-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KdxQefrPU7etaWp+v/sWB21Xta+nGknPLUR6+xVfMq9P/FLDNxtOPryd8KDyhxHf OEme8w2+H2CmC8rzPdjm8g== 0000950149-96-000511.txt : 19960513 0000950149-96-000511.hdr.sgml : 19960513 ACCESSION NUMBER: 0000950149-96-000511 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960510 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHWAB INVESTMENTS CENTRAL INDEX KEY: 0000869365 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06200 FILM NUMBER: 96559752 BUSINESS ADDRESS: STREET 1: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4156277000 MAIL ADDRESS: STREET 1: 101 MONTGOMERY ST STREET 2: 101 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94104 N-30D 1 SCHWAB TAX FREE BOND FUNDS S.A.R. DATED 2/29/96. 1 SCHWABFUNDS(R) [LOGO] SCHWAB TAX-FREE BOND FUNDS SEMI-ANNUAL REPORT FEBRUARY 29, 1996 [Photo of Schwab Building, San Francisco, California] 2 Dear Shareholder, The SchwabFunds Family(R) is celebrating substantial growth as [Photo a mutual fund complex. By placing your trust in of SchwabFunds(R), you've helped total assets under management Charles grow by $10 billion over the last 12 months to reach $35 R. Schwab] billion. We believe much of this success can be traced to the Schwab commitment to serve the needs of shareholders, a commitment demonstrated by the entire SchwabFunds staff and, in particular, by our experienced team of portfolio managers. The professionals who make up our growing portfolio management team have over 200 years of combined experience and are devoted to monitoring the financial markets for you. Through a careful and disciplined selection of securities, the portfolio managers strive to construct optimal portfolios that provide shareholders with competitive returns that meet their investment goals. And shareholders continue to signal their trust in our SchwabFunds portfolio management by keeping their money invested in SchwabFunds. We believe an important part of serving your needs is keeping you informed about your investments. For example, we added the question and answer section of this report, developed by our portfolio managers to address what they feel were the most pressing questions we've heard from shareholders over the period. It is one way we hope to keep communication open between you and the people managing your investments. The SchwabFunds Family has grown to include a group of mutual funds that addresses many "core" needs of investors. SchwabFunds offers a solution to investors who want the convenience and competitive costs of a no-load mutual fund family. The 20 no-load funds available to retail investors, including the new Schwab S&P 500 Fund, offer diversification of the U.S. and international equity markets, both taxable and tax-free bonds and a variety of money market investments. With this level of diversification, you may use SchwabFunds to create an efficient, well-rounded portfolio. Or you may use them to serve as building blocks to an overall investment program that includes more specialized investments. I invite you to learn more about the SchwabFunds Family. To receive a brochure and prospectus for the SchwabFunds, please call our toll-free number, 1-800-2 NO-LOAD, or visit any one of our more than 200 Schwab offices. A Schwab representative will be happy to provide you with a prospectus that includes more complete information on the Funds, including charges and expenses. Please read it carefully before investing. I'd like to extend my personal gratitude for your trust in the SchwabFunds Family as it continues to grow. You should feel confident that the outstanding efforts of all those who are part of the SchwabFunds organization will continue going forward. And we expect these efforts to help us to meet even higher standards of excellence in the years ahead. /s/ Charles R. Schwab Charles R. Schwab Cover: The Schwab Building, San Francisco, California 3 COMMENTS FROM THE INVESTMENT ADVISER We are pleased to report to you on the performance of the Schwab Short/Intermediate Tax-Free Bond Fund and the Schwab Long-Term Tax-Free Bond Fund (the "Funds") for the six-month period ended February 29, 1996. During this period, both Schwab Tax-Free Bond Funds continued to help you achieve your investment goals by striving to pay a high level of monthly dividends exempt from federal personal income tax. Each Fund's individual performance is reviewed in detail in the following pages. BOND MARKET PERFORMANCE The bond market rallied during most of the reporting period, bolstered by low inflationary expectations and a relatively low rate of economic growth. The performance of both Schwab Tax-Free Bond Funds reflected the performance of the bond market during the period. To help you put the Funds' performance into perspective, the portfolio management team discusses broader economic trends and their effects on the Funds' investment strategies in "Questions to the Portfolio Management Team" following this letter. SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND On February 29, 1996, the Fund's 30-day SEC yield was 3.76%, six-month total return was 2.57%, one-year total return was 7.58%, and average annual total return since inception (4/21/93) was 4.57%. For investors in the top federal personal income tax bracket of 39.6%, at the end of the period, the Fund's 30-day SEC yield was equivalent to a fully taxable yield of 6.23%. 1 As the chart on the following page illustrates, the Fund's total return during the reporting period substantially tracked the broader municipal bond market, as measured by the Lehman 3-Year Municipal Bond Index, a widely recognized market benchmark. The Fund paid shareholders monthly cash dividends, free from federal income taxes, totaling 21 cents per share during the six-month period ended February 29, 1996. Its net asset value (NAV) increased from $10.12 on August 31, 1995 to $10.17 at the end of the reporting period, reflecting the overall price appreciation in the bond market. At the end of the reporting period, the Fund's portfolio was composed of investment grade municipal bonds issued by state and municipal governments and their agencies, and its average dollar-weighted portfolio maturity was 3.89 years. 1 Income may be subject to state and local taxes and the Alternative Minimum Tax (AMT). Capital appreciation of discounted bonds may be subject to federal and state income tax. Total return assumes reinvestment of all dividends. The Investment Manager and Schwab have waived a portion of their fees during the reporting period, and guaranteed maximum total operating expenses of 0.49% through at least 12/31/96. Without such waivers and guarantee, the 30-day SEC yield would have been 3.40%, taxable equivalent yield would have been 5.63%, six-month total return would have been 2.37% one-year total return since inception would have been 7.17%, and average annual total return since inception would have been 4.09%. Past performance is no guarantee of future results. Principal value and investment returns will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 4 COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN THE SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND AND THE LEHMAN 3-YEAR MUNICIPAL BOND INDEX Average Annual Total Returns February 29, 1996 ---------------------------- One Year Since Inception 7.58% 4.57% [THE FOLLOWING IS A LINE GRAPH OF SHORT/INT. TAX-FREE BOND VS LEHMAN INDEX.]
