,339       $94,774       6,972       $125,589  
                                     
                                     
Shares Reinvested
Investor Shares
        2,157       $26,857       1,316       $25,447  
P Shares
  +     460       5,715       302       5,845  
     
     
Total shares reinvested
        2,617       $32,572       1,618       $31,292  
                                     
                                     
Shares Redeemed
Investor Shares
        (6,983 )     ($86,230 )     (6,000 )     ($104,934 )
P Shares
  +     (2,240 )     (28,121 )     (1,659 )     (29,888 )
     
     
Total shares redeemed
        (9,223 )     ($114,351 )     (7,659 )     ($134,822 )
                                     
Net transactions in fund shares
        733       $12,995       931       $22,059  
                                     
 
Shares Outstanding and Net Assets
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     NET ASSETS     SHARES     NET ASSETS  
Beginning of period
        39,976       $548,245       39,045       $823,579  
Total increase or decrease
  +     733       42,610       931       (275,334 )
     
     
End of period
        40,709       $590,855       39,976       $548,245  
     
     
Net investment income not yet distributed
                $4,242               $4,220  
 
 
 
 
24 See financial notes


 

 
Schwab MarketTrack Balanced Portfoliotm
 
Financial Statements
 
Financial Highlights
 
                                         
    11/1/08–
  11/1/07–
  11/1/06–
  11/1/05–
  11/1/04–
    10/31/09   10/31/08   10/31/07   10/31/06   10/31/05
 
                                         
Per-Share Data ($)
                                       
Net asset value at beginning of period
    12.74       18.13       17.04       15.46       14.66  
   
Income (loss) from investment operations:
                                       
Net investment income (loss)
    0.38       0.42       0.47       0.38       0.34  
Net realized and unrealized gains (losses)
    1.11       (5.06 )     1.41       1.58       0.74  
   
Total from investment operations
    1.49       (4.64 )     1.88       1.96       1.08  
Less distributions:
                                       
Distributions from net investment income
    (0.44 )     (0.48 )     (0.50 )     (0.34 )     (0.28 )
Distributions from net realized gains
    (0.25 )     (0.27 )     (0.29 )     (0.04 )      
   
Total distributions
    (0.69 )     (0.75 )     (0.79 )     (0.38 )     (0.28 )
   
Net asset value at end of period
    13.54       12.74       18.13       17.04       15.46  
   
Total return (%)
    12.41       (26.59 )     11.38       12.92       7.41  
                                         
Ratios/Supplemental Data (%)
                                       
Ratios to average net assets:
                                       
Net operating expenses1
    0.50       0.50       0.50       0.50       0.50  
Gross operating expenses1
    0.66       0.72       0.72       0.73       0.73  
Net investment income (loss)
    3.09       2.57       2.65       2.35       2.20  
Portfolio turnover rate
    30       17       6       8       25  
Net assets, end of period ($ x 1,000,000)
    434       405       598       534       519  

1 The expenses incurred by underlying funds in which the portfolio invests are not included in this ratio.
 
 
 
See financial notes 25


 

 
 Schwab MarketTrack Balanced Portfolio
 

 
Portfolio Holdings as of October 31, 2009
 
 
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)
 
  98 .4%   Other Investment Companies     391,412       426,921  
  1 .1%   Short-Term Investment     4,624       4,624  
 
 
  99 .5%   Total Investments     396,036       431,545  
  0 .5%   Other Assets and Liabilities, Net             1,985  
 
 
  100 .0%   Total Net Assets             433,530  
 
                 
    Number
  Value
Security   of Shares   ($ x 1,000)
 
 Other Investment Companies 98.4% of net assets
 
Equity Funds 59.2%
Schwab International Index Fund (a)
    3,947,359       64,184  
Schwab S&P 500 Index Fund (a)
    7,893,746       128,510  
Schwab Small-Cap Index Fund (a)
    4,244,673       64,265  
                 
              256,959  
 
Fixed-Income Funds 35.8%
Schwab Total Bond Market Fund (a)
    17,171,458       155,230  
 
Money Funds 3.4%
Schwab Value Advantage Money Fund, Institutional Shares (a)
    14,732,411       14,732  
                 
Total Other Investment Companies
(Cost $391,412)
    426,921  
         
                 
                 
Security
  Face Amount
  Value
    Rate, Maturity Date   ($ x 1,000)   ($ x 1,000)
 
 Short-Term Investment 1.1% of net assets
 
Commercial Paper & Other Obligations 1.1%
Wells Fargo, San Francisco Time Deposit
0.03%, 11/02/09
    4,624       4,624  
                 
Total Short-Term Investment
(Cost $4,624)
    4,624  
         
 
End of Investments.
 
(All dollar amounts are x 1,000)
 
At 10/31/09, the tax basis cost of the fund’s investments was $403,163 and the unrealized appreciation and depreciation were $34,096 and ($5,714), respectively, with a net unrealized appreciation of $28,382.
 
(a) Issuer is affiliated with the fund’s adviser.
 
 
 
26 See financial notes


 

 
 Schwab MarketTrack Balanced Portfolio
 

Statement of
Assets and Liabilities
As of October 31, 2009. All numbers are x 1,000 except NAV.
 
             
             
 
Assets
Investments in affiliated underlying funds, at value (cost $391,412)
        $426,921  
Investments in unaffiliated issuers, at value (cost $4,624)
  +     4,624  
     
     
Total investments, at value (cost $396,036)
        431,545  
Cash
        2,000  
Receivables:
           
Dividends
        476  
Fund shares sold
        304  
Prepaid expenses
  +     7  
     
     
Total assets
        434,332  
             
 
Liabilities
Payables:
           
Investments bought
        482  
Investment adviser and administrator fees
        18  
Shareholder services fees to affiliate
        4  
Fund shares redeemed
        248  
Accrued expenses
  +     50  
     
     
Total liabilities
        802  
             
 
Net Assets
Total assets
        434,332  
Total liabilities
      802  
     
     
Net assets
        $433,530  
Net Assets by Source
           
Capital received from investors
        421,442  
Net investment income not yet distributed
        5,019  
Net realized capital losses
        (28,440 )
Net unrealized capital gains
        35,509  
 
Net Asset Value (NAV)
 
                     
        Shares
         
Net Assets   ¸   Outstanding   =   NAV  
 
$433,530
      32,023         $13.54  
 
 
 
 
See financial notes 27


 

 
 Schwab MarketTrack Balanced Portfolio
 

Statement of
Operations
For November 1, 2008 through October 31, 2009. All numbers are x 1,000.
 
             
             
 
Investment Income
Dividends received from affiliated underlying funds and stocks
        $13,490  
Dividends received from unaffiliated issuers
        630  
Interest
  +     3  
     
     
Total investment income
        14,123  
             
 
Net Realized Gains and Losses
Net realized losses on sales of affiliated underlying funds and stocks
        (18,412 )
Net realized losses on unaffiliated investments
  +     (5,728 )
     
     
Net realized losses
        (24,140 )
             
 
Net Unrealized Gains and Losses
Net unrealized losses on unaffiliated investments
        (11,406 )
Net unrealized gains on affiliated underlying funds and stocks
  +     69,372  
     
     
Net unrealized gains
        57,966  
             
 
Expenses
Investment adviser and administrator fees
        1,428  
Transfer agent and shareholder service fees
        999  
Shareholder reports
        48  
Professional fees
        39  
Registration fees
        30  
Portfolio accounting fees
        24  
Custodian fees
        12  
Trustees’ fees
        9  
Other expenses
  +     5  
     
     
Total expenses
        2,594  
Expense reduction by adviser and Schwab
      629  
     
     
Net expenses
        1,965  
             
 
Increase (Decrease) in Net Assets from Operations
Total investment income
        14,123  
Net expenses
      1,965  
     
     
Net investment income
        12,158  
Net realized losses
        (24,140 )
Net unrealized gains
  +     57,966  
     
     
Increase in net assets from operations
        $45,984  
 
 
 
 
28 See financial notes


 

 
 Schwab MarketTrack Balanced Portfolio
 

Statements of
Changes in Net Assets
For the current and prior report periods. All numbers are x 1,000.
 
                     
                     
 
Operations
                     
        11/01/08-10/31/09     11/01/07-10/31/08  
Net investment income
        $12,158       $13,698  
Net realized gains (losses)
        (24,140 )     6,587  
Net unrealized gains (losses)
  +     57,966       (174,098 )
     
     
Increase (Decrease) in net assets from operations
        45,984       (153,813 )
                     
 
Distributions to Shareholders
Distributions from net investment income
        14,076       15,748  
Distributions from net realized gains
  +     7,744       9,065  
     
     
Total distributions
        $21,820       $24,813  
                                     
                                     
 
Transactions in Fund Shares
                                     
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     VALUE     SHARES     VALUE  
Shares sold
        5,528       $67,635       5,213       $83,413  
Shares reinvested
        1,742       20,735       1,408       23,635  
Shares redeemed
  +     (7,035 )     (84,003 )     (7,834 )     (121,760 )
     
     
Net transactions in fund shares
        235       $4,367       (1,213 )     ($14,712 )
                                     
 
Shares Outstanding and Net Assets
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     NET ASSETS     SHARES     NET ASSETS  
Beginning of period
        31,788       $404,999       33,001       $598,337  
Total increase or decrease
  +     235       28,531       (1,213 )     (193,338 )
     
     
End of period
        32,023       $433,530       31,788       $404,999  
     
     
Net investment income not yet distributed
                $5,019               $6,950  
 
 
 
 
See financial notes 29


 

 
Schwab MarketTrack Conservative Portfoliotm
 
Financial Statements
 
Financial Highlights
 
                                         
    11/1/08–
  11/1/07–
  11/1/06–
  11/1/05–
  11/1/04–
 Investor Shares   10/31/09   10/31/08   10/31/07   10/31/06   10/31/05
 
                                         
Per-Share Data ($)
                                       
Net asset value at beginning of period
    11.34       14.90       14.33       13.42       13.09  
   
Income (loss) from investment operations:
                                       
Net investment income (loss)
    0.37       0.43       0.49       0.42       0.36  
Net realized and unrealized gains (losses)
    0.91       (3.40 )     0.78       0.92       0.32  
   
Total from investment operations
    1.28       (2.97 )     1.27       1.34       0.68  
Less distributions:
                                       
