Certified Annual Shareholder Report of a Management Investment Company — Form N-CSR Filing Table of Contents
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N-CSR — Certified Annual Shareholder Report of a Management Investment Company Document Table of Contents
Fund investment adviser: Charles
Schwab Investment Management, Inc. (CSIM).
Distributor and transfer agent: 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. and Standard & Poor’s. GICS
is a service mark of MSCI and S&P and has been licensed for
use by Charles Schwab & Co., Inc. The Industry
classifications used in the schedules of Portfolio Holdings are
sub-categories of Sector classifications.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Total Return for the Report
Period*
Schwab®
Monthly Income Fund - Moderate Payout (Ticker Symbol: SWJRX)
-14.11%
Benchmark: Moderate Payout Composite Index
-11.21%
Fund Category: Morningstar Conservative Allocation
-16.30%
Performance Details
pages 6-7
Schwab®
Monthly Income Fund - Enhanced Payout (Ticker Symbol: SWKRX)
-9.53%
Benchmark: Enhanced Payout Composite Index
-5.86%
Fund Category: Morningstar Conservative Allocation
-16.30%
Performance Details
pages 8-9
Schwab®
Monthly Income Fund - Maximum Payout (Ticker Symbol: SWLRX)
-4.84%
Benchmark: Maximum Payout Composite Index
-0.32%
Fund Category: Morningstar Conservative Allocation
-16.30%
Performance Details
pages 10-11
Minimum Initial
Investment1
$ 100
*
Funds’ inception date 3/28/08.
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 have been absorbed by CSIM and Schwab. Without
these reductions, the fund’s returns would have been lower.
These returns do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of
fund shares.
Source for category information: Morningstar, Inc.
The Moderate Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 40% S&P 500 Index and 60% Barclays
Capital U.S. Aggregate Bond Index.
The Enhanced Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 25% S&P 500 Index and 75% Barclays
Capital U.S. Aggregate Bond Index.
The Maximum Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 10% S&P 500 Index and 90% Barclays
Capital U.S. Aggregate Bond Index.
1
Please see prospectus for further detail and eligibility
requirements.
The past
year marked one of the most difficult periods in financial
history. The depth and duration of the current economic crisis
have been unsettling and discouraging for investors. As a
longtime investor myself, I know that in an environment like
this, it’s hard to sift through all the information and
make clear decisions. The news creates concerns, not just about
your own financial well-being, but also about the safety and
stability of the financial system and institutions you depend
on.
The natural
instinct is to react emotionally rather than strategically. What
I’ve learned from my own experience is that trying to time
the market is both difficult and risky. Despite the urge to exit
the market during a downturn, participating in the eventual
recovery requires remaining invested. Throughout my career
I’ve seen nine notable downturns in the market, and in
every case the market has eventually recovered. Smart investing
is about having an individualized investment plan that can help
moderate the effects of down markets and share in the gains of
up markets.
At Schwab,
we are here to help no matter what the market conditions may be.
With funds and services backed by a consistent, balanced, and
ethical approach to investing, we’ll do all we can to help
you succeed.
Thank you
for investing with us.
Sincerely,
Diversification
strategies do not assure a profit and do not protect against
losses in declining markets.
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 2008,
both institutions and individual investors were affected by the
depth and duration of a crisis that began with declining real
estate valuations and tight credit. As the year wore on, it
became apparent that what had been at first localized disruption
eventually proved to be more systemic, with no sector or
industry safe from turmoil. While returns for this year have
reflected this broad-market turmoil, we continue to have
confidence in the ability of our funds to meet diversification
and income needs for our clients.
I would like
to emphasize that the Monthly Income Funds are intended to meet
the income needs of investors by making monthly payments from
net investment income rather than investor capital. As intended,
each payment made by the funds in 2008 was made from net
investment income. I would also like to remind investors that
while reinvestment of monthly payments is an option, the funds
are designed with the expectation that these payments will be
paid in cash.
If you have
any questions about our funds, we are always available at
1-800-435-4000,
while additional resources may be found on Schwab.com
Over the
past year, the U.S. financial marketplace experienced a degree
of disruption and uncertainty rarely seen in its history as
volatility, price declines and tight credit contributed to
atypical market conditions. While financials had been ailing
since last August following the subprime mortgage crisis, the
persistence of tight lending conditions finally began to take a
greater toll toward the middle to end of the reporting period.
In September, the U.S. Government took over mortgage giants
Freddie Mac and Fannie Mae, followed by the bankruptcy of Lehman
Brothers, the sale of Merrill Lynch, and Government intervention
in AIG, among other events. In this erratic environment,
investors became extremely cautious of all but U.S.
Government-backed assets, such as U.S. Treasuries, and in many
cases preferred safety and liquidity over yield.
Major
economic indicators, such as Gross Domestic Product (GDP),
unemployment and consumer confidence showed no signs of
rebounding at the end of the year as the economy fell deeper
into a recession. The GDP growth rate contracted
-0.5% in the third
quarter, reflecting the sharp downturn in personal consumption
and housing investments. The number of unemployed grew by 3.6
million during the 12-month period, resulting in a 7.2%
unemployment rate in December. Continued weakening of the global
economy was also evident in the fourth quarter as energy demand
slowed and oil prices dropped to less than $40 a barrel after
surging to a record $147 in July. Although lower gas prices
provided much-needed relief for consumers, the economic outlook
remained bleak on the expectation of continued slowing given the
persistence of broad-based turmoil. In December, the Consumer
Confidence Index reached an all-time low of 38.0, sliding from
44.7 in November, while retail sales dropped -2.7%.
When looking
at the S&P 500 Index, which is usually seen as a bellwether
for financial markets, returns for the year were solidly
negative in all major sectors. For the year ending December 31,2008, the S&P 500 Index was down
-37.00% . By
comparison, the Russell 1000 Index was down -37.60%. In the
S&P 500, Financials returned -56.95% for the year, followed
by Materials and Information Technology, which were down -47.05%
and -43.68%, respectively. Though still negative, relatively
better performing sectors were Consumer Staples and Health Care,
down -17.66% and -24.48%
, respectively. In general, stock prices experienced
heightened volatility throughout the period, exacerbated by
forced selling in large institutional funds, a flight to the
safety of cash and U.S. Government-backed assets, and a number
of dramatic market events, such as the collapse of Bear Stearns
and Lehman Brothers.
In an
attempt to stabilize market conditions, the U.S. Government
instituted a variety of stimulus measures, including a $700
billion financial rescue package. Additionally, the Federal
Reserve lowered the Federal Funds Rate to a target range of 0%
to 0.25%, its seventh rate cut in 2008. Although inflation was a
concern earlier in the period, as the economy slowed and the
prices of many commodities declined significantly in the latter
half of the year, the Federal Reserve decided that thawing
credit markets and stimulating the economy outweighed inflation
concerns. Despite these interventionist moves, market volatility
persisted and credit remained tight.
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.
-30.58%
S&P
500®
Index: measures U.S. large-cap stocks
-26.98%
Russell
2000®
Index: measures U.S. small-cap stocks
-37.89%
MSCI-EAFE®
Index: measures (in U.S. dollars) large-cap stocks in
Europe, Australasia and the Far East
3.50%
Barclays Capital U.S. Aggregate Bond Index: measures the
U.S. bond market
1.06%
Three-Month U.S. Treasury Bills (T-bills): measures
short-term U.S. Treasury obligations
These figures assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged and
you cannot invest in them directly. Remember that past
performance is not an indication of future results.