DOLLAR VALUE Date INDEX FUND ----------------------------- 4/21-4/30/93 $9,993 $9,990 5/31/93 $10,020 $10,038 6/30/93 $10,085 $10,129 7/31/93 $10,090 $10,151 8/31/93 $10,184 $10,283 9/30/93 $10,228 $10,344 10/31/93 $10,250 $10,366 11/30/93 $10,237 $10,326 12/31/93 $10,344 $10,462 1/31/94 $10,428 $10,567 2/28/94 $10,331 $10,412 3/31/94 $10,206 $10,218 4/30/94 $10,267 $10,280 5/31/94 $10,315 $10,323 6/30/94 $10,318 $10,312 7/31/94 $10,403 $10,407 8/31/94 $10,440 $10,429 9/30/94 $10,414 $10,377 10/31/94 $10,389 $10,317 11/30/94 $10,370 $10,245 12/31/94 $10,415 $10,346 1/31/95 $10,501 $10,445 2/28/95 $10,612 $10,563 3/31/95 $10,707 $10,655 4/30/95 $10,743 $10,691 5/31/95 $10,908 $10,881 6/30/95 $10,934 $10,884 7/31/95 $11,050 $10,987 8/31/95 $11,136 $11,079 9/30/95 $11,167 $11,115 10/31/95 $11,221 $11,175 11/30/95 $11,293 $11,255 12/31/95 $11,340 $11,305 1/31/96 $11,429 $11,383 2/29/96 $11,451 $11,364
Past performance is no guarantee of future results. Principal value and investment returns will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The performance graph compares a hypothetical $10,000 investment in the Schwab Short/Intermediate Tax-Free Bond Fund since inception with a hypothetical investment in the Lehman 3-Year Municipal Bond Index. The Index is unmanaged and assumes reinvestment of all dividends, and, unlike the Fund, does not reflect the payment of advisory fees and other expenses associated with an investment in the Fund. Fund total return assumes the reinvestment of all dividends and capital gain distributions, if any. SCHWAB LONG-TERM TAX-FREE BOND FUND On February 29, 1996, the Fund's 30-day SEC yield was 4.98%, six-month total return was 4.59%, one-year total return was 10.0%, and average annual total return since inception (9/11/92) was 6.69%. For investors in the top federal personal income tax bracket of 39.6%, the Fund's 30-day SEC yield at the end of the reporting period was equivalent to a fully taxable yield of 8.25%. 2 As the chart at right illustrates, the Fund's total return during the reporting period substantially tracked the broader municipal bond market, as measured by the Lehman General Municipal Bond Index, a widely recognized market benchmark. The Fund paid shareholders monthly cash dividends, free from federal income taxes, totaling 26 cents per share during the six-month period ended February 29, 1996. Its NAV increased from $10.16 on August 31, 1995 to $10.36 at the end of the reporting period, reflecting the overall rally in the bond market. 2 Income may be subject to state and local taxes and the Alternative Minimum Tax (AMT). Capital appreciation of discounted bonds may be subject to federal and state income tax. Total return assumes reinvestment of all dividends. The Investment Manager and Schwab have waived a portion of their fees, during the reporting period, and guaranteed maximum total operating expenses of 0.49% through at least 12/31/96. Without such waivers and guarantee, the 30-day SEC yield would have been 4.59%, the taxable equivalent yield would have been 7.60%, six-month total return would have been 4.38%, one-year total return would have been 9.60%, and average annual total return since inception would have been 6.10%. Past performance is no guarantee of future results. Principal value and investment returns will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 5 COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000 INVESTMENT IN THE SCHWAB LONG-TERM TAX-FREE BOND FUND AND THE LEHMAN GENERAL MUNICIPAL BOND INDEX Average Annual Total Returns February 29, 1996 ---------------------------- One Year Since Inception 10.0% 6.69% [THE FOLLOWING IS A LONG-TERM TAX-FREE BOND FUND VS LEHMAN GENERAL MUNI BOND INDEX.]
DOLLAR VALUE Date INDEX FUND ------------------------- 9/11-9/30/92 $9,923 $9,867 10/31/92 $9,826 $9,515 11/30/92 $10,002 $9,912 12/31/92 $10,104 $10,092 1/31/93 $10,221 $10,240 2/28/93 $10,591 $10,682 3/31/93 $10,479 $10,484 4/30/93 $10,585 $10,632 5/31/93 $10,644 $10,690 6/30/93 $10,822 $10,883 7/31/93 $10,836 $10,879 8/31/93 $11,062 $11,157 9/30/93 $11,188 $11,298 10/31/93 $11,209 $11,315 11/30/93 $11,111 $11,201 12/31/93 $11,345 $11,465 1/31/94 $11,475 $11,588 2/28/94 $11,177 $11,274 3/31/94 $10,722 $10,791 4/30/94 $10,813 $10,858 5/31/94 $10,907 $10,970 6/30/94 $10,840 $10,870 7/31/94 $11,044 $11,085 8/31/94 $11,083 $11,109 9/30/94 $10,920 $10,921 10/31/94 $10,726 $10,657 11/30/94 $10,532 $10,381 12/31/94 $10,764 $10,658 1/31/95 $11,072 $11,050 2/28/95 $11,394 $11,381 3/31/95 $11,524 $11,514 4/30/95 $11,538 $11,483 5/31/95 $11,906 $11,918 6/30/95 $11,802 $11,735 7/31/95 $11,914 $11,836 8/31/95 $12,065 $11,971 9/30/95 $12,141 $12,056 10/31/95 $12,317 $12,250 11/30/95 $12,521 $12,443 12/31/95 $12,642 $12,591 1/31/96 $12,738 $12,640 2/29/96 $12,651 $12,520