Distributions from net investment income
    (0.38 )     (0.46 )     (0.51 )     (0.42 )     (0.35 )
Distributions from net realized gains
    (0.09 )     (0.13 )     (0.19 )     (0.01 )      
   
Total distributions
    (0.47 )     (0.59 )     (0.70 )     (0.43 )     (0.35 )
   
Net asset value at end of period
    12.15       11.34       14.90       14.33       13.42  
   
Total return (%)
    11.72       (20.59 )     9.12       10.13       5.24  
                                         
Ratios/Supplemental Data (%)
                                       
Ratios to average net assets:
                                       
Net operating expenses1
    0.50       0.50       0.50       0.50       0.50  
Gross operating expenses1
    0.68       0.74       0.73       0.74       0.75  
Net investment income (loss)
    3.31       3.12       3.37       3.12       2.67  
Portfolio turnover rate
    25       16       4       11       9  
Net assets, end of period ($ x 1,000,000)
    181       182       252       232       300  
 
                                 
    11/1/08–
  11/01/07–
  11/01/06–
  4/06/063
 P Shares   8/04/092   10/31/08   10/31/07   10/31/06
 
                                 
Per-Share Data ($)
                               
Net asset value at beginning of period
    11.30       14.87       14.32       13.93  
   
Income (loss) from investment operations:
                               
Net investment income (loss)
    0.30       0.42       0.51       0.23  
Net realized and unrealized gains (losses)
    0.67       (3.36 )     0.78       0.35  
   
Total from investment operations
    0.97       (2.94 )     1.29       0.58  
Less distributions:
                               
Distributions from net investment income
    (0.33 )     (0.50 )     (0.55 )     (0.19 )
Distributions from net realized gains
    (0.09 )     (0.13 )     (0.19 )      
   
Total distributions
    (0.42 )     (0.63 )     (0.74 )     (0.19 )
   
Net asset value at end of period
    11.85       11.30       14.87       14.32  
   
Total return (%)
    8.88 4     (20.47 )     9.32       4.22 4
                                 
Ratios/Supplemental Data (%)
                               
Ratios to average net assets:
                               
Net operating expenses1
    0.35 5     0.35       0.35       0.35 5
Gross operating expenses1
    0.57 5     0.59       0.58       0.60 5
Net investment income (loss)
    3.63 5     3.20       3.48       2.81 5
Portfolio turnover rate
    25       16       4       11 4
Net assets, end of period ($ x 1,000,000)
    95       86       99       79  

1 The expenses incurred by the underlying funds in which the portfolio invests are not included in this ratio.
2 Effective August 4, 2009, all outstanding P shares were redeemed. The Board of Trustees voted that effective December 10, 2009 the fund will no longer offer P shares.
3 Commencement of operations.
4 Not annualized.
5 Annualized.
 
 
 
30 See financial notes


 

 
 Schwab MarketTrack Conservative Portfolio
 

 
Portfolio Holdings as of October 31, 2009
 
 
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 .6%   Other Investment Companies     166,912       179,920  
  0 .2%   Short-Term Investment     306       306  
 
 
  99 .8%   Total Investments     167,218       180,226  
  0 .2%   Other Assets and Liabilities, Net             451  
 
 
  100 .0%   Total Net Assets             180,677  
 
                 
    Number
  Value
Security   of Shares   ($ x 1,000)
 
 Other Investment Companies 99.6% of net assets
 
Equity Funds 39.4%
Schwab International Index Fund (a)
    1,099,466       17,877  
Schwab S&P 500 Index Fund (a)
    2,190,907       35,668  
Schwab Small-Cap Index Fund (a)
    1,166,848       17,666  
                 
              71,211  
 
Fixed-Income Funds 55.9%
Schwab Total Bond Market Fund (a)
    11,171,182       100,988  
 
Money Funds 4.3%
Schwab Value Advantage Money Fund, Institutional Shares (a)
    7,721,069       7,721  
                 
Total Other Investment Companies
(Cost $166,912)
    179,920  
         
                 
                 
Security
  Face Amount
  Value
    Rate, Maturity Date   ($ x 1,000)   ($ x 1,000)
 
 Short-Term Investment 0.2% of net assets
 
Commercial Paper & Other Obligations 0.2%
Wells Fargo, San Francisco Time Deposit
0.03%, 11/02/09
    306       306  
                 
Total Short-Term Investment
(Cost $306)
    306  
         
 
End of Investments.
 
(All dollar amounts are x 1,000)
 
At 10/31/09 the tax basis cost of the fund’s investments was $174,564 and the unrealized appreciation and depreciation were $9,487 and ($3,825), respectively, with a net unrealized appreciation of $5,662.
 
(a) Issuer is affiliated with the fund’s adviser.
 
 
 
See financial notes 31


 

 
 Schwab MarketTrack Conservative Portfolio
 

Statement of
Assets and Liabilities
As of October 31, 2009. All numbers are x 1,000 except NAV.
 
             
             
 
Assets
Investments in affiliated underlying funds, at value (cost $166,912)
        $179,920  
Investments in unaffiliated issuers, at value (cost $306)
  +     306  
     
     
Total investments, at value (cost $167,218)
        180,226  
Receivables:
           
Investments sold
        800  
Dividends
        312  
Fund shares sold
        92  
Prepaid expenses
  +     3  
     
     
Total assets
        181,433  
             
 
Liabilities
Payables:
           
Investments bought
        316  
Investment adviser and administrator fees
        9  
Shareholder services fees to affiliate
        2  
Fund shares redeemed
        390  
Accrued expenses
  +     39  
     
     
Total liabilities
        756  
             
 
Net Assets
Total assets
        181,433  
Total liabilities
      756  
     
     
Net assets
        $180,677  
Net Assets by Source
           
Capital received from investors
        189,089  
Net investment income not yet distributed
        229  
Net realized capital losses
        (21,649 )
Net unrealized capital gains
        13,008  
 
Net Asset Value (NAV)
 
                     
        Shares
         
Net Assets   ¸   Outstanding   =   NAV  
 
$180,677
      14,871         $12.15  
 
 
 
 
32 See financial notes


 

 
 Schwab MarketTrack Conservative Portfolio
 

Statement of
Operations
For November 1, 2008 through October 31, 2009. All numbers are x 1,000.
 
             
             
 
Investment Income
Dividends received from affiliated underlying funds and stocks
        $8,918  
Dividends received from unaffiliated issuers
        149  
Interest
  +     1  
     
     
Total investment income
        9,068  
             
 
Net Realized Gains and Losses
Net realized losses on sales of affiliated underlying funds and stocks
        (17,256 )
Net realized losses on unaffiliated investments
  +     (2,423 )
     
     
Net realized losses
        (19,679 )
             
 
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds and stocks
        38,686  
Net unrealized losses on unaffiliated investments
  +     (1,607 )
     
     
Net unrealized gains
        37,079  
             
 
Expenses
Investment adviser and administrator fees
        890  
Transfer agent and shareholder service fees:
           
Investor Shares
        435  
P Shares1
        65  
Professional fees
        39  
Registration fees
        23  
Portfolio accounting fees
        21  
Shareholder reports
        19  
Custodian fees
        9  
Trustees’ fees
        8  
Other expenses
  +     10  
     
     
Total expenses
        1,519  
Expense reduction by adviser and Schwab
      441  
     
     
Net expenses
        1,078  
             
 
Increase (Decrease) in Net Assets from Operations
Total investment income
        9,068  
Net expenses
      1,078  
     
     
Net investment income
        7,990  
Net realized losses
        (19,679 )
Net unrealized gains
  +     37,079  
     
     
Increase in net assets from operations
        $25,390  
 
 
1  Effective August 4, 2009, all outstanding P shares were redeemed. The Board of Trustees voted that effective December 10, 2009 the fund will no longer offer P shares.
 
 
 
See financial notes 33


 

 
 Schwab MarketTrack Conservative Portfolio
 

Statements of
Changes in Net Assets
For the current and prior report periods. All numbers are x 1,000.
 
                     
                     
 
Operations
                     
        11/01/08-10/31/09     11/01/07-10/31/08  
Net investment income
        $7,990       $10,619  
Net realized gains (losses)
        (19,679 )     1,899  
Net unrealized gains (losses)
  +     37,079       (85,437 )
     
     
Increase (Decrease) in net assets from operations
        25,390       (72,919 )
                     
 
Distributions to Shareholders1
Distributions from net investment income
                   
Investor Shares
        5,882       7,893  
P Shares
  +     2,531       3,905  
     
     
Total distributions from net investment income
        8,413       11,798  
                     
                     
Distributions from net realized gains
Investor Shares
        1,450       2,228  
P Shares
  +     714       1,018  
     
     
Total distributions from net realized gains
        2,164       3,246  
                     
Total distributions
        $10,577       $15,044  
                                     
                                     
 
Transactions in Fund Shares1
                                     
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     VALUE     SHARES     VALUE  
                                     
                                     
Shares Sold
Investor Shares
        3,062       $34,493       3,003       $41,069  
P Shares
  +     861       9,543       2,204       31,328  
     
     
Total shares sold
        3,923       $44,036       5,207       $72,397  
                                     
                                     
Shares Reinvested
Investor Shares
        612       $6,892       689       $9,481  
P Shares
  +     294       3,244       358       4,923  
     
     
Total shares reinvested
        906       $10,136       1,047       $14,404  
                                     
                                     
Shares Redeemed
Investor Shares
        (4,893 )     ($53,978 )     (4,522 )     ($59,815 )
P Shares
  +     (8,763 )     (102,700 )     (1,596 )     (21,433 )
     
     
Total shares redeemed
        (13,656 )     ($156,678 )     (6,118 )     ($81,248 )
                                     
Net transactions in fund shares
        (8,827 )     ($102,506 )     136       $5,553  
                                     
 
Shares Outstanding and Net Assets
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     NET ASSETS     SHARES     NET ASSETS  
Beginning of period
        23,698       $268,370       23,562       $350,780  
Total increase or decrease
  +     (8,827 )     (87,693 )     136       (82,410 )
     
     
End of period
        14,871       $180,677       23,698       $268,370  
     
     
Net investment income not yet distributed
                $229               $655  
 
 
1  Effective August 4, 2009, all outstanding P shares were redeemed. The Board of Trustees voted that effective December 10, 2009 the fund will no longer offer P shares.
 