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 my have changed since the
report date.
Jeffrey Mortimer, CFA, Chief Investment Officer,
Charles Schwab Investment Management, is responsible for the
overall management of each of the funds. Prior to joining the
firm in October 1997, he worked for more than 8 years
in asset management.
Caroline Lee, a managing director and portfolio
manager of the investment adviser, co-manages the funds. 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.
Daniel Kern, CFA, a managing director and portfolio
manager of the investment adviser, is responsible for the day
to-day co-management of the funds. 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.
The
Schwab Monthly Income Funds
(the
funds) are designed to provide monthly income throughout the
year while retaining the opportunity for growth to meet future
income needs. In accordance with guidelines stated in the
funds’ prospectus, the higher the targeted payout rate, the
lower the growth potential of a particular fund. The funds
invest in a range of Schwab Funds and Laudus
Funds—including equity funds, fixed income funds, and money
market funds—in accordance with their respective target
asset allocation. Because each Monthly Income Fund is a
fund-of-funds, its return will reflect a blend of the returns of
the underlying funds based on their relative weightings.
Schwab
Monthly Income Fund – Moderate
Payout
(the fund) returned -14.11% since inception on 3/28/08 through
the period ending
12/31/08.
During the same period, the fund’s custom benchmark
returned -11.21%. This fund is designed to offer investors a
targeted annual payout of 3-4% and an increase in capital over
the long term that is expected to be greater than that of the
Enhanced Payout Fund and the Maximum Payout Fund*. The fund
seeks to maintain a target blend of 40% equity and 60% fixed
income and money market securities.
The Moderate
Payout Fund’s recent performance reflected the difficult
investment environment its underlying funds experienced
throughout the period, characterized by atypical volatility in
the equity and bond markets, asset price declines, and tightened
credit standards. Despite multiple interest rate cuts and
stimulus measures in the U.S. and abroad, investor sentiment
remained pessimistic on the expectation of a prolonged economic
recession and persistent broad-based financial instability.
Throughout the year, investors continued to be highly
risk-averse, seeking out safer alternatives such as U.S.
Treasuries and short-term cash investments, which put downward
pressure on the values of non government-backed securities,
regardless of their quality.
As the
market priced in risk, the fund’s exposure to global real
estate stocks significantly detracted from returns. The Schwab
Global Real Estate Fund fell by -43.17% during the period,
compared to -44.74% for its benchmark, the FTSE EPRA/NAREIT
Index. International equity markets also experienced
double-digit declines. The Laudus International MarketMasters
Fund returned -41.72%, while the MSCI EAFE Index declined
-37.89%. Though still negative, the fund’s top domestic
equity sub-holding fared relatively better. The Schwab Dividend
Equity Fund returned -23.64%, compared to its respective
benchmark, the S&P 500 Index, which fell
-30.56% . In general,
bond markets outperformed equities during the period, but were
still impacted by the domestic and global economic slowdown. The
fund’s top two sub-holdings, the Schwab Premier Income Fund
and Total Bond Market Fund, declined
-2.14% and -2.00%,
respectively. In comparison, the Barclays Capital U.S. Aggregate
Bond Index returned 3.50%.
As of
12/31/08:
Statistics
Number
of Holdings
10
Weighted Average
Market Cap
($ x
1,000,000)
$37,559
Price/Earnings
Ratio (P/E)
11.8
Price/Book
Ratio (P/B)
1.6
Portfolio
Turnover
Rate1
25%
Asset Class
Weightings % of Investments
Equity
Funds - Domestic
20.9%
Equity
Funds - International
14.4%
Fixed-Income
Funds
61.2%
Short-Term
Investments
3.5%
Total
100.0%
Top
Holdings % of Net
Assets2
Schwab Premier Income Fund,
Institutional
Shares
24.8%
Schwab
Total Bond Market Fund
19.3%
Schwab Dividend Equity Fund,
Select
Shares
15.5%
Schwab
Short-Term Bond Market Fund
11.8%
Schwab Global Real Estate
Fund,
Select Shares
9.3%
Total
80.7%
Manager views and portfolio holdings may have changed since the
report date.
The Laudus Group of Funds includes the Laudus Rosenberg Funds
and Laudus Mondrian Funds, which are part of the Laudus Trust
and distributed by ALPS Distributors, Inc., and the Laudus
MarketMasters Funds, which are part of the Schwab Capital Trust
and distributed by Charles Schwab & Co., Inc.
*
The fund’s actual annual payout could be higher or lower
than the targeted annual payout based on the interest rate
environment and other market factors occurring during that year.
1
Not annualized.
2
This list is not a recommendation of any security by the
investment adviser.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Performance of a
Hypothetical
$10,000
Investment1,3
Total
Returns1,2
Fund and Inception Date
Since Inception
Fund:
Schwab®
Monthly Income Fund - Moderate Payout (3/28/08)
-14.11%
Benchmark: Moderate Payout Composite
Index3
-11.21%
Fund Category: Morningstar Conservative Allocation
-16.30%
Fund Expense
Ratios4:
Net 0.76%; Gross 0.88%
All figures on this page assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less
than one year are not annualized.
1
Fund expenses have been absorbed by CSIM and Schwab. Without
these reductions, the fund’s returns would have been lower.
These returns do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of
fund shares.
2
Source for category information: Morningstar, Inc.
3
The Moderate Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 40% S&P 500 Index and 60% Barclays
Capital U.S. Aggregate Bond Index.
4
As stated in the 3/3/08 prospectus (as supplemented 2/27/09).
Includes expenses of the underlying funds in which the fund
invests. The annualized weighed average expense ratio of the
underlying funds was 0.76%. Net Expense: Expenses reduced by a
contractual fee waiver in effect through at least 4/29/11. Gross
Expense: Does not reflect the effect of contractual fee waivers.
For actual ratios during the period, refer to the financial
highlights section in the financial statements.
The
Schwab Monthly Income Funds
(the
funds) are designed to provide monthly income throughout the
year while retaining the opportunity for growth to meet future
income needs. In accordance with guidelines stated in the
funds’ prospectus, the higher the targeted payout rate, the
lower the growth potential of a particular fund. The funds
invest in a range of Schwab Funds and Laudus
Funds—including equity funds, fixed income funds, and money
market funds—in accordance with their respective target
asset allocation. Because each Monthly Income Fund is a
fund-of-funds, its return will reflect a blend of the returns of
the underlying funds based on their relative weightings.
Schwab
Monthly Income Fund – Enhanced
Payout
(the fund) returned -9.53% since inception on 3/28/08 through
the period ending
12/31/08.
During the same period, the fund’s custom benchmark
returned -5.86%. This fund is designed to offer investors a
targeted annual payout of 4-5% and an increase in capital over
the long term that is expected to be less than that of the
Moderate Payout Fund and greater than that of the Maximum Payout
Fund*. The fund seeks to maintain a target blend of 25% equity
and 75% fixed income and money market securities.