Past performance is no guarantee of future results. Principal value and investment returns will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The performance graph compares a hypothetical $10,000 investment in the Schwab Long-Term Tax-Free Bond Fund since inception with a hypothetical investment in the Lehman General Municipal Bond Index. The Index is unmanaged and assumes reinvestment of all dividends, and, unlike the Fund, does not reflect the payment of advisory fees and other expenses associated with an investment in the Fund. Fund total return assumes the reinvestment of all dividends and capital gain distributions, if any. At the end of the reporting period, the Fund's portfolio was composed of investment grade municipal bonds issued by state and municipal governments and their agencies, and the Fund's average dollar-weighted portfolio maturity was 17.02 years. BOND FUND ADVANTAGES In view of the recent strength of the stock market, some investors may be wondering whether investing in bond funds still makes sense. At Schwab, we believe the answer is yes -- for several reasons. If you need a regular source of income in retirement or as a supplement to your other financial resources, bond funds may be a good investment choice. The federal tax-exempt income paid by municipal bonds can help you reduce your tax bill and keep more of the income you earn from your investment. Moreover, bond funds can be an important component of 6 a well-rounded investment portfolio. Since bonds have generally been less volatile than stocks, investing in a bond fund may help increase the overall stability of your portfolio, while also helping to provide regular income. The Schwab Tax-Free Bond Funds offer you important advantages that are more difficult to obtain by investing in bonds on your own, including experienced professional management, monthly income, portfolio diversification, and daily liquidity. Our portfolio management team closely monitors the economy and the financial markets, carefully evaluates a wide range of securities for investment, and adjusts portfolio composition and average maturity as this team strives to achieve optimum performance. At the end of the reporting period, each Fund's portfolio contained a mix of investment grade municipal bonds from a variety of issuers that met our stringent investment guidelines. The average portfolio maturity and credit quality of each Fund is described in the "Portfolio Quality Summary" following the Question and Answer section. In addition, you'll find a complete listing of each Fund's holdings at the end of the period, along with their individual credit ratings, in the "Schedule of Investments" included in this report. LOWER COSTS HELP MAXIMIZE YOUR RETURNS At Schwab, we're committed to keeping the cost of mutual fund investing low. Lower fund expenses generally translate into higher returns to you, since the less you pay in fees and expenses, the greater the portion of a fund's investment returns you can receive. Both Schwab Tax-Free Bond Funds have an operating expense ratio of 0.49%, compared with an industry average of 0.96% for similar national municipal bond funds. 3 Of course, like all SchwabFunds(R), the Funds charge no sales loads or 12b-1 fees, which can also reduce your returns significantly over time. LOOKING FORWARD IN 1996 Whatever direction the bond markets take in the balance of the year, we're confident that the Schwab Tax-Free Bond Funds will strive to offer you a relatively reliable stream of federal tax-exempt income and competitive taxable equivalent yields. Thank you for placing your trust in SchwabFunds. We value your confidence, and we'll continue to do our best to help you achieve your investing goals in the future. CHARLES SCHWAB INVESTMENT MANAGEMENT, INC. 3 Source: Morningstar, Inc. Average operating expense ratio of 524 national municipal bond funds as of 2/29/96. Operating expenses in excess of 0.49% will be waived or reimbursed through at least 12/31/96. Please see Note 4 in Notes to Financial Statements for additional information on expenses. 7 QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM OF CHARLES SCHWAB INVESTMENT MANAGEMENT, INC. Stephen B. Ward: Senior Vice President and Chief Investment Officer Joanne Larkin: Portfolio Manager Q. HOW WOULD YOU DESCRIBE THE ECONOMIC CLIMATE DURING THE SIX-MONTH PERIOD ENDED FEBRUARY 29, 1996? A. The Federal Reserve Board (the "Fed") appears to have been successful in its attempt to engineer a "soft landing" for the economy. The goal of the soft landing strategy was to raise interest rates sufficiently during 1994 and early 1995 to slow the rate of economic growth (thereby reducing the threat of rising inflation) and yet not cause a recession. The growth rate of the real Gross Domestic Product (GDP) slowed to 2.0% 4 during 1995, and the inflation rate, as measured by the Consumer Price Index (CPI), was 2.6%, its fifth consecutive year under 3.0%. In light of relatively low inflation and slow economic growth, the Fed initiated a series of three 0.25% decreases in the federal funds rate target in July and December of 1995, and again in January of 1996. As of February 29, 1996, the federal funds rate was 5.25%. Many observers believe the Fed is moving towards a federal funds rate target equal to approximately 2.5% greater than the rate of inflation. The primary strengths in the current economy are strong exports, increased capital spending, and a low rate of unemployment. The primary weaknesses are a near record level of consumer debt, uncertainty surrounding the ongoing federal budget deadlock, and the threat of lower corporate earnings associated with a slower economic growth rate. Q. HAVE RECENT POLITICAL EVENTS RELATED TO THE FEDERAL BUDGET DEADLOCK IMPACTED SHORT-TERM INTEREST RATES? A. As shown on the chart on the following page, interest rates declined causing bond values to increase throughout most of the reporting period. During most of the period, two-year notes offered yields that were below the federal funds rate. This was an unusual condition which indicated that market participants anticipated lower interest rates in the future. There was a significant reversal in February, and the yield on two-year notes returned to a more usual pattern of having a higher yield than the federal funds rate. As shown on the following chart, the yields on 5-year and 30-year Treasury Bonds also experienced significant increases in February. This reversal, due in part to Fed Chairman Greenspan's Congressional testimony on the stable conditions of the economy, led many market participants to discount the likelihood of near-term federal funds rate reductions. Another factor contributing to February's fall of bond prices and the rise in yields was that large amounts of notes and bonds were sold primarily by investors who are not traditionally associated with the government bond market. 