 
 
34 See financial notes


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes
 
 
1. Business Structure of the Funds:
 
Each of the portfolios 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 MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab S&P 500 Index Fund
Schwab Small-Cap Index Fund
Schwab Total Stock Market Index Fund
Schwab International Index Fund
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 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 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 Monthly Income Fund-Moderate Payout
Schwab Monthly Income Fund-Enhanced Payout
Schwab Monthly Income Fund-Maximum Payout
   
 
 
The Schwab MarketTrack Portfolios are primarily “fund of funds” as they invest a major portion of their assets in a combination of other Schwab Funds (underlying funds) to achieve their investment objectives and maintain their asset allocation. In addition, the portfolios may purchase individual securities to achieve their investment objectives. Each portfolio bears its share of the allocable expenses of the underlying funds in which they invest. Such expenses are reflected in the net asset value.
 
Schwab MarketTrack Growth Portfolio offers two share classes: Investor Shares and P Shares. Shares of each class represent interest in the same portfolio, but each class has different expenses and investment minimums. The Board of Trustees voted that effective December 10, 2009, Schwab MarketTrack All Equity Portfolio, Schwab MarketTrack Balanced Portfolio and Schwab MarketTrack Conservative Portfolio, each offer one share class: Investor class. Prior to December 10, 2009, Schwab MarketTrack Conservative Portfolio also offered P shares.
 
Shares are bought and sold (subject to a redemption fee, see Note 8) at closing net asset value (“NAV”), which is the price for all outstanding shares of a fund or share class, as applicable. 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 law.
 
2. Significant Accounting Policies:
       (All dollar amounts are x 1,000)
 
The following is a summary of the significant accounting policies the funds use in the preparation of 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”).
 
 
 
 35


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
2. Significant Accounting Policies (continued):
       (All dollar amounts are x 1,000)
 
(a) Security Valuation:
 
The funds value the securities in their portfolios every business day. The funds use the following policies to value various types of securities:
 
  •  Securities traded on an exchange or over-the-counter: valued at the closing value for the day, or, on days when no closing value has been reported, halfway between the most recent bid and asked quotes. Securities that are primarily traded on foreign exchanges are valued at the closing values of such securities on their respective exchanges with these values then translated into U.S. dollars at the valuation date exchange rate.
 
  •  Securities for which no quoted value is available or when a significant event has occurred between the time of the security’s last close and the time the fund calculates net asset value: valued at fair value, as determined in good faith by the funds’ investment adviser using guidelines adopted by the funds’ Board of Trustees and the Pricing Committee. Some of the more common reasons that may necessitate that a security be valued at fair value include: the security’s trading has been halted or suspended; the security has been delisted from a national exchange; the security’s primary pricing source is not able or willing to provide a price, or certain foreign securities’ closing market prices adjusted for changes in value that may occur between the close of foreign exchange and the time at which funds’ shares are priced. The Board of Trustees regularly reviews fair value determinations made by the funds pursuant to the procedures.
 
  •  Futures and Forwards contracts: valued at their settlement prices as of the close of their exchanges (for futures) or at a value based on that day’s exchange rates (for forwards).
 
  •  Underlying funds: valued at their respective net asset values as determined by those funds in accordance with the 1940 Act for a given day.
 
  •  Short-term securities (60 days or less to maturity): valued at amortized cost, which approximates market value.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the fund discloses the fair value of its 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 fund 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 Fund determines 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 investments, even in situations where the funds hold a large position and a sale could reasonably impact the quoted price.
 
  •  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 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 revised 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 revised valuations of
 
 
 
36 


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
2. Significant Accounting Policies (continued):
       (All dollar amounts are x 1,000)
 
  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 non-transferability, 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 funds use 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 October 31, 2009:
 
                                 
    Schwab MarketTrack All Equity Portfolio
    Quoted Prices
           
    in Active
  Significant
       
    Markets for
  Other
  Significant
   
    Identical
  Observable
  Unobservable
   
    Assets
  Inputs
  Inputs
   
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total*
 
Other Investment Companies(a)
    $460,832       $—       $—       $460,832  
Short-Term Investment(a)
          572             $572  
                                 
Total
    $460,832       $572       $—       $461,404  
                                 
 
                                 
    Schwab MarketTrack Growth Portfolio
    Quoted Prices
           
    in Active
  Significant
       
    Markets for
  Other
  Significant
   
    Identical
  Observable
  Unobservable
   
    Assets
  Inputs
  Inputs
   
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total*
 
Other Investment Companies(a)
    $585,551       $—       $—       $585,551  
Short-Term Investment(a)
          5,928             5,928  
                                 
Total
    $585,551       $5,928       $—       $591,479  
                                 
 
                                 
    Schwab MarketTrack Balanced Portfolio
    Quoted Prices
           
    in Active
  Significant
       
    Markets for
  Other
  Significant
   
    Identical
  Observable
  Unobservable
   
    Assets
  Inputs
  Inputs
   
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total*
 
Other Investment Companies(a)
    $426,921       $—       $—       $426,921  
Short-Term Investment(a)
          4,624             4,624  
                                 
Total
    $426,921       $4,624       $—       $431,545  
                                 
 
 
 
 
 37


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
2. Significant Accounting Policies (continued):
(All dollar amounts are x 1,000)
 
                                 
    Schwab MarketTrack Conservative Portfolio
    Quoted Prices
           
    in Active
  Significant
       
    Markets for
  Other
  Significant
   
    Identical
  Observable
  Unobservable
   
    Assets
  Inputs
  Inputs
   
Description
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
Total*
 
Other Investment Companies(a)
    $179,920       $—       $—       $179,920  
Short-Term Investment(a)
          306             306  
                                 
Total
    $179,920       $306       $—       $180,226  
                                 
 
* The fund had no Other Financial Instruments.
(a) As categorized in Portfolio Holdings
 
(b) Portfolio Investments:
 
Derivatives: The funds may invest in futures contracts to reduce the effects of uninvested cash on performance or for other reasons. Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed-upon price on a stipulated future date.
 
Because futures contracts carry inherent risks, a fund must give the broker a deposit of cash and/or securities (the “Initial Margin”) whenever it enters into the futures contract. The amount of the deposit may vary from one contract to another, but it is generally a percentage of the contract amount. Subsequent payments (“Variation Margin”) are made or received by a fund depending on the daily fluctuations in the value of the future contract and are accounted for as unrealized gains or losses. Futures are traded publicly on exchanges, and their market value changes daily.
 
(c) Security Transactions:
 
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.
 
Assets and liabilities denominated in foreign currencies are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and expense payments, are calculated using exchange rates in effect on the transaction date. The funds do not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
 
When a fund closes out a futures or forwards position, it calculates the difference between the value of the position at the beginning and at the end of the contract, and records a realized gain or loss accordingly. A fund records the daily change in market value of futures, and also the change in the amount of margin deposit required (“due to/from broker”).
 
(d) 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.
 
(e) Expenses:
 
Expenses that are specific to a fund or a class within the trust are charged directly to that fund or class. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.
 
 
 
38 


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
2. Significant Accounting Policies (continued):
       (All dollar amounts are x 1,000)
 
For funds offering multiple share classes, net investment income, other than class specific expenses, and realized and unrealized gains or losses, are allocated daily to each class in proportion to its average daily net assets.
 
(f) Distributions to Shareholders:
 
The funds make distributions from net investment income and net realized capital gains once a year, if any, except for the MarketTrack Conservative Portfolio, which makes distributions from net investment income quarterly.
 
(g) Accounting Estimates:
 
The accounting policies described in this report conform with 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 is possible that once the results are known, they may turn out to be different from these estimates.
 
(h) 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 except for the Schwab MarketTrack Conservative Portfolio, which typically makes distributions at the end of every calendar quarter. As long as a fund meets the tax requirements, it is not required to pay federal income tax.
 
(i) Indemnification:
 
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. These risks are associated with the underlying funds in which the funds may invest and the types of investments made by those underlying funds. The funds’ direct investments, if any, are subject to the same or similar risks.
 
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 portfolios will fluctuate, which means that you could lose money.
 
The funds’ asset and stock allocations can have a substantial effect on performance. The risks and returns of different classes of assets and different segments of the stock market can vary over the long-term and the short-term. Because a fund may maintain exposure to bonds as well as stocks, the portfolio will be hurt by poor performance in either market. Also, because it does not intend to make strategic changes in its allocation, a fund’s performance may be hurt during times when segments emphasized by its target allocation are out of favor.
 
Many of the risks of the portfolios are associated with their investments in underlying stock and bond index funds. A fund’s underlying index funds seek to track the performance of various segments of the stock or bond market, as measured by their respective indices. Neither the funds, because of their asset allocation strategy, nor the underlying funds, because of their indexing strategy, take steps to reduce market exposure or to lessen the effects of a declining market. While a fund’s underlying funds seek to track the returns of various indices, in each case an underlying fund’s performance normally is below that of the index. This gap occurs mainly because, unlike an index, the underlying funds incur expenses and must keep a small portion of their assets in cash. To the extent that an underlying fund lends securities or makes short-term or other investments to reduce its
 
 
 
 39


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
3. Risk factors (continued):
 
performance gap, it may increase the risk that its performance will be reduced. A portfolio itself keeps a small portion of its assets in cash, which may contribute modestly to lower performance.
 
Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. A portfolio’s performance also could be affected if an issuer or guarantor of a bond held by the fund fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to its issuer’s ability to make timely payments or otherwise honor its obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. Mortgage-or asset-backed securities are subject to the risk that these bonds may be paid off earlier or later than expected. Either situation could cause the fund to hold securities paying lower than market rates of interest, which could hurt the fund’s yield or share price. Also, bonds of foreign issuers may be more volatile than those of comparable bonds from U.S. issuers, for reasons ranging from limited issuer information to the risk of political upheaval. A fund’s use of mortgage dollar rolls could cause the fund to lose money if the price of the mortgage-backed securities sold fall below the agreed upon repurchase price, or if the counterparty is unable to honor the agreement.
 
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. Individual companies may report poor results or be negatively affected by industry and/or economic trends and developments. The prices of securities issued by such companies may suffer a decline in response. In addition, the equity market tends to move in cycles which may cause stock prices to fall over short or extended periods of time.
 
Historically, small-cap stocks have been riskier than large and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — bonds or large-cap stocks, for instance — a portfolio’s performance also may lag these investments.
 