The Enhanced
Payout Fund’s recent performance reflected the difficult
investment environment its underlying funds experienced
throughout the period, characterized by atypical volatility in
the equity and bond markets, asset price declines, and tightened
credit standards. Despite multiple interest rate cuts and
stimulus measures in the U.S. and abroad, investor sentiment
remained pessimistic on the expectation of a prolonged economic
recession and persistent broad-based financial instability.
Throughout the year, investors continued to be highly
risk-averse, seeking out safer alternatives such as U.S.
Treasuries and short-term cash investments, which put downward
pressure on the values of non government-backed securities,
regardless of their quality.
As the
market priced in risk, the fund’s exposure to global real
estate stocks significantly detracted from returns. The Schwab
Global Real Estate Fund fell by -43.17% during the period,
compared to -44.74% for its benchmark, the FTSE EPRA/NAREIT
Index. Though still negative, the fund’s top equity
sub-holding fared relatively better. The Schwab Dividend Equity
Fund returned -23.64%, compared to its respective benchmark, the
S&P 500 Index, which fell -30.56%. In general, bond markets
outperformed equities during the period, but were still impacted
by the domestic and global economic slowdown. The fund’s
top two sub-holdings, the Schwab Premier Income Fund and Total
Bond Market Fund, declined -2.14% and -2.00%, respectively. In
comparison, the Barclays Capital U.S. Aggregate Bond Index
returned 3.50%.
As of
12/31/08:
Statistics
Number
of Holdings
10
Weighted Average
Market Cap
($ x
1,000,000)
$36,753
Price/Earnings
Ratio (P/E)
11.8
Price/Book
Ratio (P/B)
1.5
Portfolio
Turnover
Rate1
39%
Asset Class
Weightings % of Investments
Equity
Funds - Domestic
11.6%
Equity
Funds - International
8.2%
Fixed-Income
Funds
74.7%
Short-Term
Investments
5.5%
Total
100.0%
Top
Holdings % of Net
Assets2
Schwab Premier Income Fund,
Institutional
Shares
30.9%
Schwab
Total Bond Market Fund
25.7%
Schwab
Short-Term Bond Market Fund
13.0%
Schwab Dividend Equity Fund,
Select
Shares
9.2%
Schwab Global Real Estate
Fund,
Select Shares
6.1%
Total
84.9%
Manager views and portfolio holdings may have changed since the
report date.
The Laudus Group of Funds includes the Laudus Rosenberg Funds
and Laudus Mondrian Funds, which are part of the Laudus Trust
and distributed by ALPS Distributors, Inc., and the Laudus
MarketMasters Funds, which are part of the Schwab Capital Trust
and distributed by Charles Schwab & Co., Inc.
*
The fund’s actual annual payout could be higher or lower
than the targeted annual payout based on the interest rate
environment and other market factors occurring during that year.
1
Not annualized.
2
This list is not a recommendation of any security by the
investment adviser.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Performance of a
Hypothetical
$10,000
Investment1,3
Average
Annual Total
Returns1,2
Fund and Inception Date
Since Inception
Fund:
Schwab®
Monthly Income Fund - Enhanced Payout (3/28/08)
-9.53%
Benchmark: Enhanced Payout Composite
Index3
-5.86%
Fund Category: Morningstar Conservative Allocation
-16.30%
Fund Expense
Ratios4:
Net 0.68%; Gross 0.80%
All figures on this page assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less
than one year are not annualized.
1
Fund expenses have been absorbed by CSIM and Schwab. Without
these reductions, the fund’s returns would have been lower.
These returns do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of
fund shares.
2
Source for category information: Morningstar, Inc.
3
The Enhanced Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 25% S&P 500 Index and 75% Barclays
Capital U.S. Aggregate Bond Index.
4
As stated in the 3/3/08 prospectus (as supplemented 2/27/09).
Includes expenses of the underlying funds in which the fund
invests. The annualized weighed average expense ratio of the
underlying funds was 0.68%. Net Expense: Expenses reduced by a
contractual fee waiver in effect through at least 4/29/11. Gross
Expense: Does not reflect the effect of contractual fee waivers.
For actual ratios during the period, refer to the financial
highlights section in the financial statements.
The
Schwab Monthly Income Funds
(the
funds) are designed to provide monthly income throughout the
year while retaining the opportunity for growth to meet future
income needs. In accordance with guidelines stated in the
funds’ prospectus, the higher the targeted payout rate, the
lower the growth potential of a particular fund. The funds
invest in a range of Schwab Funds and Laudus
Funds—including equity funds, fixed income funds, and money
market funds—in accordance with their respective target
asset allocation. Because each Monthly Income Fund is a
fund-of-funds, its return will reflect a blend of the returns of
the underlying funds based on their relative weightings.
Schwab
Monthly Income Fund – Maximum
Payout
(the fund) returned -4.84% since inception on 3/28/08 through
the period ending
12/31/08.
During the same period, the fund’s custom benchmark
returned -0.32%. This fund offers a targeted annual payout of
5-6% and an increase in capital over the long term that is
expected to be less than that of the Moderate Payout Fund and
the Enhanced Payout Fund*. The fund seeks to maintain a target
blend of 10% equity and 90% fixed income and money market fund
securities.
The Maximum
Payout Fund’s recent performance reflected the difficult
investment environment its underlying funds experienced
throughout the period, characterized by atypical volatility in
the equity and bond markets, asset price declines, and tightened
credit standards. Despite multiple interest rate cuts and
stimulus measures in the U.S. and abroad, investor sentiment
remained pessimistic on the expectation of a prolonged economic
recession and persistent broad-based financial instability.
Throughout the year, investors continued to be highly
risk-averse, seeking out safer alternatives such as U.S.
Treasuries and short-term cash investments, which put downward
pressure on the values of non government-backed securities,
regardless of their quality.
The
fund’s money market sub-holding was the only underlying
fund to post a positive return. The Schwab Value Advantage Money
Fund returned 1.82%, while its benchmark Barclays Capital U.S.
Treasury Bills: 1-3 Months Index returned 1.06%. In general,
bond markets outperformed equities during the period, but were
still impacted by the domestic and global economic slowdown. The
fund’s top two sub-holdings, the Schwab Premier Income Fund
and Total Bond Market Fund, declined -2.14% and -2.00%,
respectively. In comparison, the Barclays Capital U.S. Aggregate
Bond Index returned 3.50%. Though still negative, the Laudus
Mondrian International Fixed Income Fund fared relatively
better, returning -0.27%. Its benchmark, the Citigroup World
Government Bond Index, declined -0.35% during the same period.
As of
12/31/08:
Statistics
Number
of Holdings
8
Weighted Average
Market Cap
($ x
1,000,000)
$31,170
Price/Earnings
Ratio (P/E)
11.6
Price/Book
Ratio (P/B)
1.2
Portfolio
Turnover
Rate1
24%
Asset Class
Weightings % of Investments
Equity
Funds - Domestic
2.5%
Equity
Funds - International
2.6%
Fixed-Income
Funds
87.2%
Short-Term
Investments
7.7%
Total
100.0%
Top
Holdings % of Net
Assets2
Schwab Premier Income Fund,
Institutional
Shares
36.2%
Schwab
Total Bond Market Fund
28.3%
Schwab
Short-Term Bond Market Fund
15.8%
Schwab Value Advantage Money
Fund,
Institutional Shares
7.2%
Laudus Mondrian International
Fixed Income Fund,
Institutional
Shares
6.9%
Total
94.4%
Manager views and portfolio holdings may have changed since the
report date.