4 All Gross Domestic Product (GDP) statistics used in this report are based on the Commerce Department's new chain-weighted calculation methodology. As a result, these statistics may differ from those in previous SchwabFunds(R) shareholder reports, which used the prior fixed-weighted methodology. During 1996, the Commerce Department will revise all GDP growth rate reporting to a chain-weighted basis. 8 [THE FOLLOWING IS A LINE GRAPH OF 30-YEAR TREASURY BOND YIELD VS. 5-YEAR TREASURY BOND YIELD.] 30-YEAR TREASURY BOND YIELD VS. 5-YEAR TREASURY BOND YIELD
Date 5-Year 30-Year 31-Aug-95 6.066 6.648 1-Sep-95 6.015 6.617 4-Sep-95 6.004 6.611 5-Sep-95 5.967 6.567 6-Sep-95 5.963 6.593 7-Sep-95 6.022 6.599 8-Sep-95 6.025 6.587 11-Sep-95 6.021 6.589 12-Sep-95 5.955 6.502 13-Sep-95 5.988 6.521 14-Sep-95 5.881 6.467 15-Sep-95 5.925 6.48 18-Sep-95 5.968 6.53 19-Sep-95 5.939 6.486 20-Sep-95 5.913 6.47 21-Sep-95 6.016 6.557 22-Sep-95 6.059 6.585 25-Sep-95 6.078 6.58 26-Sep-95 6.111 6.575 27-Sep-95 6.107 6.578 28-Sep-95 6.099 6.587 29-Sep-95 6.015 6.501 2-Oct-95 5.975 6.476 3-Oct-95 5.949 6.456 4-Oct-95 5.902 6.432 5-Oct-95 5.883 6.417 6-Oct-95 5.883 6.42 9-Oct-95 5.882 6.419 10-Oct-95 5.930 6.442 11-Oct-95 5.908 6.434 12-Oct-95 5.864 6.387 13-Oct-95 5.798 6.304 16-Oct-95 5.787 6.304 17-Oct-95 5.775 6.284 18-Oct-95 5.837 6.331 19-Oct-95 5.819 6.306 20-Oct-95 5.895 6.362 23-Oct-95 5.928 6.393 24-Oct-95 5.847 6.326 25-Oct-95 5.818 6.325 26-Oct-95 5.834 6.393 27-Oct-95 5.827 6.356 30-Oct-95 5.812 6.354 31-Oct-95 5.808 6.328 1-Nov-95 5.743 6.297 2-Nov-95 5.659 6.245 3-Nov-95 5.699 6.284 6-Nov-95 5.735 6.294 7-Nov-95 5.764 6.308 8-Nov-95 5.699 6.254 9-Nov-95 5.720 6.284 10-Nov-95 5.764 6.338 13-Nov-95 5.713 6.277 14-Nov-95 5.694 6.286 15-Nov-95 5.731 6.292 16-Nov-95 5.654 6.224 17-Nov-95 5.650 6.232 20-Nov-95 5.665 6.247 21-Nov-95 5.690 6.266 22-Nov-95 5.720 6.282 23-Nov-95 5.712 6.278 24-Nov-95 5.686 6.25 27-Nov-95 5.661 6.233 28-Nov-95 5.660 6.229 29-Nov-95 5.609 6.198 30-Nov-95 5.516 6.131 1-Dec-95 5.495 6.087 4-Dec-95 5.440 6.027 5-Dec-95 5.476 6.051 6-Dec-95 5.498 6.033 7-Dec-95 5.548 6.078 8-Dec-95 5.552 6.054 11-Dec-95 5.530 6.046 12-Dec-95 5.552 6.052 13-Dec-95 5.566 6.082 14-Dec-95 5.566 6.086 15-Dec-95 5.566 6.098 18-Dec-95 5.650 6.201 19-Dec-95 5.533 6.115 20-Dec-95 5.562 6.123 21-Dec-95 5.547 6.088 22-Dec-95 5.500 6.064 25-Dec-95 5.504 6.066 26-Dec-95 5.479 6.04 27-Dec-95 5.453 6.01 28-Dec-95 5.417 5.985 29-Dec-95 5.381 5.949 1-Jan-96 5.374 5.951 2-Jan-96 5.388 5.963 3-Jan-96 5.356 5.958 4-Jan-96 5.410 6.032 5-Jan-96 5.413 6.045 8-Jan-96 5.417 6.044 9-Jan-96 5.460 6.122 10-Jan-96 5.525 6.183 11-Jan-96 5.485 6.15 12-Jan-96 5.430 6.148 15-Jan-96 5.430 6.149 16-Jan-96 5.322 6.057 17-Jan-96 5.293 6.01 18-Jan-96 5.249 5.985 19-Jan-96 5.267 5.974 22-Jan-96 6.360 6.044 23-Jan-96 5.379 6.093 24-Jan-96 5.332 6.036 25-Jan-96 5.409 6.113 26-Jan-96 5.333 6.045 29-Jan-96 5.380 6.096 30-Jan-96 6.297 6.036 31-Jan-96 5.236 6.029 1-Feb-96 5.221 6.017 2-Feb-96 5.261 6.163 5-Feb-96 5.297 6.158 6-Feb-96 5.264 6.13 7-Feb-96 5.271 6.156 8-Feb-96 5.248 6.147 9-Feb-96 5.232 6.098 12-Feb-96 5.159 6.034 13-Feb-96 5.131 6.031 14-Feb-96 5.163 6.089 15-Feb-96 5.239 6.168 16-Feb-96 5.297 6.243 19-Feb-96 5.297 6.24 20-Feb-96 5.523 6.396 21-Feb-96 5.527 6.371 22-Feb-96 5.446 6.343 23-Feb-96 5.509 6.405 26-Feb-96 5.554 6.455 27-Feb-96 5.635 6.476 28-Feb-96 5.676 6.474 29-Feb-96 5.731 6.47
One of the most significant news stories during the reporting period was the uncertainty surrounding the federal budget and debt ceiling negotiations between Congress and the Clinton Administration, and the resulting government shutdowns. While these events have received considerable national attention, the issues relating to the deficit ceiling itself had a relatively minor impact on the financial markets during the reporting period. Short-term interest rates declined throughout most of the reporting period, largely as a result of weaker economic growth, lower inflation, and the market's expectations that a balanced budget agreement may be achieved. Q. HOW HAVE TAX-EXEMPT YIELDS RESPONDED TO THE CHANGES IN TAXABLE YIELDS? A. While the yields on tax-exempt securities have followed the general trend of taxable securities, the distinct sectors of the tax-exempt market have responded differently. As shown on the graph at right, the ratio of 30-year municipal bond yields to 30-year U.S. Treasury Bond yields had declined, returning approximately to its four-year average of 83% on 30-year U.S. Treasury Bond yields. This decline represents relative strength in the long end of the municipal bond market compared to the long end of the U.S. Treasury Bond market, perhaps an indication of 9 [THE FOLLOWING IS A LINE GRAPH OF THE RATIO BETWEEN YIELDS ON 30-YEAR AAA MUNICIPAL BONDS AND 30-YEAR TREASURY BONDS, AND THE RATIO BETWEEN 5-YEAR MUNICIPAL BONDS AND 5-YEAR TREASURY BONDS.] THE RATIO BETWEEN YIELDS ON 30-YEAR AAA MUNICIPAL BONDS AND 30-YEAR TREASURY BONDS, AND THE RATIO BETWEEN 5-YEAR MUNICIPAL BONDS AND 5-YEAR TREASURY BONDS
Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Date 30-year 5-year Date 30-year 5-year Date 30-year 5-year - ------- -------- -------- ------- -------- -------- ------- -------- -------- 1-Sep-95 0.8845 0.7132 7-Nov-95 0.8818 0.7321 15-Jan-96 0.8656 0.7826 4-Sep-95 0.8845 0.7132 8-Nov-95 0.8829 0.737 16-Jan-96 0.8737 0.793 5-Sep-95 0.8851 0.7122 9-Nov-95 0.882 0.7377 17-Jan-96 0.8872 0.7935 6-Sep-95 0.8815 0.7127 10-Nov-95 0.8792 0.7373 18-Jan-96 0.8742 0.7925 7-Sep-95 0.8777 0.7025 13-Nov-95 0.8861 0.7422 19-Jan-96 0.8758 0.7898 8-Sep-95 0.8793 0.7021 14-Nov-95 0.8865 0.7463 22-Jan-96 0.869 0.7813 11-Sep-95 0.8791 0.7026 15-Nov-95 0.8841 0.7398 23-Jan-96 0.8653 0.7808 12-Sep-95 0.8801 0.6986 16-Nov-95 0.8889 0.7446 24-Jan-96 0.8701 0.7802 13-Sep-95 0.8744 0.6914 17-Nov-95 0.8861 0.7433 25-Jan-96 0.8657 0.7765 14-Sep-95 0.8755 0.6971 20-Nov-95 0.8841 0.7414 26-Jan-96 0.8755 0.7875 15-Sep-95 0.8769 0.6954 21-Nov-95 0.8829 0.7398 29-Jan-96 0.8653 0.777 18-Sep-95 0.8747 0.6953 22-Nov-95 0.8807 0.7361 30-Jan-96 0.8651 0.7759 19-Sep-95 0.8792 0.6971 23-Nov-95 0.8812 0.737 31-Jan-96 0.8629 0.7812 20-Sep-95 0.8799 0.7069 24-Nov-95 0.8852 0.7404 1-Feb-96 0.8602 0.7814 21-Sep-95 0.8758 0.7032 27-Nov-95 0.8843 0.7384 2-Feb-96 0.8489 0.7755 22-Sep-95 0.8827 0.7096 28-Nov-95 0.8801 0.742 5-Feb-96 0.8513 0.7703 25-Sep-95 0.8864 0.7108 29-Nov-95 0.8814 0.7488 6-Feb-96 0.8486 0.7674 26-Sep-95 0.887 0.7069 30-Nov-95 0.8828 0.7523 7-Feb-96 0.8418 0.7626 27-Sep-95 0.8958 0.7172 1-Dec-95 0.8859 0.7517 8-Feb-96 0.8397 0.7625 28-Sep-95 0.8885 0.7115 4-Dec-95 0.8848 0.7481 9-Feb-96 0.8465 0.7608 29-Sep-95 0.894 0.7149 5-Dec-95 0.8796 0.7414 12-Feb-96 0.8522 0.7675 2-Oct-95 0.8929 0.7163 6-Dec-95 0.8722 0.7385 13-Feb-96 0.8493 0.764 3-Oct-95 0.8926 0.7177 7-Dec-95 0.8658 0.7317 14-Feb-96 0.8379 0.7554 4-Oct-95 0.8928 0.7235 8-Dec-95 0.8726 0.7349 15-Feb-96 0.8304 0.7445 5-Oct-95 0.8917 0.7224 11-Dec-95 0.8703 0.7378 16-Feb-96 0.8284 0.7439 6-Oct-95 0.8897 0.7208 12-Dec-95 0.8729 0.7421 19-Feb-96 0.8289 0.7439 9-Oct-95 0.8899 0.7208 13-Dec-95 0.8701 0.7456 20-Feb-96 0.8243 0.7314 10-Oct-95 0.8836 0.7116 14-Dec-95 0.8728 0.7492 21-Feb-96 0.8291 0.7309 11-Oct-95 0.8847 0.7143 15-Dec-95 0.8728 0.751 22-Feb-96 0.8312 0.7363 12-Oct-95 0.8897 0.718 18-Dec-95 0.8777 0.7611 23-Feb-96 0.8277 0.7333 13-Oct-95 0.8918 0.7158 19-Dec-95 0.8933 0.7808 26-Feb-96 0.8291 0.7365 16-Oct-95 0.8887 0.7137 20-Dec-95 0.8839 0.7677 27-Feb-96 0.8264 0.7258 17-Oct-95 0.8883 0.7151 21-Dec-95 0.8857 0.7661 28-Feb-96 0.8237 0.717 18-Oct-95 0.8818 0.7075 22-Dec-95 0.8843 0.7672 29-Feb-96 0.8303 0.7137 19-Oct-95 0.8852 0.7132 25-Dec-95 0.884 0.7667 20-Oct-95 0.8838 0.7108 26-Dec-95 0.8845 0.7666 23-0ct-95 0.8826 0.7102 27-Dec-95 0.8823 0.7628 24-Oct-95 0.8872 0.72 28-Dec-95 0.8826 0.7642 25-Oct-95 0.8873 0.7237 29-Dec-95 0.888 0.7693 26-Oct-95 0.8794 0.7233 1-Jan-96 0.8877 0.7707 27-Oct-95 0.8893 0.7328 2-Jan-96 0.8825 0.7648 30-Oct-95 0.8833 0.7312 3-Jan-96 0.8732 0.7674 31-Oct-95 0.8837 0.7283 4-Jan-96 0.864 0.7653 1-Nov-95 0.8833 0.7314 5-Jan-96 0.8722 0.7759 2-Nov-95 0.8875 0.7422 8-Jan-96 0.8723 0.7754 3-Nov-95 0.882 0.737 9-Jan-96 0.8609 0.7674 6-Nov-95 0.8806 0.7323 10-Jan-96 0.8575 0.7656 11-Jan-96 0.8654 0.7748 12-Jan-96 0.8668 0.7826
the market's increasing skepticism that any of the flat tax proposals would actually be adopted. If adopted, such proposals could have a negative impact on municipal bond values. Unlike the long end of the market, the ratio of 5-year municipal bond yields to 5-year U.S. Treasury Bond yields moved within a range near its four-year average of 76%. This ratio of 5-year municipal bond yields to 5-year Treasury Bond yields increased during the first five months of the reporting period to a high of 79%, then dropped to 72% at the close of the period. Unlike the longer end of the municipal bond market, which is more sensitive to the flat tax debate, the fluctuations in the intermediate-term municipal and taxable relative bond yields have been more a function of supply and demand. The numerous flat tax proposals have been the source of a significant degree of uncertainty in the municipal bond market. As referred to above, the market has already been responding to this uncertainty for some time. Although we will continue to monitor the status of these proposals, there is currently no way of predicting when, if, or in what form any flat tax proposal would be enacted. If a proposal were enacted, it is not known what provisions may be employed to ease the burdens on current municipal securities owners. 10 Q. HOW HAS THE ECONOMIC AND INTEREST RATE ENVIRONMENT AFFECTED THE FUNDS' PERFORMANCE DURING THE REPORTING PERIOD? A. Yields on municipal bonds dropped in response to lower market interest rates and for the second consecutive year, new issuance of municipal bonds was very low. As buyers of municipal bonds competed for the available securities, they bid up the bond prices, thereby causing a further reduction in yields on tax-exempt securities. The decrease in municipal yields had a positive impact, resulting in an increase in each Fund's NAV. The Schwab Short/Intermediate Tax-Free Bond Fund's NAV increased from $10.12 at the beginning of the reporting period to $10.17 at the end of the period. The Schwab Long-Term Tax-Free Bond Fund's NAV increased from $10.16 at the beginning of the reporting period to $10.36 at the end of the period. Q. WHAT ACTIONS DID THE INVESTMENT MANAGER TAKE DURING THE REPORTING PERIOD ON BEHALF OF THE FUNDS TO RESPOND TO THE CHANGING INTEREST RATE