A fund’s investments in securities of foreign issuers involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and other conditions, or changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges). In certain countries, legal remedies available to investors may be more limited than those available with respect to investments in the United States. The securities of some foreign companies may be less liquid and, at times, more volatile than securities of comparable U.S. companies. A fund may also experience more rapid or extreme changes in value as compared to a fund that invests solely in securities of U.S. companies because the securities’ markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries.
 
A fund may use derivatives (including futures) to enhance returns or hedge against market declines. A fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause a fund to lose more than the principal amount invested. In addition, investments in derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately larger impact on a fund.
 
As index funds, the funds seek to track the performance of their benchmark indices, although they may not be successful in doing so. The divergence between the performance of a fund and its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, a fund may not invest in all of the securities in its benchmark index or may invest in securities not in the index, because the manager may use a sampling technique that is designed to balance the risk of tracking error against the negative effects of transaction costs associated with certain investments. Similarly, a fund may not invest in certain securities in its benchmark index, or match the securities’ weighting to the benchmark, due to regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error. In addition, international funds may not invest in issuers located in certain countries due to these considerations. A fund may attempt to offset the effects of not being invested in certain index securities by making substitute investments, but these efforts
 
 
 
40 


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
3. Risk factors (continued):
 
may not be successful. In addition, cash flows into and out of a fund, operating expenses and trading costs all affect the ability of the fund to match the performance of its benchmark index, because the benchmark index does not have to manage cash flows and does not incur any costs.
 
The funds do not fully replicate the benchmark indices and may hold securities not included in the indices. As a result, the funds are subject to the risk that the Adviser’s investment management strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. Because the funds utilize a sampling approach they may not track the return of the indices as well as they would if each fund purchased all of the securities in their benchmark index.
 
Please refer to the funds’ prospectus for a more complete description of the principal risks of investing in the fund 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.
 
Effective July 1, 2009, for its advisory and administrative services to each fund, the investment adviser is entitled to receive an annual fee (fees), payable monthly based on each fund’s average daily net assets described as follows:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
% of Average Daily
  All Equity
  Growth
  Balanced
  Conservative
Net Assets
 
Portfolio
 
Portfolio*
 
Portfolio
 
Portfolio*
 
Current rate
    0.23%       0.23%       0.23%       0.23%  
 
Prior to July 1, 2009, the fees were:
                                 
First $500 million
    0.44%       0.44%       0.44%       0.44%  
Over $500 million
    0.39%       0.39%       0.39%       0.39%  
 
Charles Schwab & Co., Inc. (“Schwab”) is an affiliate of the investment adviser and was the trust’s transfer agent and shareholder services agent prior to July 1, 2009. Effective July 1, 2009, the trust has appointed Boston Financial Data Services, Inc. (“BFDS”) as transfer agent of the funds and adopted a Shareholder Servicing Plan (the “Plan”) on behalf of the funds. Pursuant to the Plan, the funds pay Schwab and other financial intermediaries to provide certain account maintenance, customer liaison and shareholder services to the funds’ shareholders holding shares of the funds through that financial intermediary. Under the Plan, Schwab is entitled to receive an annual fee payable monthly based on each funds’ average daily net assets as follows:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
% of Average Daily
  All Equity
  Growth
  Balanced
  Conservative
Net Assets
 
Portfolio
 
Portfolio*
 
Portfolio
 
Portfolio*
 
Investor Shares
    0.25%       0.25%       0.25%       0.25%  
P Shares*
    n/a       0.10%       n/a       n/a  
 
Prior to July 1, 2009, for its transfer agent and shareholder services, Schwab was entitled to receive an annual fee payable monthly based on each fund’s average daily net assets described as follows:
 
                 
   
Transfer Agent Fees
 
Shareholder Service Fees
 
Investor Shares
    0.05%       0.20%  
P Shares*
    0.05%       0.05%  
 
 
 
 41


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
4. Affiliates and Affiliated Transactions (continued):
       (All dollar amounts are x 1,000)
 
Although these agreements specify certain fees for these services, CSIM and Schwab have made additional agreements with the funds to limit (“expense limitation”) the total expenses charged, excluding interest, taxes and certain non-routine expenses for so long as the investment adviser serves as the adviser to the funds, which may only be amended or terminated with the approval of the Fund’s Board of Trustees as follows:
 
The expense limitation is:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
% of Average Daily
  All Equity
  Growth
  Balanced
  Conservative
Net Assets
 
Portfolio
 
Portfolio
 
Portfolio
 
Portfolio
 
Investor Shares
    0.50%       0.50%       0.50%       0.50%  
P Shares*
    n/a       0.35%       n/a       0.35%  
 
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.
 
*P Shares are currently only offered by MarketTrack Growth Portfolio and were previously offered by MarketTrack Conservative Portfolio.
 
The funds may engage in certain transactions involving related parties. Pursuant to an exemptive order issued by the SEC, the funds may invest in other related funds. As of October 31, 2009, the percentages of shares of other related funds owned by each MarketTrack Portfolio are:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
    All Equity
  Growth
  Balanced
  Conservative
   
Portfolio
 
Portfolio
 
Portfolio
 
Portfolio
 
Schwab Equity Index Funds:
                               
Schwab International Index Fund
    9.9%       10.1%       4.7%       1.3%  
Schwab S&P 500 Index Fund
    2.4%       2.7%       1.5%       0.4%  
Schwab Small-Cap Index Fund
    10.2%       8.6%       5.6%       1.6%  
                                 
Schwab Bond Funds:
                               
Schwab Total Bond Market Fund
    —%       9.8%       16.7%       10.9%  
                                 
Schwab Money Funds:
                               
Schwab Value Advantage Money Fund
    —%       0.1%       —%       —%  
 
As of October 31, 2009, the shares owned by Schwab Charitable Giving Trust (an affiliate of Schwab) as a percentage of the total shares of the MarketTrack Growth Portfolio is 14.1%.
 
The funds may make direct transactions with certain other Schwab Funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the same investment adviser, trustees and officers. During the period ended October 31, 2009, each fund’s total aggregate security transactions with other Schwab Funds were as follows;
 
         
Schwab MarketTrack All Equity Portfolio
  $  
Schwab MarketTrack Growth Portfolio
    61,069  
Schwab MarketTrack Balanced Portfolio
    40,771  
Schwab MarketTrack Conservative Portfolio
    9,607  
 
 
 
42 


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
4. Affiliates and Affiliated Transactions (continued):
       (All dollar amounts are x 1,000)
 
Below is a summary of the affiliated transactions for each underlying fund during the period ended October 31, 2009:
 
Schwab MarketTrack All Equity Portfolio
 
                                                         
                        Realized
  Distribution
                Balance
      Gain (Loss)
  Received*
    Balance of
          of Shares
  Market
  11/01/2008
  11/01/2008
    Shares Held
  Gross
  Gross
  Held at
  Value at
  to
  to
Underlying Fund
 
at 10/31/08
 
Additions
 
Sales
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
Schwab Equity Index Funds:
                                                       
Schwab International Index Fund
    9,006,531       614,372       (1,058,398 )     8,562,505       $139,226       ($8,382 )     $5,707  
Schwab S&P 500 Index Fund
          12,879,891       (89,552 )     12,790,339       208,227       (581 )      
Schwab Small-Cap Index Fund
    7,853,845       500,447       (865,626 )     7,488,666       113,379       (8,455 )     2,340  
Schwab Institutional Select Funds:
                                                       
Schwab Institutional Select S&P 500 Index Fund
    24,175,121       3,128,652       (27,303,773 )                 (10,193 )     7,889  
                                                         
Total
                                    $460,832       ($27,611 )     $15,936  
                                                         
 
Schwab MarketTrack Growth Portfolio
 
                                                         
                        Realized
  Distribution
                Balance
      Gain (Loss)
  Received*
    Balance of
          of Shares
  Market
  11/01/2008
  11/01/2008
    Shares Held
  Gross
  Gross
  Held at
  Value at
  to
  to
Underlying Fund
 
at 10/31/08
 
Additions
 
Sales
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
Schwab Equity Index Funds:
                                                       
Schwab International Index Fund
    7,559,140       539,543       (846,408 )     7,252,275       $117,922       ($5,036 )     $4,915  
Schwab S&P 500 Index Fund
          14,646,843       (58,191 )     14,588,652       237,503       (163 )      
Schwab Small-Cap Index Fund
    7,975,717       944,206       (1,289,283 )     7,630,640       115,528       (9,503 )     2,450  
                                                         
Schwab Institutional Select Funds:
                                                       
Schwab Institutional Select S&P 500 Fund
    17,368,767       13,056,677       (30,425,443 )                 (5,847 )     6,979  
                                                         
Schwab Bond Funds:
                                                       
Schwab Total Bond Market Fund
    9,539,883       3,048,022       (2,484,293 )     10,103,612       91,337       (2,845 )     3,105  
                                                         
Schwab Money Funds:
                                                       
Schwab Value Advantage Money Fund
    27,419,712       3,140,704       (7,300,000 )     23,260,416       23,261             156  
Institutional Shares
                                                       
                                                         
The Charles Schwab Corp.
    11,242               (11,242 )                 47       1  
                                                         
Total
                                    $585,551       ($23,347 )     $17,606  
                                                         
 
 
 
 43


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
4. Affiliates and Affiliated Transactions (continued):
       (All dollar amounts are x 1,000)
 
Schwab MarketTrack Balanced Portfolio
 
                                                         
                        Realized
  Distribution
                Balance
      Gain (Loss)
  Received*
    Balance of
          of Shares
  Market
  11/01/2008
  11/01/2008
    Shares Held
  Gross
  Gross
  Held at
  Value at
  to
  to
Underlying Fund
 
at 10/31/08
 
Additions
 
Sales
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
Schwab Equity Index Funds:
                                                       
Schwab International Index Fund
    4,194,205       512,359       (759,205 )     3,947,359       $64,184       ($1,754 )     $2,805  
Schwab S&P 500 Index Fund
          7,893,746             7,893,746       128,510       (505 )      
Schwab Small-Cap Index Fund
    4,455,891       1,008,292       (1,219,510 )     4,244,673       64,265       (6,318 )     1,392  
                                                         
Schwab Bond Funds:
                                                       
Schwab Total Bond Market Fund
    16,524,627       4,463,751       (3,816,920 )     17,171,458       155,230       (4,391 )     5,501  
                                                         
Schwab Institutional Select Funds:
                                                       