The Laudus Group of Funds includes the Laudus Rosenberg Funds
and Laudus Mondrian Funds, which are part of the Laudus Trust
and distributed by ALPS Distributors, Inc., and the Laudus
MarketMasters Funds, which are part of the Schwab Capital Trust
and distributed by Charles Schwab & Co., Inc.
*
The fund’s actual annual payout could be higher or lower
than the targeted annual payout based on the interest rate
environment and other market factors occurring during that year.
1
Not annualized.
2
This list is not a recommendation of any security by the
investment adviser.
The
performance data quoted represents past performance. Past
performance does not guarantee future results. Investment
returns and principal value will fluctuate so that an
investor’s shares may be worth more or less than their
original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information
current to the most recent month end, please visit
www.schwab.com/schwabfunds.
Performance of a
Hypothetical
$10,000
Investment1,3
Average
Annual Total
Returns1,2
Fund and Inception Date
Since Inception
Fund:
Schwab®
Monthly Income Fund - Maximum Payout (3/28/08)
-4.84%
Benchmark: Maximum Payout Composite
Index3
-0.32%
Fund Category: Morningstar Conservative Allocation
-16.30%
Fund Expense
Ratios4:
Net 0.61%; Gross 0.73%
All figures on this page assume dividends and distributions were
reinvested. Index figures do not include trading and management
costs, which would lower performance. Indices are unmanaged, and
you cannot invest in them directly. Performance results less
than one year are not annualized.
1
Fund expenses have been absorbed by CSIM and Schwab. Without
these reductions, the fund’s returns would have been lower.
These returns do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of
fund shares.
2
Source for category information: Morningstar, Inc.
3
The Maximum Payout Composite Index is based on a comparable
portfolio asset allocation and calculated using the following
portion allocations: 10% S&P 500 Index and 90% Barclays
Capital U.S. Aggregate Bond Index.
4
As stated in the 3/3/08 prospectus (as supplemented 2/27/09).
Includes expenses of the underlying funds in which the fund
invests. The annualized weighed average expense ratio of the
underlying funds was 0.61%. Net Expense: Expenses reduced by a
contractual fee waiver in effect through at least 4/29/11. Gross
Expense: Does not reflect the effect of contractual fee waivers.
For actual ratios during the period, refer to the financial
highlights section in the financial statements.
As a fund shareholder, you incur two types of costs: transaction
costs, such as redemption fees; and, ongoing costs, such as
management fees, transfer agent and shareholder services fees,
and other fund expenses.
The expense examples below are intended to help you understand
your ongoing cost (in dollars) of investing in a fund and to
compare this cost with the ongoing cost of investing in other
mutual funds. These examples are based on an investment of
$1,000 invested for the period beginning July 1, 2008 and held
through December 31, 2008.
Actual Return lines in the table below provide
information about actual account values and actual expenses. You
may use this information, together with the amount you invested,
to estimate the expenses that you paid over the period. To do
so, simply divide your account value by $1,000 (for example, an
$8,600 account value
¸
$1,000 = 8.6), then multiply the result by the number given for
your fund or share class under the heading entitled
“Expenses Paid During Period”.
Hypothetical Return lines in the table below provide
information about hypothetical account values and hypothetical
expenses based on a fund’s or share class’ actual
expense ratio and an assumed return of 5% per year before
expenses. Because the return used is not an actual return, it
may not be used to estimate the actual ending account value or
expenses you paid for the period.
You may use this information to compare the ongoing costs of
investing in the fund and other funds. To do so, compare this 5%
hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only, and do not reflect any
transactional costs, such as redemption fees. If these
transactional costs were included, your costs would have been
higher.
Ending
Beginning
Account Value
Expenses Paid
Expense
Ratio1
Account Value
(Net of Expenses)
During
Period2
(Annualized)
at 7/1/08
at
12/31/08
7/1/08–12/31/08
Schwab Monthly Income Fund - Moderate Payout
Actual Return
0.00%
$
1,000
$
870.40
$
0.00
Hypothetical 5% Return
0.00%
$
1,000
$
1,025.14
$
0.00
Schwab Monthly Income Fund - Enhanced Payout
Actual Return
0.00%
$
1,000
$
915.00
$
0.00
Hypothetical 5% Return
0.00%
$
1,000
$
1,025.14
$
0.00
Schwab Monthly Income Fund - Maximum Payout
Actual Return
0.00%
$
1,000
$
960.60
$
0.00
Hypothetical 5% Return
0.00%
$
1,000
$
1,025.14
$
0.00
1
Based on the most recent expense ratio; may differ from the
expense ratio provided in Financial Highlights; Schwab and CSIM
have agreed to limit the “net operating expenses”
(excluding interest, taxes and certain non-routine expenses) of
each fund through 4/29/11 to 0.00%. The agreement to limit each
fund’s net operating expenses is limited to the fund’s
direct operating expenses and therefore does not apply to the
indirect expenses incurred by the fund through its investments
in the underlying funds.
2
Expenses for each fund or share class are equal to its
annualized expense ratio, multiplied by the average account
value over the period, multiplied by 184 days of the period, and
divided by 366 days of the fiscal year.
This section shows all the securities in the fund’s
portfolio and their value 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
.1%
Other Investment Companies
8,619
7,117
100
.1%
Total Investments
8,619
7,117
(0
.1)%
Other Assets and Liabilities, Net
(8
)
100
.0%
Total Net Assets
7,109
Number
Value
Security
of Shares
($ x 1,000)
Other Investment Companies 100.1% of net assets
Equity Funds 35.3%
Laudus International MarketMasters Fund, Select
Shares (a)
33,262
363
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Select
Shares (a)
62,982
385
Schwab Dividend Equity Fund, Select Shares (a)
108,248
1,101
Schwab Global Real Estate Fund, Select Shares (a)
148,865
661
2,510
Fixed-Income Funds 61.3%
Laudus Mondrian International Fixed Income Fund, Institutional
Shares (a)
35,180
383
Schwab Premier Income Fund, Institutional Shares (a)
186,906
1,761
Schwab Short-Term Bond Market Fund (a)
93,940
842
Schwab Total Bond Market Fund (a)
154,353
1,375
4,361
Money Fund 3.5%
Schwab Value Advantage Money Fund, Institutional
Shares (a)
226,778
227
State Street Institutional Liquid Reserves Fund - Institutional
Class
19,458
19
246
Total Other Investment Companies (Cost $8,619)
7,117
End
of Investments.
(All dollar amounts are x 1,000)
At
12/31/08 the
tax basis cost of the fund’s investments was $8,723 and the
unrealized appreciation and depreciation were $0 and ($1,606),
respectively, with a net unrealized depreciation of ($1,606).
This section shows all the securities in the fund’s
portfolio and their value as of the report date.
The fund files its complete schedule of portfolio holdings with
the SEC for the first and third quarters of each fiscal year on
Form N-Q. The fund’s Form N-Q is available on the
SEC’s website at http://www.sec.gov and may be viewed and
copied at the SEC’s Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the
Public Reference Room. The schedule of portfolio holdings filed
on a fund’s most recent Form N-Q is also available by
visiting Schwab’s website at www.schwab.com/schwabfunds.