ENVIRONMENT? A. The average weighted maturity of the Schwab Short/Intermediate Tax-Free Bond Fund's portfolio was extended from 3.41 years at the beginning of the period to 3.89 years on February 29 -- near the longer end of the permissible range. Many market participants felt confident that the short end of the municipal securities market would be immune to the negative effects of a potential flat tax, as any proposal would take several years to implement and the bonds at the shorter end of the maturity spectrum would have matured by that time. As a result, the Fund remained fully invested during most of the period and was able to take advantage of the positive impact of rising bond prices. The Fund's portfolio was composed primarily of municipal bonds with high credit ratings, with 77% of the portfolio rated AAA or AA, and heavily concentrated in issues backed by essential services such as transportation, water and power. As the reporting period progressed and the municipal bond market rallied, the Fund maintained a relatively low cash position. The average weighted maturity of the Schwab Long-Term Tax-Free Bond Fund's portfolio was maintained at approximately 17 years throughout the reporting period -- a strategy designed to minimize the volatility of the longer maturity bonds caused by the uncertainty surrounding the flat tax debate. The Fund's portfolio was also composed primarily of bonds with high credit ratings, with 76% of the portfolio rated AAA or AA, and heavily concentrated in issues backed by essential services such as transportation, water, and power. As the longer end of the maturity spectrum reacted negatively to tax reform proposals, the Fund reduced its position in bonds and overweighted its cash position relative to its normal target. 11 SchwabFunds(R) - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO SUMMARY (Unaudited) - -------------------------------------------------------------------------------- ASSET GROWTH
Total Total Percentage Net Assets Net Assets Growth Over as of 2/29/96 as of 8/31/95 Reporting (000s) (000s) Period - ------------------------------------------------------------- $52,769 $52,504 1% - -------------------------------------------------------------
AVERAGE WEIGHTED MATURITY AT FEBRUARY 29, 1996
Value Maturity Schedule (000s) % of Portfolio % of Portfolio - ------------------------------------------------------------------------------------ (cum.) 1 - 6 Months $ 1,048 2.0% 2.0% 7 - 36 Months 8,350 16.1 18.1 37 - 60 Months 30,864 59.3 77.4 Over 60 Months 11,768 22.6 100.0% ------- ----- $52,030 100.0% ======= =====
Average Weighted Maturity -- 3.89 Years [THE FOLLOWING IS A PIE CHART OF THE PUBLISHED RATINS FOR THE INVESTMENTS IN THE PORTFOLIO.] PORTFOLIO QUALITY SUMMARY (as of February 29, 1996) AAA 50% AA 27% Other 5%* A 18% This summary reflects the published ratings (for the investments in the portfolio) of Standard & Poor's Ratings Group and/or Moody's Investor Service, which are recognized rating services. Categories reflect the higher published ratings for securities rated differently by the two agencies and percentages are dollar-weighted. *Short-term securities 12 SchwabFunds(R) - -------------------------------------------------------------------------------- SCHWAB LONG-TERM TAX-FREE BOND FUND PORTFOLIO SUMMARY (Unaudited) - -------------------------------------------------------------------------------- ASSET GROWTH
Total Total Percentage Net Assets Net Assets Growth Over as of 2/29/96 as of 8/31/95 Reporting (000s) (000s) Period - ------------------------------------------------------------- $44,826 $41,413 8% - -------------------------------------------------------------
AVERAGE WEIGHTED MATURITY AT FEBRUARY 29, 1996
Value Maturity Schedule (000s) % of Portfolio % of Portfolio - ------------------------------------------------------------------------------------ (cum.) 0 - 1 Year $ 6,519 14.5% 14.5% 2 - 20 Years 22,920 51.0 65.5 21 - 30 Years 11,796 26.2 91.7 Over 30 Years 3,743 8.3 100.0% ------- ----- $44,978 100.0% ======= =====
Average Weighted Maturity -- 17.02 Years [THE FOLLOWING IS A PIE CHART OF THE PUBLISHED RATINGS FOR THE INVESTMENTS IN THE PORTFOLIO.] PORTFOLIO QUALITY SUMMARY (as of February 29, 1996) AAA 50% AA 26% A 9% Other 15%* This summary reflects the published ratings (for the investments in the portfolio) of Standard & Poor's Ratings Group and/or Moody's Investor Service, which are recognized rating services. Categories reflect the higher published ratings for securities rated differently by the two agencies and percentages are dollar-weighted. *Short-term securities 13 SchwabFunds(R) 1 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
Par Value ------ ------- VARIABLE RATE OBLIGATIONS--1.9%(a) NEW YORK--1.9% New York City, New York General Obligation Bonds Series 1993B Subseries B-4/ (Union Bank of Switzerland LOC) (VMIG1 A-1+) 3.35%, 03/01/96 $ 300 $ 300 New York City, New York General Obligation Bonds Series 1994B Subseries B-4/ (MBIA Insurance & National Westminster Bank SBPA) (VMIG1 A-1+) 3.35%, 03/01/96 700 700 ------- TOTAL VARIABLE RATE OBLIGATIONS (Cost $1,000) 1,000 ------- MUNICIPAL BONDS--98.0%(b) ALABAMA--2.1% Alabama Special Care Facilities Finance Authority of Birmingham Hospital Revenue Bonds (Daughters of Charity National Health System St. Vincent's Hospital & Providence) Series 1995 (Aa AA) 7.00%, 11/01/01 1,000 1,101 ------- ALASKA--2.3% Anchorage, Alaska Refunding School Bonds Series 1993 A/ (MBIA Insurance) (Aaa AAA) 5.10%, 08/01/99 1,145 1,184 ------- ARIZONA--4.0% Phoenix, Arizona Civic