Schwab Institutional Select S&P 500 Index
    8,600,045       9,789,321       (18,389,366 )                 (5,474 )     3,706  
                                                         
Schwab Money Funds:
                                                       
Schwab Value Advantage Money Fund
    12,712,884       2,069,527       (50,000 )     14,732,411       14,732             85  
                                                         
The Charles Schwab Corp.
    6,883             (6,883 )                 30       1  
                                                         
Total
                                    $426,921       ($18,412 )     $13,490  
                                                         
 
Schwab MarketTrack Conservative Portfolio
 
                                                         
                        Realized
  Distribution
                Balance
      Gain (Loss)
  Received*
    Balance of
          of Shares
  Market
  11/01/2008
  11/01/2008
    Shares Held
  Gross
  Gross
  Held at
  Value at
  to
  to
Underlying Fund
 
at 10/31/08
 
Additions
 
Sales
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
10/31/2009
 
Schwab Equity Index Funds:
                                                       
Schwab International Index Fund
    1,861,475       354,184       (1,116,193 )     1,099,466       $17,877       $343       $1,285  
Schwab S&P 500 Index Fund
    1,785,442       2,294,095       (1,888,630 )     2,190,907       35,668       (382 )     704  
Schwab Small-Cap Index Fund
    1,958,569       477,793       (1,269,514 )     1,166,848       17,666       (3,415 )     619  
                                                         
Schwab Institutional Select Funds:
                                                       
Schwab Institutional Select S&P 500 Fund
    1,973,844       3,386,063       (5,359,907 )                 (3,167 )     1,031  
                                                         
Schwab Bond Funds:
                                                       
Schwab Total Bond Market Fund
    17,173,417       3,094,768       (9,097,003 )     11,171,182       100,988       (10,638 )     5,211  
                                                         
Schwab Money Funds:
                                                       
Schwab Value Advantage Money Fund, Institutional Shares
    10,389,731       556,338       (3,225,000 )     7,721,069       7,721             68  
                                                         
The Charles Schwab Corp.
    2,125             (2,125 )                 3        
                                                         
Total
                                    $179,920       ($17,256 )     $8,918  
                                                         
 
     
*
  Distributions received include distributions from net investment income and from capital gains from the underlying funds.
 
 
 
44 


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
4. Affiliates and Affiliated Transactions (continued):
       (All dollar amounts are x 1,000)
 
Pursuant to an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions within the 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. There was no interfund borrowing or lending activity for any fund 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 it did pay non-interested persons (independent trustees), as noted in each fund’s Statement of Operations.
 
6. Borrowing from Banks:
 
The funds may borrow money from banks and custodians. The funds have custodian overdraft facilities, a committed line of credit of $150 million with State Street Corp., 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 Corp. for the committed line of credit.
 
There were no borrowings from the lines of credit by the funds during the period. However, certain funds utilized their overdraft facility and incurred interest expense, which is disclosed in the Statement of Operations. The interest expense is determined based on a negotiated rate above the current Federal Funds Rate.
 
7. Purchases and Sales of Investment Securities:
 
For the period ended October 31, 2009, purchases and sales of securities (excluding short-term obligations) were as follows:
 
                 
   
Purchases of Securities
 
Sales/Maturities of Securities
 
Schwab MarketTrack All Equity Portfolio
    $38,786       $39,025  
Schwab MarketTrack Growth Portfolio
    122,730       130,890  
Schwab MarketTrack Balanced Portfolio
    116,932       122,962  
Schwab MarketTrack Conservative Portfolio
    58,930       163,433  
 
8. Redemption Fee:
       (All dollar amounts are x 1,000)
 
The funds charge a 2.00% redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior period are:
 
                 
    Current Period
  Prior Period
   
(11/01/08-10/31/09)
 
(11/01/07-10/31/08)
 
Schwab MarketTrack All Equity Portfolio
    $18       $62  
Schwab MarketTrack Growth Portfolio
    19       18  
Schwab MarketTrack Balance Portfolio
    8       14  
Schwab MarketTrack Conservative Portfolio
    7       14  
 
 
 
 45


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
9. Federal Income Taxes:
       (All dollar amounts are x 1,000)
 
As of October 31, 2009, the components of distributable earnings on a tax-basis were as follows:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
    All Equity
  Growth
  Balanced
  Conservative
   
Portfolio
 
Portfolio
 
Portfolio
 
Portfolio
 
Undistributed ordinary income
    $—       $4,243       $5,018       $230  
Undistributed long-term capital gains
                       
Unrealized appreciation
          39,581       34,096       9,487  
Unrealized depreciation
    (58,920 )     (3,186 )     (5,714 )     (3,825 )
Other unrealized appreciation/(depreciation)
                       
Net unrealized appreciation/(depreciation)
    ($58,920 )     $36,395       $28,382       $5,662  
 
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 October 31, 2009, the following funds had capital loss carry forwards available to offset net capital gains before the expiration dates:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
    All Equity
  Growth
  Balanced
  Conservative
   
Portfolio*
 
Portfolio
 
Portfolio
 
Portfolio
 
Expiration Date
                               
    $12,514                    
          $34,090       $21,312       $14,304  
 
For tax purposes, realized net capital losses, occurring after October 31, may be deferred and treated as occurring on the first day of the following year. For the period ended, December 31, 2008, the Schwab MarketTrack All Equity Portfolio had deferred realized capital losses of $615 and did not utilize any capital losses to offset capital gains.
 
The tax-basis components of distributions paid during the current and prior fiscal years were:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
    All Equity
  Growth
  Balanced
  Conservative
   
Portfolio*
 
Portfolio
 
Portfolio
 
Portfolio
 
Current period distributions
                               
Ordinary income
    $10,482       $16,025       $14,079       $8,414  
Long-term capital gains
    23,828       17,649       7,741       2,163  
Return of Capital
                       
                                 
Prior period distributions
                               
Ordinary income
    9,825       17,000       15,943       12,042  
Long-term capital gains
    312       15,235       8,870       3,002  
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 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 fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
 
 
 
46 


 

 
 Schwab MarketTrack Portfolios
 

 
Financial Notes (continued)
 
9. Federal Income Taxes (continued):
       (All dollar amounts are x 1,000)
 
The permanent book and tax basis differences may result in reclassifications between capital account and other accounts as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2009, the funds made the following reclassifications:
 
                                 
    Schwab
  Schwab
  Schwab
  Schwab
    MarketTrack
  MarketTrack
  MarketTrack
  MarketTrack
    All Equity
  Growth
  Balanced
  Conservative
   
Portfolio*
 
Portfolio
 
Portfolio
 
Portfolio
 
Capital Shares
    ($6 )     $—       $—       $—  
Undistributed net investment income
    3       (17 )     (13 )     (3 )
Net realized capital gains and losses
    3       17       13       3  
 
     
*
  Tax information for Schwab MarketTrack All Equity Portfolio is as of December 31, 2008.
 
As of October 31, 2009, management has reviewed the tax positions for open periods (for Federal purposes, three years from the date of filing and 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 year ended October 31, 2009, the funds did not incur any interest or penalties. The funds are not subject to examination by U.S. federal tax authorities for tax years before 2006 and by state tax authorities for tax years before 2005.
 
10. Subsequent Events:
 
As of December 16, 2009, 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.
 
 
 
 47


 

 
Report of Independent Registered Public Accounting Firm
 
 
To the Board of Trustees and Shareholders of:
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
 
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 MarketTrack All Equity Portfolio, Schwab MarketTrack Growth Portfolio, Schwab MarketTrack Balanced Portfolio, and Schwab MarketTrack Conservative Portfolio (four of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2009, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with 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 October 31, 2009 by correspondence with the custodian, transfer agents and brokers, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2009
 
 
 
48 


 

Other Federal Tax Information (unaudited)
(All dollar amounts are x 1,000)
 
For corporate shareholders, the following percentage of the funds dividend distributions paid during the fiscal year ended October 31, 2009, qualify for the corporate dividends received deduction:
 
         
   
Percentage
 
Schwab MarketTrack All Equity Portfolio*
    48.26  
Schwab MarketTrack Growth Portfolio
    56.86  
Schwab MarketTrack Balanced Portfolio
    35.17  
Schwab MarketTrack Conservative Portfolio
    28.30  
 
For the fiscal year ended October 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 Internal 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.
 
         
Schwab MarketTrack All Equity Portfolio*
    $11,218  
Schwab MarketTrack Growth Portfolio
    14,551  
Schwab MarketTrack Balanced Portfolio
    11,543  
Schwab MarketTrack Conservative Portfolio
    4,024  
 
     
*
  Tax information for MarketTrack All Equity Portfolio is as of December 31, 2008.
 
For the fiscal year ended October 31, 2009, the funds hereby designate the following amounts as capital gain dividends:
 
         
Schwab MarketTrack All Equity Portfolio*
    $23,828  
Schwab MarketTrack Growth Portfolio
    17,649  
Schwab MarketTrack Balanced Portfolio
    7,741  
Schwab MarketTrack Conservative Portfolio
    2,163  
 
 
 
 49


 

 
Investment Advisory Agreement Approval
 
The Investment Company Act of 1940 (the “1940 Act”) requires that initial approval of, as well as the continuation of, a fund’s investment advisory agreement must be specifically approved (1) by the vote of the trustees or by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who are not parties to the investment advisory agreement or “interested persons” of any party (the “Independent Trustees”), cast in person at a meeting called for the purpose of voting on such approval. In connection with such approvals, the fund’s trustees must request and evaluate, and the investment adviser is required to furnish, such information as may be reasonably necessary to evaluate the terms of the investment advisory agreement.
 
The Board of Trustees (the “Board” or the “Trustees”, as appropriate) calls and holds one or more meetings each year that are dedicated, in whole or in part, to considering whether to renew the investment advisory agreement between Schwab Capital Trust (the “Trust”) and Charles Schwab Investment Management, Inc. (“CSIM”) (the “Agreement”) with respect to the existing funds in the Trust, including Schwab MarketTrack All Equity Portfolio, Schwab MarketTrack Growth Portfolio, Schwab MarketTrack Balanced Portfolio and Schwab MarketTrack Conservative Portfolio (the “Funds”), and to review certain other agreements pursuant to which CSIM provides investment advisory services to certain other registered investment companies. In preparation for the meeting(s), the Board requests and reviews a wide variety of materials provided by CSIM, including information about CSIM’s affiliates, personnel and operations. The Board also receives extensive data provided by third parties. This information is in addition to the detailed information about the Funds that the Board reviews during the course of each year, including information that relates to fund operations and fund performance. The Independent Trustees receive advice from independent counsel to the Independent Trustees, including a memorandum regarding the responsibilities of trustees for the approval of investment advisory agreements. In addition, the Independent Trustees meet in executive session outside the presence of fund management and participate in question and answer sessions with representatives of CSIM.
 