Cost
Value
Holdings by Category
($ x 1,000)
($ x 1,000)
100
.4%
Other Investment Companies
11,460
9,980
100
.4%
Total Investments
11,460
9,980
(0
.4)%
Other Assets and Liabilities, Net
(41
)
100
.0%
Total Net Assets
9,939
Number
Value
Security
of Shares
($ x 1,000)
Other Investment Companies 100.4% of net assets
Equity Funds 19.9%
Laudus International MarketMasters Fund, Select
Shares (a)
19,839
217
Laudus Rosenberg U.S. Large Capitalization Growth Fund, Select
Shares (a)
39,138
239
Schwab Dividend Equity Fund, Select Shares (a)
89,935
915
Schwab Global Real Estate Fund, Select Shares (a)
136,554
606
1,977
Fixed-Income Funds 75.0%
Laudus Mondrian International Fixed Income Fund, Institutional
Shares (a)
49,238
536
Schwab Premier Income Fund, Institutional Shares (a)
326,646
3,077
Schwab Short-Term Bond Market Fund (a)
144,037
1,292
Schwab Total Bond Market Fund (a)
286,562
2,553
7,458
Money Fund 5.5%
Schwab Value Advantage Money Fund, Institutional
Shares (a)
537,698
537
State Street Institutional Liquid Reserves Fund - Institutional
Class
7,539
8
545
Total Other Investment Companies (Cost $11,460)
9,980
End
of Investments.
(All dollar amounts are x 1,000)
At
12/31/2008
the tax basis cost of the fund’s investments was $11,541
and the unrealized appreciation and depreciation were $0 and
($1,561), respectively, with a net unrealized depreciation of
($1,561).
This section shows all the securities in the fund’s
portfolio and their value as of the report date.
The fund files its complete schedule of portfolio holdings with
the SEC for the first and third quarters of each fiscal year on
Form N-Q. The fund’s Form N-Q is available on the
SEC’s website at http://www.sec.gov and may be viewed and
copied at the SEC’s Public Reference Room in Washington,
D.C. Call 1-800-SEC-0330 for information on the operation of the
Public Reference Room. The schedule of portfolio holdings filed
on a fund’s most recent Form N-Q is also available by
visiting Schwab’s website at www.schwab.com/schwabfunds.
Cost
Value
Holdings by Category
($ x 1,000)
($ x 1,000)
100
.0%
Other Investment Companies
31,597
29,247
100
.0%
Total Investments
31,597
29,247
0
.0%
Other Assets and Liabilities, Net
(6
)
100
.0%
Total Net Assets
29,241
Number
Value
Security
of Shares
($ x 1,000)
Other Investment Companies 100.0% of net assets
Equity Funds 5.1%
Schwab Dividend Equity Fund, Select Shares (a)
72,419
736
Schwab Global Real Estate Fund, Select Shares (a)
168,176
747
1,483
Fixed-Income Funds 87.2%
Laudus Mondrian International Fixed Income Fund, Institutional
Shares (a)
185,300
2,016
Schwab Premier Income Fund, Institutional Shares (a)
1,124,038
10,588
Schwab Short-Term Bond Market Fund (a)
513,958
4,610
Schwab Total Bond Market Fund (a)
929,377
8,281
25,495
Money Fund 7.7%
Schwab Value Advantage Money Fund, Institutional
Shares (a)
2,096,713
2,097
State Street Institutional Liquid Reserves Fund - Institutional
Class
171,662
172
2,269
Total Other Investment Companies (Cost $31,597)
29,247
End
of Investments.
(All dollar amounts are x 1,000)
At
12/31/08 the
tax basis cost of the fund’s investments was $31,691 and
the unrealized appreciation and depreciation were $0 and
($2,444), respectively, with a net unrealized depreciation of
($2,444).
Each of the
funds discussed in this report is a series of Schwab Capital
Trust (the “trust”), a no-load, open-end management
investment company. The trust is organized as a Massachusetts
business trust and is registered under the Investment Company
Act of 1940, as amended (the “1940 Act”). The list
below shows all the funds in the trust including the funds
discussed in this report, which are highlighted:
Schwab Capital Trust (organized May 7, 1993) Schwab Monthly Income
Fund-Moderate Payout
Schwab Monthly Income Fund-Enhanced Payout
Schwab Monthly Income Fund-Maximum Payout Schwab Target 2010 Fund
Schwab Target 2015 Fund
Schwab Target 2020 Fund
Schwab Target 2025 Fund
Schwab Target 2030 Fund
Schwab Target 2035 Fund
Schwab Target 2040 Fund
Schwab Retirement Income Fund
Schwab S&P 500 Index Fund
Schwab Institutional Select S&P 500 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 U.S. MarketMasters Fund
Laudus Small-Cap MarketMasters Fund
Laudus International MarketMasters Fund
Schwab Balanced Fund (formerly Schwab Viewpoints Fund)
Schwab Premier Equity Fund
Schwab Core Equity Fund
Schwab Dividend Equity Fund
Schwab Large-Cap Growth Fund
Schwab Small-Cap Equity Fund
Schwab Hedged Equity Fund
Schwab Financial Services Fund
Schwab Health Care Fund
Schwab International Core Equity Fund
Schwab Fundamental US Large Company Index Fund
Schwab Fundamental US Small-Mid Company Index Fund
Schwab Fundamental International Large Company Index Fund
Schwab Fundamental International Small-Mid Company Index Fund
Schwab Fundamental Emerging Markets Index Fund
The Schwab
Monthly Income Funds commenced operations on March 28, 2008
and the funds are “fund of funds”. Each of the funds
seeks to achieve its investment objective by investing in a
combination of other Schwab Funds and Laudus Funds (underlying
funds) in accordance with its target portfolio allocation. In
addition, the funds may purchase individual securities to
achieve their investment objectives. Each fund bears its share
of the allocable expenses of the underlying funds in which they
invest. The financial statements of the funds should be read in
conjunction with the underlying funds’ financial
statements, which are filed with the Securities and Exchange
Commission (SEC). The funds offer one share class. Shares are
bought and sold at net asset value, or closing NAV, which is the
price for all outstanding shares. Each share has a par value of
1/1,000 of a cent, and the trustees may authorize the issuance
of as many shares as necessary.
Each fund
maintains its own account for purposes of holding assets and
accounting, and is considered a separate entity for tax
purposes. Within its account, each fund also may 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 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 SEC.
(a) Security
Valuation:
The funds
value the investments in underlying funds every business day.
The funds use the following policies to value these investments:
•
Underlying
funds:
valued
at their respective net asset values as determined by those
funds, in accordance with the 1940 Act for a given day.
•
Short-term
securities (60 days or less to maturity):
valued
at amortized cost, which approximates market value.
Significant
Accounting Policies (continued):
(All
dollar amounts are x 1,000)
(b) 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.
(c) Investment
Income:
Interest
income is recorded as it accrues. Dividends and distributions
from portfolio securities and underlying funds are recorded on
the date they are effective (the ex-dividend date), although the
funds record certain foreign security dividends on the day they
learn of the ex-dividend date. Any distributions from underlying
funds are recorded in accordance with the character of the
distributions as designated by the underlying funds.