Improvement Corp. Wastewater Systems Lease Revenue Bonds Series 1993 (A1 A) 5.10%, 07/01/99 1,005 1,038 Phoenix, Arizona Senior Lien Street and Highway User Revenue Refunding Bonds Series 1992 (A1 AA) 5.95%, 07/01/00 1,000 1,058 ------- 2,096 ------- CONNECTICUT--4.0% Connecticut State Special Tax Obligation Refunding Bonds (Transportation Infrastructure Purposes) Series 1995C/(FGIC Insurance) (Aaa AAA) 5.50%, 10/01/00 2,000 2,105 ------- ILLINOIS--2.2% Illinois Health Facilities Authority Revenue Bonds (OSF Healthcare System) Series 1993 (A1 A+) 5.13%, 11/15/00 1,145 1,152 ------- INDIANA--1.5% Indiana University Student Fee Revenue Bonds Series J (Aa AA-) 4.00%, 08/01/97 $ 800 $ 801 ------- IOWA--7.3% Black Hawk County, Iowa Hospital Facilities Revenue Bonds (Allen Memorial Hospital) Series 1990/(Escrowed to Maturity with Government Securities & AMBAC Insurance) (Aaa AAA) 7.38%, 02/01/01 2,000 2,308 Le Claire, Iowa Electric Revenue Bonds Series 1986B (- SP-1+) 4.13%, 09/01/96 1,495 1,501 ------- 3,809 ------- KENTUCKY--5.3% Kentucky Housing Corp. Housing Revenue Bonds Series 1993B/(Multiple Credit Enhancements) (Aaa AAA) 4.45%, 07/01/00 1,000 1,000 Kentucky State Property and Buildings Commission Revenue Refunding Bonds (Project 55) (A A+) 4.15%, 09/01/99 1,735 1,731 ------- 2,731 ------- MARYLAND--6.1% Washington, Maryland Suburban Sanitation District (Montgomery & Prince George Counties, Maryland) Sewage Disposal Refunding Bonds (Aa1 AA) 6.00%, 11/01/99 3,000 3,199 ------- MASSACHUSETTS--8.9% Massachusetts Municipal Wholesale Electric Company Power Supply Systems Revenue Bonds Series 1992E/ (AMBAC Insurance) (Aaa AAA) 5.50%, 07/01/00 2,000 2,103 Massachusetts State Health and Educational Facilities Authority Revenue Bonds (Brigham and Womens Hospital) Series E (A1 A+) 4.40%, 07/01/00 1,000 1,000 Massachusetts State Housing Finance Agency Bonds (Housing Project) Series 1993A (A1 A+) 4.60%, 04/01/97 1,500 1,505 ------- 4,608 -------
14 SchwabFunds(R) 2 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
Par Value ------ ------- MINNESOTA--6.7% Minneapolis, Minnesota Community Development Agency Tax Increment Revenue Bonds/ (MBIA Insurance) (Aaa AAA) 7.00%, 09/01/00 $1,000 $1,115 Minnesota State Housing Finance Agency Rental Housing Bonds Series D/ (MBIA Insurance) (Aaa AAA) 4.80%, 08/01/01 2,390 2,393 ------- 3,508 ------- MISSISSIPPI--4.0% Mississippi Hospital Equipment & Facilities Authority Revenue Refunding Bonds (Mississippi Baptist Medical Center) Series 1995/(MBIA Insurance) (Aaa AAA) 5.25%, 05/01/01 2,000 2,068 ------- MISSOURI--1.0% Missouri State Environmental Improvement & Energy Resources Authority Water Pollution Control Revenue Bonds (State Revolving Fund Program) Series 1992A (Aa -) 5.80%, 07/01/99 500 528 ------- NEW YORK--8.0% New York State Dormitory Authority Lease Revenue Refunding Bonds (State University Dormitory Facilities) Series 1995A/(AMBAC Insurance) (Aaa AAA) 5.10%, 07/01/01 4,000 4,170 ------- OHIO--3.9% Ohio State Public Finance Commission (Higher Education Capital Facilities) Revenue Bonds Series IIA/ (MBIA Insurance) (Aaa AAA) 4.38%, 11/01/00 2,000 2,013 ------- SOUTH CAROLINA--6.6% Charleston, South Carolina Public Facilities Corp. Certificates of Participation (Public Improvement Project)/ Series 1993 (AMBAC Insurance) (Aaa AAA) 4.30%, 09/01/00 1,085 1,074 Greenville Hospital System, Board of Trustees South Carolina Hospital Facilities Revenue Refunding Bonds Series 1993C (- AA-) 5.00%, 05/01/00 1,090 1,100 Par Value ------ ------- South Carolina State Public Service Authority (Santee Cooper) Power/Electric Revenue Refunding and Improvement Bonds Series 1991A (A1 A+) 5.60%, 07/01/00 $1,200 $ 1,254 ------- 3,428 ------- TENNESSEE--5.4% Knox County, Tennessee Health & Education (Fort Sanders Alliance) Series 1990C (Pre-Refunded)/ (MBIA Insurance) (Aaa AAA) 7.00%, 01/01/00 2,500 2,788 ------- TEXAS--10.0% Houston, Texas Public Improvement Refunding Bonds Series 1995A (Aa AA-) 5.20%, 03/01/00 1,000 1,036 5.30%, 03/01/01 1,000 1,036 Houston, Texas Water Conveyance System Contract Certificates of Participation Series 1993E/ (AMBAC Insurance) (Aaa AAA) 5.50%, 12/15/97 1,000 1,031 Tarrant County, Texas Water Control Improvement District No. 1 Water Revenue Refunding Bonds Series 1993 (A1 AA) 5.40%, 03/01/99 2,000 2,078 ------- 5,181 ------- WASHINGTON--6.8% Washington State Certificates of Participation (State Equipment) Series 1993B (A A) 4.13%, 04/01/97 1,500 1,502 Washington State Public Power Supply System Revenue Refunding Bonds (Nuclear Project #2) Series A (Aa AA) 4.63%, 07/01/98 2,000 2,010 ------- 3,512 ------- WISCONSIN--1.9% Wisconsin State Health & Educational Facilities Authority Revenue Bonds (Aurora Medical Group Project) Series 1996/(FSA Insurance) (Aaa AAA) 4.90%, 11/15/02 1,000 1,000 ------- TOTAL MUNICIPAL BONDS (Cost $50,264) 50,982 ------- Shares ------ SHORT-TERM INVESTMENT--0.1%(c) Provident Institutional Funds - MuniFund 2.79%, 03/07/96 48 48 ------- TOTAL SHORT-TERM INVESTMENT (Cost $48) 48 ------- TOTAL INVESTMENTS--100.0% (Cost $51,312) $52,030 =========
See accompanying Notes to Schedules of Investments. 15 SchwabFunds(R) 3 - -------------------------------------------------------------------------------- SCHWAB LONG-TERM TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