The Board, including a majority of the Independent Trustees, considered information specifically relating to its consideration of the continuance of the Agreement with respect to the Funds at meetings held on April 27, 2009, and May 15, 2009, and approved the renewal of the Agreement with respect to the Funds for an additional one year term at the meeting held on May 15, 2009. The Board’s approval of the Agreement with respect to the Funds was based on consideration and evaluation of a variety of specific factors discussed at these meetings and at prior meetings, including:
 
1.  the nature, extent and quality of the services provided to the Funds under the Agreement, including the resources of CSIM and its affiliates dedicated to the Funds;
 
2.  each Fund’s investment performance and how it compared to that of certain other comparable mutual funds;
 
3.  each Fund’s expenses and how those expenses compared to those of certain other comparable mutual funds;
 
4.  the profitability of CSIM and its affiliates, including Charles Schwab & Co., Inc. (“Schwab”), with respect to each Fund, including both direct and indirect benefits accruing to CSIM and its affiliates; and
 
5.  the extent to which economies of scale would be realized as the Funds grow and whether fee levels in the Agreement reflect those economies of scale for the benefit of Fund investors.
 
Nature, Extent and Quality of Services. The Board considered the nature, extent and quality of the services provided by CSIM to the Funds and the resources of CSIM and its affiliates dedicated to the Funds. In this regard, the Trustees evaluated, among other things, CSIM’s personnel, experience, track record and compliance program. The Trustees also considered investments in CSIM’s mutual fund infrastructure and the fact that Schwab’s wide range of products, services, and channel alternatives such as free advice, investment and research tools, Internet access, and an array of account features that benefit the Funds and their shareholders. The Trustees also considered Schwab’s excellent reputation as a full service brokerage firm and its overall financial condition. Finally, the Trustees considered that the vast majority of the Funds’ shareholders are also brokerage clients of Schwab. Following such evaluation, the Board concluded, within the context of its full deliberations, that the nature, extent and quality of services provided by CSIM to the Funds and the resources of CSIM and its affiliates dedicated to the Funds supported renewal of the Agreement with respect to the Funds.
 
Fund Performance. The Board considered Fund performance in determining whether to renew the Agreement with respect to the Funds. Specifically, the Trustees considered each Fund’s performance relative to a peer group and peer category of other mutual funds and appropriate indices/benchmarks, in light of total return, yield, if applicable, and market trends. As part of this review, the Trustees considered the composition of the peer group and peer category,
 
 
 
50 


 

selection criteria and the reputation of the third party who prepared the peer group and peer category analysis. In evaluating the performance of each Fund, the Trustees considered both risk and shareholder risk expectations for such Fund and the appropriateness of the benchmark used to compare the performance of each Fund. The Trustees further considered the level of Fund performance in the context of its review of Fund expenses and adviser profitability discussed below. Following such evaluation the Board concluded, within the context of its full deliberations, that the performance of the Funds supported renewal of the Agreement with respect to the Funds.
 
Fund Expenses. With respect to the Funds’ expenses, the Trustees considered the rate of compensation called for by the Agreement, and each Fund’s net operating expense ratio, in each case, in comparison to those of other comparable mutual funds, such peer groups and comparisons having been selected and calculated by an independent third party. The Trustees considered the effects of CSIM’s and Schwab’s historical practice of voluntarily waiving management and other fees to prevent total Fund expenses from exceeding a specified cap. The Trustees also considered a commitment (i) by CSIM to reduce its contractual investment advisory fee relating to each Fund; and (ii) by CSIM and Schwab to extend the specified expense cap of each Fund for so long as CSIM serves as the adviser to such Fund. The Trustees also considered fees charged by CSIM to other mutual funds and to other types of accounts, such as wrap accounts, but, with respect to such other types of accounts, accorded less weight to such comparisons due to the different legal, regulatory, compliance and operating features of mutual funds as compared to these other types of accounts. Following such evaluation, the Board concluded, within the context of its full deliberations, that the expenses of the Funds are reasonable and supported renewal of the Agreement with respect to the Funds.
 
Profitability. With regard to profitability, the Trustees considered the compensation flowing to CSIM and its affiliates, directly or indirectly. In this connection, the Trustees reviewed management’s profitability analyses, together with certain commentary thereon from an independent accounting firm. The Trustees also considered any other benefits derived by CSIM from its relationship with the Funds, such as whether, by virtue of its management of the Funds, CSIM obtains investment information or other research resources that aid it in providing advisory services to other clients. The Trustees considered whether the varied levels of compensation and profitability under the Agreement and other service agreements were reasonable and justified in light of the quality of all services rendered to each Fund by CSIM and its affiliates. Based on this evaluation, the Board concluded, within the context of its full deliberations, that the profitability of CSIM is reasonable and supported renewal of the Agreement with respect to the Funds.
 
Economies of Scale. The Trustees considered the existence of any economies of scale and whether those are passed along to a Fund’s shareholders through a graduated investment advisory fee schedule or other means, including any fee waivers by CSIM and its affiliates. In this regard, and consistent with their consideration of Fund expenses, the Trustees considered that CSIM and Schwab have previously committed resources to minimize the effects on shareholders of diseconomies of scale during periods when fund assets were relatively small through their contractual expense waivers. For example, such diseconomies of scale may particularly affect newer funds or funds with investment strategies that are from time to time out of favor, but shareholders may benefit from the continued availability of such funds at subsidized expense levels. The Trustees also considered CSIM’s agreement to revised contractual investment advisory fee schedules. Based on this evaluation the Board concluded, within the context of its full deliberations, that the Funds obtain reasonable benefit from economies of scale.
 
In the course of their deliberations, the Trustees did not identify any particular information or factor that was all important or controlling. Based on the Trustees’ deliberation and their evaluation of the information described above, the Board, including all of the Independent Trustees, approved the continuation of the Agreement with respect to the Funds and concluded that the compensation under the Agreement with respect to the Funds is fair and reasonable in light of such services and expenses and such other matters as the Trustees have considered to be relevant in the exercise of their reasonable judgment.
 
 
 
 51


 

 
Trustees and Officers
 
 
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 86 funds.
 
The address for all trustees and officers is 211 Main Street, San Francisco, CA 94105. 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.   78   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.   66   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).   78   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).   66   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).   66   None
 
Joseph H. Wender
1944
Trustee
(Trustee of Schwab Capital Trust since 2008.)
  Senior Consultant, Goldman Sachs & Co., Inc., 2008 to present; Senior Director, Chairman of the Finance Committee, GSC Group, until December 2007; General Partner, Goldman Sachs & Co., Inc., until June 2005.   66   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).   66   None
 
 
 
 
52 


 

 Interested 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 Served )   During the Past Five Years   the Trustee   Other Directorships
 
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.   66   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.   74   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); President and Chief Executive Officer, Schwab Strategic Trust (Oct. 2009 – present); Director, Charles Schwab Asset Management (Ireland) Limited and Charles Schwab Worldwide Funds PLC (Sept. 2002 – present).
 
 
 
 
 53


 

 
 Officers of the Trust (continued)
 
     
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
 
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. (May 2004 – present); Chief Investment Officer (2004 – present), President and Chief Executive Officer (March 2008 – 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, 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. and Charles Schwab Investment Management, Inc., (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer (March 2007 – present), Laudus Trust and Laudus Institutional Trust; Vice President, Schwab Strategic Trust (Oct. 2009 – present).
 
Michael Haydel
1972
Vice President (Officer of Schwab Capital Trust since 2006.)
  Vice President, Asset Management Client Services, Charles Schwab & Co., Inc. (2004 – present); Vice President (Sept. 2005 – present), Anti-Money Laundering Officer (Oct. 2005 – Feb. 2009), Laudus Trust and Laudus Institutional Trust; Vice President, Schwab Strategic Trust (Oct. 2009 – present).
 
 
 
1 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.
 
 
 
54 


 

 
Glossary
 
 
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.
 
 
 
 
 55


 

 
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.
 
•  WEBSITE USAGE.
 
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® direct investors:  1-800-407-0256
 
 
© 2009 Schwab Funds. All rights reserved.
 
 
 
56 


 

 
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
Schwab Target 2030 Fund
Schwab Target 2035 Fund
Schwab Target 2040 Fund
Schwab® Monthly Income Fund – Moderate Payout
Schwab® Monthly Income Fund – Enhanced Payout
Schwab® Monthly Income Fund – Maximum Payout
 
Bond Funds
Schwab YieldPlus Fund®
Schwab Short-Term Bond Market Fundtm
Schwab® Premier Income Fund
Schwab Total Bond Market Fundtm
Schwab GNMA Fundtm
Schwab Inflation Protected Fundtm
Schwab Tax-Free YieldPlus Fundtm
Schwab Tax-Free Bond Fundtm
Schwab California Tax-Free YieldPlus Fundtm
Schwab California Tax-Free Bond Fundtm
 
Schwab Money Funds
Schwab offers an array of money market funds that seek high current income consistent with safety and liquidity1. Choose from taxable or tax-advantaged alternatives. Many can be linked to your eligible Schwab account to “sweep” cash balances automatically, subject to availability, when you’re between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments®.
 
 
* SCHWAB is a registered trademark of Charles Schwab & Co., Inc. 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.



 

(CHARLES SCHWAB LOGO)
 
 
 
Investment Adviser
Charles Schwab Investment Management, Inc.
211 Main Street, San Francisco, CA 94105
 
Funds
Schwab Funds®
P.O. Box 3812, Englewood, CO 80155–3812
 
 
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
© 2009 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC®
Printed on recycled paper.
MFR13813-12



 

  



 

(CHARLES SCHWAB LOGO)



 

Annual report dated October 31, 2009 enclosed.
 
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Schwab Balanced Fundtm
 
Annual Report
October 31, 2009
 
 
 
(CHARLES SCHWAB LOGO)
 



 

 
 
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Schwab Balanced Fund™
 
In This Report
 
     
  2
  3
  4
  5
  6
  8
  9
  14
  21
  23
  25
  28
 
 
 
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.
 