(d) Expenses:
Expenses
that are specific to a fund 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.
(e) Distributions
to Shareholders:
The funds
declare and pay dividends from net investment income to
shareholders once a month. The funds may make distributions from
any net realized capital gains once a year.
(f) 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’s possible that
once the results are known, they may turn out to be different
from these estimates.
(g) Federal
Income Taxes:
The funds
intend to meet federal income and excise tax requirements for
regulated investment companies. Accordingly, the funds
distribute substantially all of their net investment income and
realized net capital gains (if any) to their respective
shareholders each year. As long as a fund meets the tax
requirements, it is not required to pay federal income tax.
(h) 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.
(i) Accounting
Pronouncements:
The funds
adopted Financial Accounting Standards Board (“FASB”)
Statement of Financial Accounting Standards No. 157
(“SFAS No. 157”), Fair Value Measurements,
effective March 28, 2008. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles and
expands disclosure about fair value measurements.
SFAS No. 157
establishes a three-tier hierarchy of inputs to establish a
classification of fair value measurements for disclosure
purposes. These inputs are summarized in the three broad levels
listed below:
•
Level 1 —
quoted prices in active markets for identical securities
•
Level 2 —
other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit
risk, etc.)
Significant
Accounting Policies (continued):
(All
dollar amounts are x 1,000)
•
Level 3 —
significant unobservable inputs (including the funds’ own
assumptions in determining the fair value of investments)
The inputs
or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those
securities. The following is a summary of the inputs used to
value the funds’ investments as of December 31, 2008:
Investment
in Securities*
Monthly
Income Fund
Monthly
Income Fund
Monthly
Income Fund
Valuation
Inputs
Moderate
Payout
Enhanced
Payout
Maximum
Payout
Level 1 — Quoted prices
$7,117
$9,980
$29,247
Level 2 — Other significant observable inputs
—
—
—
Level 3 — Significant unobservable inputs
—
—
—
Total
$7,117
$9,980
$29,247
* The
funds had no other financial instruments.
3. Risk
Factors:
Investing in
the funds and the underlying funds may involve certain risks
including, but not limited to, those described below:
The prices
of common stocks and other equity-type securities held by the
funds and the underlying funds may decline in response to
certain events, including those directly involving issuers of
these securities; adverse conditions affecting the general
economy; overall market declines; world political, social, and
economic instability; and currency fluctuations.
The values
of, and the income generated by, debt securities held by the
funds and the underlying funds may be affected by changing
interest rates and by changes in the effective maturities and
credit ratings of these securities. For example, the values of
debt securities in the funds portfolio generally will decline
when interest rates rise and increase when interest rates fall.
In addition, falling interest rates may cause an issuer to
redeem, “call” or refinance a security before its
stated maturity, which may result in the fund having to reinvest
the proceeds in lower yielding securities.
Investments
in securities issued by entities based outside the United States
may be subject to the risks described above to a greater extent
and may also be affected by currency controls; different
accounting, auditing, financial reporting, and legal standards
and practices in some countries; expropriation; changes in tax
policy; greater market volatility; differing securities market
structures; higher transaction costs; and various administrative
difficulties, such as delays in clearing and settling portfolio
transactions or in receiving payment of dividends. These risks
may be heightened in connection with investments in developing
countries.
The
performance of the underlying funds will impact the performance
of the funds.
4.
Affiliates
and Affiliated Transactions:
(All dollar amounts are x 1,000)
Charles
Schwab Investment Management, Inc. (“CSIM” or the
“investment adviser”), a wholly owned subsidiary of
The Charles Schwab Corporation, serves as each fund’s
investment adviser and administrator pursuant to an Investment
Advisory and Administration Agreement (Advisory Agreement)
between it and the trust.
Charles
Schwab & Co., Inc. (“Schwab”) is an
affiliate of the investment adviser and is the trust’s
transfer agent and shareholder services agent.
The
underlying funds pay fees to the investment adviser for advisory
and administrative services and to Schwab for transfer agent and
shareholder services. The funds are not charged such fees
directly. These fees are included in the net asset value of the
underlying funds. CSIM and Schwab have made agreements with the
funds to limit the total expenses charged, excluding interest,
taxes and certain non-routine expenses to 0.00% through
April 29, 2011.
Affiliates
and Affiliated Transactions (continued):
(All
dollar amounts are x 1,000)
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.
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 December 31, 2008, the
percentages of shares of other related funds owned by each
Monthly Income Fund are:
Affiliates
and Affiliated Transactions (continued):
(All
dollar amounts are x 1,000)
(a) Commencement
of operations.
Pursuant to
an exemptive order issued by the SEC, the funds may enter into
interfund borrowing and lending transactions with other Schwab
Funds. All loans are for temporary or emergency purposes only.
The interest rate charged on the loan is the average of the
overnight repurchase agreement rate and the short-term bank loan
rate. The interfund lending facility is subject to the oversight
and periodic review of the Board of Trustees of the Schwab
Funds. The funds had no interfund borrowing or lending activity
during the period.
5. Board
of Trustees:
Trustees may
include people who are officers and/or directors of the
investment adviser or Schwab. Federal securities law limits the
percentage of such “interested persons” who may serve
on a trust’s board, and the trust was in compliance with
these limitations throughout the report period. The trust did
not pay any of these persons for their service as trustees, but
it did pay non-interested persons (independent trustees), as
noted in the funds’ Statement of Operations.
6. Borrowing
from Banks:
The funds
may borrow money from banks and custodians. The funds may obtain
temporary bank loans through the trusts to which they belong, to
use for meeting shareholder redemptions or for extraordinary or
emergency purposes. The funds covered in this report 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 had
no borrowings from the line of credit during the period.
However, certain funds utilized their overdraft facility and
incurred interest expenses, which is disclosed in the Statement
of Operations.
7.
Purchases
and Sales of Investment Securities:
(All dollar amounts are x 1,000)
For the
period ended December 31, 2008, purchases and sales of
securities (excluding short-term obligations) were as follows:
Purchases
of
Sales/Maturities
Securities
of
Securities
Monthly Income Fund — Moderate Payout
$11,045
$2,200
Monthly Income Fund — Enhanced Payout
16,367
4,682
Monthly Income Fund — Maximum Payout
39,280
7,330
8.
Federal
Income Taxes:
(All dollar amounts are x 1,000)
As of
December 31, 2008, the components of distributable earnings
on a tax-basis were as follows:
Monthly
Income Fund
Monthly
Income Fund
Monthly
Income Fund
Moderate
Payout
Enhanced
Payout
Maximum
Payout
Undistributed ordinary income
$6
$8
$20
Undistributed long-term capital gains
—
—
—
Unrealized appreciation
—
—
—
Unrealized depreciation
(1,606
)
(1,561
)
(2,444
)
Net unrealized appreciation/(depreciation)
($1,606
)
($1,561
)
($2,444
)
The primary
difference between book-basis and tax-basis unrealized
appreciation or unrealized depreciation of investments is the
tax deferral of losses on wash sales. Capital loss carry
forwards may be used to offset future realized capital gains for
federal
income tax
purposes. As of December 31, 2008, the funds had capital
loss carry forwards available to offset net capital gains before
the expiration dates:
Monthly
Income Fund
Monthly
Income Fund
Monthly
Income Fund
Moderate
Payout
Enhanced
Payout
Maximum
Payout
2016
$81
$83
$285
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 fiscal year. As of December 31,2008, the funds had aggregate deferred realized net capital
losses as follows:
Monthly
Income Fund
Monthly
Income Fund
Monthly
Income Fund
Moderate
Payout
Enhanced
Payout
Maximum
Payout
Deferred capital losses
$57
$67
$146
The
tax-basis components of distributions paid during the current
period were:
Monthly
Income Fund
Monthly
Income Fund
Monthly
Income Fund
Moderate
Payout
Enhanced
Payout
Maximum
Payout
Current period distributions
Ordinary income
$269
$400
$1,112
Long-term capital gains
—
—
—
Return of capital
—
—
—
Distributions
paid to shareholders are based on net investment income and net
realized gains determined on a tax basis, which may differ from
net investment income and net realized gains for financial
reporting purposes. These differences are due primarily to
differing treatment for items such as non-U.S. currency gains
and losses, short-term capital gains and losses; capital losses
related to wash sales, unrealized appreciation of certain
investments in non-U.S. securities; paydowns on fixed-income
securities; and income on certain investments. The fiscal year
in which amounts are distributed may differ from the year in
which the net investment income and net realized gains are
recorded by the funds for financial reporting purposes. The
funds may also designate a portion of the amount paid to
redeeming shareholders as a distribution for tax purposes.
The
permanent book and tax basis differences may result in
reclassifications between capital account and other accounts as
required. The adjustments have no impact on net assets or the
results of operations. As of December 31, 2008, the funds
did not make any reclassifications.
As of
December 31, 2008, management has reviewed the tax
positions for open periods, 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 December 31, 2008, the funds did not incur any
interest or penalties.
Report
of Independent Registered Public Accounting Firm
To the
Boards of Trustees and Shareholders of: Schwab
Monthly Income Fund - Moderate Payout
Schwab Monthly Income Fund - Enhanced Payout
Schwab Monthly Income Fund - Maximum Payout
In our
opinion, the accompanying statements of assets and liabilities,
including the portfolio holdings, and the related statements of
operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the
financial position of Schwab Monthly Income Fund - Moderate
Payout, Schwab Monthly Income Fund - Enhanced Payout and Schwab
Monthly Income Fund - Maximum Payout (three of the portfolios
constituting The Schwab Capital Trust, hereafter referred to as
the “Funds”) at December 31, 2008, the results of each
of their operations, the changes in each of their net assets and
the financial highlights for the period March 28, 2008
(commencement of operations) through December 31, 2008, 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 audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits,
which included confirmation of securities at December 31, 2008
by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers
LLP San
Francisco, California February 13, 2009
For
corporate shareholders, the following percentage of the
funds’ dividend distributions paid during the fiscal year
ended December 31, 2008, qualify for the corporate
dividends received deduction:
Percentage
Monthly Income Fund — Moderate Payout
13.64
Monthly Income Fund — Enhanced Payout
7.72
Monthly Income Fund — Maximum Payout
2.81
For the
fiscal year ended December 31, 2008, 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 2009 via IRS form 1099 of the amounts
for use in preparing their 2008 income tax return.
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, Laudus Trust and Laudus
Institutional Trust. As of December 31, 2008, the
Fund Complex included 84 funds.
The address
for all trustees and officers is 101 Montgomery Street, SanFrancisco, CA94104. 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.
84
Board 1–Director, Redwood Trust, Inc. Board 2–Director, PMI Group, 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
69
Board 1–Director, Gilead Sciences, Inc. Board 2–Director, Monaco Coach Corporation Board 3–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).
Charles R.
Schwab2 1937
Chairman and Trustee
(Chairman and Trustee of Schwab Capital Trust since 1989.)
Chairman, The Charles Schwab Corporation, Charles Schwab &
Co., Inc., Charles Schwab Investment Management, Inc., Charles
Schwab Bank, N. A.; Chairman and Chief Executive Officer, Schwab
(SIS) Holdings Inc. I, Schwab International Holdings, Inc.;
Chief Executive Officer, Schwab Holdings, Inc.; 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, Charles Schwab & Co., Inc.
69
Not Applicable.
Walter W. Bettinger
II2 1960
Trustee
(Trustee of Schwab Capital Trust since 2008.)
As of October 2008, Chief Executive Officer, Charles Schwab
& Co., Inc. and The Charles Schwab Corporation; President
and Chief Operating Officer, Charles Schwab & Co., Inc. and
The Charles Schwab Corporation; Director, Charles Schwab Bank;
Executive Vice President and President – Schwab Investor
Services, The Charles Schwab Corporation; Executive Vice
President and President – Schwab Investor Services, Charles
Schwab & Co., Inc.; Chairman and President, Schwab
Retirement Plan Services, Inc.; President and Chief Executive
Officer, The Charles Schwab Trust Company; Director, Charles
Schwab Bank, N.A., Schwab Retirement Plan Services, and Schwab
Retirement Technologies.
69
Not Applicable.
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.; Executive Vice
President, Charles Schwab & Co., Inc. (2002-present);
President and Chief Executive Officer, Charles Schwab Investment
Management, Inc. (2007-present); Director, Charles Schwab Asset
Management (Ireland) Limited and Charles Schwab Worldwide Funds
PLC. From September 2002 to July 2004, Chief Executive Officer
and President, Charles Schwab Investment Management, Inc. and
Executive Vice President, Charles Schwab & Co., Inc.
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.; Chief Financial Officer,
Laudus Trust and Laudus Institutional Trust; Director, Charles
Schwab Worldwide Fund, PLC and Charles Schwab Asset Management
(Ireland) Limited. Through June 2007, Treasurer, Chief Financial
Officer and Chief Accounting Officer, Excelsior Funds Inc.,
Excelsior Tax-Exempt Funds, Inc. and Excelsior Funds Trust;
Chief Financial Officer, Mutual Fund Division, UST Advisors,
Inc. From December 1999 to November 2004, Sr. Vice President,
Financial Reporting, Charles Schwab & Co. Inc.
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.; President, CEO and Chief
Investment Officer, Laudus Trust and Laudus Institutional Trust.
Prior to March 31, 2008, Vice President and Chief
Investment Officer, Laudus Trust and Laudus Institutional Trust.
Randall Fillmore 1960
Chief Compliance Officer and AML Officer
(Officer of Schwab Capital Trust since 2002.)
Senior Vice President and Chief Compliance Officer, Charles
Schwab Investment Management, Inc.; Senior Vice President,
Charles Schwab & Co. Inc.; Chief Compliance Officer, Laudus
Trust and Laudus Institutional Trust. Through June 2007, Chief
Compliance Officer, Excelsior Funds Inc., Excelsior Tax-Exempt
Funds, Inc., and Excelsior Funds Trust.
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.; Senior Vice
President and Deputy General Counsel, Charles Schwab & Co.,
Inc. Through June 2007, Chief Legal Officer, Excelsior Funds
Inc., Excelsior Tax-Exempt Funds, Inc. and Excelsior Funds
Trust. Until 2006, Chief Legal Officer, Laudus Trust and Laudus
Institutional Trust.