 

 
Performance at a Glance
 
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 Balanced Fundtm (Ticker Symbol: SWOBX)   9.45%
Benchmark: Balanced Blended Index   12.04%
Fund Category: Morningstar Moderate Allocation   15.71%
Performance Details   pages 6-7
 
Minimum Initial Investment1   $ 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. Performance results less than one year are not annualized.
 
Fund expenses may have been partially 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.
 
Please see prospectus for further details and eligibility requirements.
 
 
 
Schwab Balanced Fund


 

 
From the President
 

MERK PHOTO
 
Randall W. Merk is President and CEO of Charles Schwab Investment Management, Inc. and the fund covered in this report. He joined the firm in 2002 and has held a variety of executive positions at Schwab.

 
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, many have recovered substantially from lows touched as markets dropped in 2008 and early 2009. In particular, prices of many equity and fixed income securities declined precipitously toward the end of 2008 and the beginning of 2009. Since March of 2009, however, improvements in the financial markets and diminished concern over the depth and duration of the economic recession led to a broad-market recovery, with the prices of many equity securities rebounding from earlier lows.
 
During the reporting period, we made a number of improvements to the Schwab Funds family of mutual funds making it cheaper and easier for our clients to invest in Schwab Funds. On May 5, 2009, we lowered expenses on Schwab Equity Index Funds and consolidated share classes for Schwab equity and bond funds. Each Schwab equity and bond fund now offers one low fund expense to investors regardless of how much they invest, with a low $100 minimum investment. Our goal is to make investing easier and more affordable for our clients and the advisors who serve them.
 
For information on the investment environment and the performance of individual funds contained in this book, please see the fund managers’ discussion and analysis in the following pages of this report.
 
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,
 
-s- Randall W. Merk
 
 
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.
 
 
 
Schwab Balanced Fund 3


 

 
The Investment Environment
 
 
 
Investment conditions in the global financial market improved markedly in the second half of the reporting period, from the end of March through October, as concern over the economic recession and financial crisis ebbed. The first four months of the period, from November through February, were generally bearish; equity prices were driven down across the board as investors pulled back from the markets amidst poor macroeconomic data and pessimism over the markets’ ability to mount swift recoveries. Since March of 2009, however, both domestic and international markets experienced recovery, which helped to reduce earlier losses and produce positive 12-month returns in many cases. 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 period.
 
Major economic indicators, such as Gross Domestic Product (GDP) and unemployment, continued to demonstrate that a consistent recovery has yet to materialize across many measures of the economy. GDP—the output of goods and services produced by labor and property located in the United States—rose 2.8% in the third quarter of 2009, after declining 0.7% in the prior quarter. The third quarter GDP gain was primarily attributable to increases in personal consumption expenditures, exports, private inventory investment, and government spending, according to the Bureau of Economic Analysis. The U.S. unemployment rate increased from 6.7% in November of 2008 to 10.2% in October of 2009. Sales of existing homes were a bright spot toward the end of the period, rising 9.4% in September, fueled by tax credits for new home buyers and favorable prices.
 
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 October 31, 2009, the S&P 500 Index returned 9.80%. In the index, Information Technology was the strongest performing sector, followed by Consumer Discretionary and Materials. Financials was the weakest sector, followed by Utilities and Industrials. In general, large-cap stocks outperformed small-cap as evidenced by the Russell 1000 Index, which returned 11.20%, compared with the Russell 2000 Index, which returned 6.46%. Looking at the broad market, growth outperformed value; the Russell 3000 Growth Index returned 17.04%, while the Russell 3000 Value Index returned 4.56%. Internationally, the MSCI EAFE Index returned 28.41%, while the MSCI Emerging Markets Index (Net)* returned 64.13%.
 
On the fixed income side, 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 1.75%. 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 13.79%. Returns were also positive in the tax free bond market—the Barclays Capital General Muni Bond Index returned 13.60%. The Federal Open Market Committee reaffirmed on November 4, 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.
         
         
(LEGEND)   9.80%   S&P 500® Index: measures U.S. large-cap stocks
         
(LEGEND)   6.46%   Russell 2000® Index: measures U.S. small-cap stocks
         
(LEGEND)   28.41%   MSCI EAFE® Index: measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East
         
(LEGEND)   13.79%   Barclays Capital U.S. Aggregate Bond Index: measures the U.S. bond market
         
(LEGEND)   0.21%   Three-Month U.S. Treasury Bills (T-bills): measures short-term U.S. Treasury obligations
 
(LINE GRAPH)
 
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.
 
Data source: Charles Schwab & Co., Inc.
 
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.
 
*The MSCI Emerging Markets Index (Net) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. This series approximates the minimum possible dividend reinvestment.

 
 
 
Schwab Balanced Fund


 

 
Fund Management
 
     
     
(PHOTO)   Jeffrey Mortimer, CFA, Chief Investment officer, Charles Schwab Investment Management, Inc., is responsible for the overall management of the fund. Prior to joining the firm in October 1997, he worked for more than 8 years in asset management.
     
(PHOTO)   Caroline Lee, a managing director and portfolio manager of the investment adviser, co-manages the fund. Prior to joining the firm in November 2005, she worked in asset management for over 4 years overseeing subadvisor relationships in the pension group of a major corporation. She has also had 3 years of previous experience in investment management at another financial services firm.
     
(PHOTO)   Daniel Kern, CFA, a managing director and portfolio manager of the investment adviser, is responsible for the day-to-day co-management of the fund. He was appointed portfolio manager in 2008. Prior to joining the firm in 2003, he worked for more than 13 years in the investment management industry, with more than 6 of those years spent in portfolio management.
 
 
 
Schwab Balanced Fund 5


 

 
Schwab Balanced Fundtm
 
 
The Schwab Balanced Fund returned 9.45% for the period, underperforming the benchmark Balanced Blended Index, which returned 12.04%. During the period, the fixed income portion of the Schwab Balanced Fund’s portfolio experienced the largest gain on a total return basis, but underperformed relative to the benchmark. The Schwab Total Bond Market Fund returned 9.68%, underperforming the Barclays Capital U.S. Aggregate Bond Index, which returned 13.79%. Underperformance of the Schwab Total Bond Market Fund relative to its respective benchmark occurred primarily due to security selection in corporate and mortgage sectors, particularly in non-agency collateralized mortgage obligations and commercial mortgage-backed securities. The Schwab Core Equity Fund returned 8.11%, underperforming the S&P 500 Index, which returned 9.80%. Underperformance of the Schwab Core Equity Fund occurred primarily due to stock selection in Consumer Staples and Consumer Discretionary, while selection in and an overweight allocation to Industrials also hurt relative performance. In the small-cap portion of the portfolio, the Laudus Small-Cap MarketMasters Fund Select Shares returned 7.29%, outperforming the Russell 2000 Index, which returned 6.46%.

 
As of 10/31/09:
 
 Statistics
 
Number of Holdings 4
Weighted Average Market
  Cap ($ x 1,000,000) $47,496
Price/Earnings Ratio (P/E) 12.1
Price/Book Ratio (P/B) 1.9
Portfolio Turnover Rate 21%
 
 
 Asset Class Weightings % of Investments
 
Equity Funds - Domestic 63.2%
Fixed - Income Funds 36.5%
Short-Term Investments 0.3%
Total 100.0%
 
 
 Top Holdings % of Net Assets1
 
Schwab Core Equity Fund 46.2%
Schwab Total Bond Market Fund 36.5%
Laudus Small-Cap MarketMasters
  Fund, Select Shares 17.0%
State Street Institutional
  Liquid Reserves Fund - Institutional
  Class 0.3%
Total 100.0%
 
 
Manager views and portfolio holdings may have changed since the report date.
 
Source of Sector Classification: S&P and MSCI.
 
Small company stocks are subject to greater volatility than other asset classes.
 
1  This list is not a recommendation of any security by the investment adviser.

 
 
 
Schwab Balanced Fund


 

 
 Schwab Balanced Fundtm

 
Performance Summary as of 10/31/09
 
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.
 
October 31, 1999October 31, 2009
Performance of a Hypothetical
$10,000 Investment1
 
(LINE GRAPH)
 
 Average Annual Total Returns1,2
                         
Fund and Inception Date   1 Year   5 Years   10 Years
 
Fund: Schwab Balanced Fundtm (11/18/96)     9.45%       1.76%       2.63%  
Benchmark: Balanced Blended Index     12.04%       2.50%       2.25%  
Fund Category: Morningstar Moderate Allocation     15.71%       2.07%       2.50%  
 
Fund Expense Ratios3: Net 0.48%; Gross 0.78%
 
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.
 
Because the fund originally used a different asset allocation strategy and a multi-fund strategy, its performance prior to June 3, 2002 does not reflect the current strategy and may have been different if it did. From June 3, 2002 to February 28, 2008, the fund used a manager of managers strategy, and therefore its performance during this time does not reflect the fund’s current multi-fund strategy and may have been different if it did.
 
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. The Balanced Blended Index is composed of 60% S&P 500® Index and 40% Barclays Capital U.S. Aggregate Bond Index.
 
2  Source for category information: Morningstar, Inc.
 
3  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 0.48%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as 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 of the financial statements.
 