Catherine MacGregor 1964
Vice President
(Officer of Schwab Capital Trust since 2005.)
Vice President, Charles Schwab & Co., Inc. and Charles
Schwab Investment Management, Inc., Laudus Trust and Laudus
Institutional Trust; since 2006, Chief Counsel, Laudus Trust and
Laudus Institutional Trust. Until July 2005, Senior Associate,
Paul Hastings Janofsky & Walker LLP.
Michael Haydel 1972
Vice President
(Officer of Schwab Capital Trust since 2006.)
Vice President, Asset Management Client Services, Charles Schwab
& Co., Inc.; Vice President and AML Officer, Laudus Trust
and Laudus Institutional Trust. Until March 2004, Director
Charles Schwab & Co., Inc.
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
In addition to their employment with the investment adviser and
the distributor, Messrs. Schwab and Bettinger also own stock of
The Charles Schwab Corporation. Mr. Schwab and Mr. Bettinger are
Interested Trustees because they are employees of Schwab and/or
the adviser.
3
The President, Treasurer and Secretary hold office until their
respective successors are chosen and qualified or until he or
she sooner dies, resigns, is removed or becomes disqualified.
Each of the other officers serves at the pleasure of the Board.
asset allocation The practice of dividing a
portfolio among different asset classes, with each asset class
assigned a particular percentage.
asset class A group of securities with similar
structure and basic characteristics. Stocks, bonds and cash are
the three main examples of asset classes.
beta A historical measure of an investment’s
volatility relative to a market index (usually the
S&P 500®).
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.
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
Fundtm
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
Institutional
Select®
S&P 500 Fund
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 Retirement
Income 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 Long-Term
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.
Registrant has adopted a code of ethics that applies to its principal executive officer,
principal financial officer, and any other persons who perform a similar function, regardless
of whether these individuals are employed by Registrant or a third party.
(c)
During the period covered by the report, no amendments were made to the provisions of this
code of ethics.
(d)
During the period covered by the report, Registrant did not grant any waivers, including
implicit waivers, from the provisions of this code of ethics.
(f)(1)
Registrant has filed this code of ethics as an exhibit pursuant to Item 12(a)(1) of Form
N-CSR.
Item 3: Audit Committee Financial Expert.
Registrant’s Board of Trustees has determined that William Hasler, Mariann Byerwalter and
Donald Stephens, currently serving on its audit committee, are “audit committee financial
experts,” as such term is defined in Item 3 of Form N-CSR. Each of these members of
Registrant’s audit committee is “independent” under the standards set forth in Item 3 of
Form N-CSR.
The designation of each of Messrs. Hasler and Stephens and Ms. Byerwalter as an “audit
committee financial expert” pursuant to Item 3 of Form N-CSR does not (i) impose upon such
individual any duties, obligations, or liability that are greater than the duties,
obligations and liability imposed upon such individual as a member of Registrant’s audit
committee or Board of Trustees in the absence of such designation; and (ii) affect the
duties, obligations or liability of any other member of Registrant’s audit committee or
Board of Trustees.
Item 4: Principal Accountant Fees and Services.
(a) Below are the aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for the audit of Registrant’s annual financial
statements or services that are normally provided by the accountant in connection with statutory
and regulatory filings or engagements.
(b) Below are the aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountant that are reasonably related to the performance of the
audit of Registrant’s financial statements and are not reported under paragraph (a) above.
Audit-Related Fees
For services rendered to Registrant:
2008: $86,911 2007: $60,057
Nature of these services: tax provision review and procedures performed related to
Registrant’s service provider conversion.
In each of the last two fiscal years there were no “Audit-Related Fees” required to be
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
(c) Below are the aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice, and tax planning.
Tax Fees
For services rendered to Registrant:
2008: $95,808 2007: $68,760
Nature of these services: preparation and review of tax returns.
In each of the last two fiscal years there were no “Tax Fees” required to be approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
(d) Below are the aggregate fees billed in each of the last two fiscal years for products and
services provided by the principal accountant, other than the services reported in paragraphs (a)
through (c) above.
All Other Fees
For services rendered to Registrant:
2008: $14,285 2007: $13,158
Nature of these services:
review of the methodology of allocation of Charles
Schwab & Co., Inc. (“Schwab”) expenses for purposes of Section 15(c) of the Investment
Company Act of 1940.
In each of the last two fiscal years there were no “All Other Fees” required to be approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
(e)(1) Registrant’s audit committee does not have pre-approval policies and procedures as described
in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
(2) The percentage of services described in paragraph (c) of this Item that were approved by the
audit committee in 2005 pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X was 10.6%
and the dollar amount was $10,901. This $10,901 equals 1.2% of the total fees paid by Registrant
to its principal accountant in 2005. None of the services described in paragraphs (b) and (d) of
this Item were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) Below are the aggregate non-audit fees billed in each of the last two fiscal years by
Registrant’s principal accountant for services rendered to Registrant, to Registrant’s investment
adviser, and to any entity controlling, controlled by, or under common control with Registrant’s
investment adviser that provides ongoing services to Registrant.
2008: $- 2007: $188,361
Although not required to be included in the amounts disclosed under this paragraph (g) or any other
paragraph of this Item 4, below are the aggregate fees billed in each of the last two fiscal years
by Registrant’s principal accountant for tax compliance services rendered to U.S. Trust, an entity
under common control with Registrant’s investment adviser that does not provide services to
Registrant.
2008: $- 2007: $2,541,476
(h)
During the past fiscal year, all non-audit services provided by Registrant’s
principal accountant to either Registrant’s investment adviser or to any entity
controlling, controlled by, or under common control with Registrant’s investment adviser
that provides ongoing services to Registrant were pre-approved. Included in the audit
committee’s pre-approval was the review and consideration as to whether the provision of
these non-audit services is compatible with maintaining the principal accountant’s
independence.
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment
Companies.
Not applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9: Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated
Purchasers.
Not applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11: Controls and Procedures.
(a)
Based on their evaluation of Registrant’s disclosure controls and procedures, as of a date
within 90 days of the filing date, Registrant’s Chief Executive Officer, Randall W. Merk and
Registrant’s Principal Financial Officer, George Pereira, have concluded that Registrant’s
disclosure controls and procedures are: (i) reasonably designed to ensure that information
required to be disclosed in this report is appropriately communicated to Registrant’s officers
to allow timely decisions regarding disclosures required in this report; (ii) reasonably
designed to ensure that information required to be disclosed in this report is recorded,
processed, summarized and reported in a timely manner; and (iii) are effective in achieving
the goals described in (i) and (ii) above.
(b)
During the second fiscal quarter of the period covered by this report, there have been no
changes in Registrant’s internal control over financial reporting that the above officers
believe to have materially affected, or to be reasonably likely to materially affect,
Registrant’s internal control over financial reporting.
Item 12: Exhibits.
(a)
(1) Registrant’s code of ethics (that is the subject of the disclosure required by Item
2(a)) is attached.
(2)
Separate certifications for Registrant’s principal executive officer and principal
financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached.
A certification for Registrant’s principal executive officer and principal financial
officer, as required by Rule 30a-2(b) under the 1940 Act, is attached. This certification is
being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. section
1350 and is not being filed as part of the Form N-CSR with the Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act
of 1940, this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.