 
 
Schwab Balanced Fund 7


 

 
Fund Expenses (Unaudited)
 
 Examples for a $1,000 Investment
 
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 six-months beginning May 1, 2009 and held through October 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 5/1/09   at 10/31/09   5/1/09–10/31/09
 
 
Schwab Balanced Fundtm                                
Actual Return
    0.00%     $ 1,000     $ 1,126.30     $ 0.00  
Hypothetical 5% Return
    0.00%     $ 1,000     $ 1,025.21     $ 0.00  

 
1  Based on the most recent six-month expense ratio; may differ from the expense ratio provided in Financial Highlights.
 
2  Expenses for each share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 365 days of the fiscal year.

 
 
 
Schwab Balanced Fund


 

 
Schwab Balanced Fundtm
 
Financial Statements
 
Financial Highlights
 
                                         
    11/1/08–
  11/1/07–
  11/1/06–
  11/1/05–
  11/1/04–
    10/31/09   10/31/081   10/31/07   10/31/06   10/31/05
 
                                         
Per-Share Data ($)
                                       
Net asset value at beginning of period
    9.82       13.86       13.39       12.85       11.88  
   
Income (loss) from investment operations:
                                       
Net investment income (loss)
    0.22 2     0.20 2     0.25 2     0.25 2     0.15  
Net realized and unrealized gains (losses)
    0.64       (3.26 )     1.06       0.83       0.91  
   
Total from investment operations
    0.86       (3.06 )     1.31       1.08       1.06  
Less distributions:
                                       
Distributions from net investment income
    (0.37 )     (0.29 )     (0.24 )     (0.16 )     (0.09 )
Distributions from net realized gains
    (0.32 )     (0.69 )     (0.60 )     (0.38 )      
   
Total distributions
    (0.69 )     (0.98 )     (0.84 )     (0.54 )     (0.09 )
   
Net asset value at end of period
    9.99       9.82       13.86       13.39       12.85  
   
Total return (%)
    9.45       (23.56 )     10.24       8.59       8.92  
                                         
Ratios/Supplemental Data (%)
                                       
Ratios to average net assets:
                                       
Net operating expenses3
    0.00       0.36       1.02 4     1.03 4     1.10  
Gross operating expenses3
    0.17       0.53       1.27       1.26       1.27  
Net investment income (loss)
    2.41       1.81       1.84       1.90       1.14  
Portfolio turnover rate
    21       267       244       244       283  
Net assets, end of period ($ x 1,000,000)
    86       85       112       122       130  

1 Effective February 28, 2008, the Investor Share class and the Select Share class were combined into a single class of shares of the fund. The financial history as shown in the financial highlights is that of the former Investor Shares.
2 Calculated based on average shares outstanding during the period.
3 The expenses incurred by underlying funds in which the fund invests are not included in this ratio.
4 The ratio of net operating expenses would have been 1.10% for periods ended 10/31/06 and 10/31/07, respectively, if custody credits and dividend and interest expenses on short sales had not been included.
 
 
 
See financial notes 9


 

 
 Schwab Balanced Fund
 

 
Portfolio Holdings  as of October 31, 2009
 
 
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)
 
  100 .0%   Other Investment Companies     94,612       85,490  
  100 .0%   Total Investments     94,612       85,490  
  0 .0%   Other Assets and Liabilities             13  
  100 .0%   Net Assets             85,503  
 
                 
    Number of
  Value
Security   Shares   ($ x 1,000)
 
 Other Investment Companies 100.0% of net assets
 
Equity Funds 63.2%
Laudus Small-Cap MarketMasters Fund, Select Shares (a)
    1,528,130       14,502  
Schwab Core Equity Fund (a)
    2,771,812       39,526  
                 
              54,028  
 
Fixed-Income Funds 36.5%
Schwab Total Bond Market Fund (a)
    3,447,725       31,168  
 
Money Funds 0.3%
State Street Institutional Liquid Reserves Fund - Institutional Class
    294,106       294  
                 
Total Other Investment Companies
(Cost $94,612)
    85,490  
         
 
End of Investments.
 
(All dollar amounts are x 1,000)
 
At 10/31/09, the tax basis cost of the fund’s investments was $95,838 and the unrealized appreciation and depreciation were $1,700 and ($12,048), respectively, with a net unrealized depreciation of ($10,348).
 
 (a) Issuer is affiliated with the fund’s adviser.
 
 
 
10 See financial notes


 

 
 Schwab Balanced Fund
 

Statement of
Assets and Liabilities
As of October 31, 2009. All numbers are x 1,000 except NAV.
 
             
             
 
Assets
Investments in affiliated underlying funds, at value (cost $94,318)
        $85,196  
Investments in unaffiliated issuers, at value (cost $294)
  +     294  
     
     
Total Investments, at value (cost $94,612)
        85,490  
Receivables:
           
Dividends
        96  
Fund shares sold
        27  
Prepaid expenses
  +     2  
     
     
Total assets
        85,615  
             
 
Liabilities
Payables:
           
Administrator fees
        16  
Fund shares redeemed
        53  
Accrued expenses
  +     43  
     
     
Total liabilities
        112  
             
 
Net Assets
Total assets
        85,615  
Total liabilities
      112  
     
     
Net assets
        $85,503  
Net Assets by Source
           
Capital received from investors
        100,180  
Net investment income not yet distributed
        870  
Net realized capital losses
        (6,425 )
Net unrealized capital losses
        (9,122 )
 
Net Asset Value (NAV)
 
                     
        Shares
         
Net Assets   ¸   Outstanding   =   NAV  
 
$85,503
      8,559         $9.99  
 
 
 
 
See financial notes 11


 

 
 Schwab Balanced Fund
 

Statement of
Operations
For November 1, 2008 through October 31, 2009. All numbers are x 1,000.
 
             
             
 
Investment Income
Dividends received from affiliated underlying funds
        $1,936  
Interest
  +     6  
     
     
Total investment income
        1,942  
             
 
Net Realized Gains and Losses
Net realized losses on sales of affiliated underlying funds
        (5,982 )
Net realized gains on unaffiliated investments
  +     10  
     
     
Net realized losses
        (5,972 )
             
 
Net Unrealized Gains and Losses
Net unrealized gains on affiliated underlying funds
        11,205  
             
 
Expenses
Professional fees
        43  
Shareholder reports
        31  
Portfolio accounting fees
        15  
Registration fees
        14  
Transfer agent fees
        9  
Trustees’ fees
        6  
Custodian fees
        1  
Other expenses
  +     18  
     
     
Total expenses
        137  
Expense reduction by adviser and Schwab
      137  
     
     
Net expenses
         
             
 
Increase (Decrease) in Net Assets from Operations
Total investment income
        1,942  
Net expenses
       
     
     
Net investment income
        1,942  
Net realized losses
        (5,972 )
Net unrealized gains
  +     11,205  
     
     
Increase in net assets from operations
        $7,175  
 
 
 
 
12 See financial notes


 

 
 Schwab Balanced Fund
 

Statements of
Changes in Net Assets
For the current and prior report periods. All numbers are x 1,000.
 
                     
                     
 
Operations
                     
        11/01/08-10/31/09     11/01/07-10/31/08  
Net investment income
        $1,942       $2,079  
Net realized gains (losses)
        (5,972 )     3,160  
Net unrealized gains (losses)
  +     11,205       (33,936 )
     
     
Increase (Decrease) in net assets from operations
        7,175       (28,697 )
                     
 
Distributions to Shareholders1
Distributions from net investment income
                   
Investor Shares
        3,133       2,272  
Select Shares
  +           573  
     
     
Total distributions from net investment income
        3,133       2,845  
                     
                     
Distributions from net realized gains
Investor Shares
        2,727       5,482  
Select Shares
  +           1,276  
     
     
Total distributions from net realized gains
        2,727       6,758  
                     
Total distributions
        $5,860       $9,603  
                                     
                                     
 
Transactions in Fund Shares1
                                     
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     VALUE     SHARES     VALUE  
                                     
                                     
Shares Sold
Investor Shares
        899       $8,338       2,660       $31,962  
Select Shares
  +                 125       1,558  
     
     
Total shares sold
        899       $8,338       2,785       $33,520  
                                     
                                     
Shares Reinvested
Investor Shares
        608       $5,511       593       $7,378  
Select Shares
  +                 132       1,638  
     
     
Total shares reinvested
        608       $5,511       725       $9,016  
                                     
                                     
Shares Redeemed
Investor Shares
        (1,584 )     ($14,502 )     (2,719 )     ($31,898 )
Select Shares
  +                 (2,242 )     (27,365 )
     
     
Total shares redeemed
        (1,584 )     ($14,502 )     (4,961 )     ($59,263 )
                                     
Net transactions in fund shares
        (77 )     ($653 )     (1,451 )     ($16,727 )
                                     
 
Shares Outstanding and Net Assets
        11/01/08-10/31/09     11/01/07-10/31/08  
        SHARES     NET ASSETS     SHARES     NET ASSETS  
Beginning of period
        8,636       $84,841       10,087       $139,868  
Total increase or decrease
  +     (77 )     662       (1,451 )     (55,027 )
     
     
End of period
        8,559       $85,503       8,636       $84,841  
     
     
Net investment income not yet distributed
                $870               $2,062  
 
 
1  Effective February 28, 2008, all outstanding Select Shares (1,906 shares valued at $23,077) combined with Investor Shares, resulting in a single class of shares of the fund..
 
 
 
See financial notes 13


 

 
 Schwab Balanced Fund
 

 
Financial Notes
 
 
1. Business Structure of the Fund:
 
Schwab Balanced Fund 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 fund discussed in this report, which is highlighted:
 
         
 
Schwab Capital Trust (organized May 7, 1993)
Schwab Balanced 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 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 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 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 Monthly Income Fund—Moderate Payout
Schwab Monthly Income Fund—Enhanced Payout
Schwab Monthly Income Fund—Maximum Payout
   
 
 
The Schwab Balanced Fund is a single class “fund of funds” which seeks to achieve its investment objective by investing in a diversified group of other Schwab and/or Laudus Funds, but also may invest in other unaffiliated, third party mutual funds, including exchange traded funds (“ETFs”). In addition, the fund may purchase individual securities to maintain its allocations. The fund bears its share of allocable expenses of the underlying funds in which it invests. The financial statements of the fund should be read in conjunction with the underlying funds’ financial statements.
 
The fund offers one share class. Shares are bought and sold (subject to a redemption fee, see Note 8) at closing net asset value (“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.
 
The fund maintains its own account for purposes of holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, the fund may also keep certain assets in segregated accounts, as required by securities law.
 
2. Significant Accounting Policies:
       (All dollar amounts are x 1,000)
 
The following is a summary of the significant accounting policies the fund used in the preparation of its 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 fund values the investments in underlying funds every business day. The fund uses the following policies to value various types of securities:
 
  •  Underlying funds: valued at their respective NAV as determined by the fund in accordance with the 1940 Act for a given day.
 
  •  Short-term securities (60 days or less to maturity): valued at amortized cost, which approximates market value.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the fund discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The
 
 
 
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 Schwab Balanced Fund
 

 
Financial Notes (continued)
 
2. Significant Accounting Policies (continued):
       (All dollar amounts are x 1,000)
 
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).
 
The fund 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 Fund determines 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 fund does not adjust the quoted price for such instruments, even in situations where the fund holds a large position and a sale could reasonably impact the quoted price.
 
  •  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 revised 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 revised 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 trade