Par Value ------ ------- VARIABLE RATE OBLIGATIONS--14.5%(a) CALIFORNIA--8.7% California Pollution Control Financing Authority Pollution Control Refunding Revenue Bonds (Southern California Edison) Series 1986A (VMIG1 A-1+) 3.50%, 03/01/96 $ 900 $ 900 Irvine Ranch, California Water District Consolidated General Obligation Revenue Bonds (Improvement District Numbers 140, 240, 105, 250) Series 1993/(Bank of America LOC) (VMIG1 A-1+) 3.55%, 03/01/96 1,700 1,700 Irvine Ranch, California Water District Consolidated Revenue Refunding Bonds Series 1985B/(Sumitomo Bank LOC) (- A-1) 3.75%, 03/01/96 1,200 1,200 Irvine Ranch, California Water District Sewer Bonds (Improvement District No. 282) Series 1988A/(Sumitomo Bank LOC) (- A-1) 3.75%, 03/01/96 100 100 ------- 3,900 ------- NEW YORK--3.4% New York City, New York General Obligation Bonds Series 1993A Subseries A-5/ (Kredietbank, N.V. LOC) (VMIG1 A-1+) 3.35%, 03/01/96 100 100 New York City, New York General Obligation Bonds Series 1994 Subseries B-4/ (Union Bank of Switzerland LOC) (VMIG1 A-1+) 3.35%, 03/01/96 905 905 New York City, New York General Obligation Bonds Series 1994 Subseries B-2/ (Dai-Ichi Kangyo Bank LOC) (VMIG1 A-1) 3.40%, 03/01/96 200 200 New York City, New York Municipal Water Finance Authority Water & Sewer System Revenue Bonds Series 1994G/(FGIC SPA & FGIC Insurance) (VMIG1 A-1+) 3.35%, 03/01/96 300 300 ------- 1,505 ------- Par Value ------ ------- WYOMING--2.4% Lincoln County, Wyoming Pollution Control Revenue Bonds (Exxon Project) Series 1984A (P-1 A-1+) 3.35%, 03/01/96 $ 800 $ 800 Platte County, Wyoming Pollution Control Revenue Refunding Bonds (Tri-State Generation and Transmission Project) Series 1984A/ (Societe Generale LOC) (P-1 -) 3.45%, 03/01/96 300 300 ------- 1,100 ------- TOTAL VARIABLE RATE OBLIGATIONS (Cost $6,505) 6,505 ------- MUNICIPAL BONDS--85.5%(b) ALASKA--14.1% Alaska Revenue Bonds/ (MBIA Insurance) (Aaa AAA) 5.88%, 12/01/24 2,000 1,985 Kodiak Island Borough, Alaska General Obligation Bonds Series 1994A/(AMBAC Insurance) (Aaa AAA) 5.40%, 02/15/10 2,500 2,475 Valdez, Alaska Marine Terminal Revenue Refunding Bonds (BP Pipeline Project) Series 1993B (Aa3 AA-) 5.50%, 10/01/28 2,000 1,870 ------- 6,330 ------- ARIZONA--5.0% Maricopa County, Arizona Alhambra Elementary School District 68 Series 1994A/ (AMBAC Insurance) (Aaa AAA) 6.80%, 07/01/12 2,000 2,253 ------- CALIFORNIA--6.2% San Francisco, California Downtown Parking Corp. Parking Revenue Bonds Series 1993 (A -) 6.65%, 04/01/18 500 522 Santa Clara County, California Financing Authority Lease Revenue Bonds (VMC Facility Replacement Project) Series 1994A/ (AMBAC Insurance) (Aaa AAA) 7.75%, 11/15/10 1,000 1,260
16 SchwabFunds(R) 4 - -------------------------------------------------------------------------------- SCHWAB LONG-TERM TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS (in thousands) February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
Par Value ------ ------- University of California Regents Refunding Certificates of Participation (UCLA Central Chiller Cogeneration Facility) (Aa -) 5.30%, 11/01/08 $1,000 $1,010 ------- 2,792 ------- CONNECTICUT--1.3% Connecticut State Housing Finance Authority Bonds (Housing Mortgage Finance Program) Series 1990B Subseries B1 (Aa AA) 7.55%, 11/15/08 570 584 ------- ILLINOIS--3.8% Illinois State Special State Obligation Bonds (Civic Center)/ (AMBAC Insurance) (Aaa AAA) 6.25%, 12/15/20 500 544 Illinois State Toll Highway Authority Priority Revenue Bonds Series 1992A (A1 A+) 6.38%, 01/01/15 1,100 1,170 ------- 1,714 ------- IOWA--5.4% Ames, Iowa Hospital Revenue Bonds (Mary Greeley Medical Center Project) Series 1993/ (AMBAC Insurance) (Aaa AAA) 5.70%, 08/15/12 500 510 Cedar Rapids, Iowa Hospital Revenue Bonds (St. Luke's Methodist Project) Series 1993/ (FGIC Insurance) (Aaa AAA) 6.13%, 08/15/13 600 617 Woodbury County, Iowa Health Systems Revenue Refunding Bonds (St. Luke's Obligated Group) Series 1995A/(MBIA Insurance) (Aaa AAA) 5.50%, 09/01/16 1,350 1,320 ------- 2,447 ------- MASSACHUSETTS--5.0% Massachusetts Bay Transportation Authority Bonds (General Transportation System) Series 1995A (A1 A+) 5.75%, 03/01/18 1,400 1,402 Massachusetts State Housing Finance Agency Multi Family Residential Housing Revenue Bonds Series 1989A (A A+) 7.80%, 08/01/22 800 833 ------- 2,235 ------- Par Value ------ ------- MICHIGAN--4.2% Michigan State Hospital Financing Authority Hospital Revenue Bonds (St. John's Hospital and Medical Center)/ (AMBAC Insurance) (Aaa AAA) 5.25%, 05/15/26 $2,000 $ 1,873 ------- MISSISSIPPI--5.0% Mississippi Hospital Equipment & Facilities Authority Revenue Refunding Bonds (Mississippi Baptist Medical Center) Series 1995/ (MBIA Insurance) (Aaa AAA) 6.00%, 05/01/13 2,150 2,233 ------- MISSOURI--2.2% Kansas City, Missouri School District Building Revenue Bonds (Capital Improvement Project) Series 1993/(FGIC Insurance) (Aaa AAA) 5.15%, 02/01/08 1,000 1,009 ------- NEW HAMPSHIRE--1.7% New Hampshire Higher Educational & Health Facilities Authority Hospital Revenue Bonds (Mary Hitchcock Memorial Hospital) Series 1993/ (FGIC Insurance) (Aaa AAA) 5.25%, 08/15/08 750 754 ------- NEW MEXICO--1.1% Santa Fe, New Mexico Utility Revenue Bonds Series 1995A/ (AMBAC Insurance) (Aaa AAA) 5.25%, 06/01/17 500 483 ------- PENNSYLVANIA--5.0% Philadelphia, Pennsylvania Hospitals and Higher Education Facilities Authority Revenue Refunding Bonds (Children's Hospital Project) Series 1993A (Aa AA) 5.25%, 02/15/08 1,000 984 Pittsburgh, Pennsylvania Water & Sewer Authority Revenue Bonds Series B/ (FSA Insurance) (Aaa AAA) 5.75%, 09/01/25 1,250 1,250 ------- 2,234 -------
17 SchwabFunds(R) 5 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Par Value ------ ------- RHODE ISLAND--2.3% Rhode Island Housing and Mortgage Finance Corp. Homeownership Opportunity Bonds Series 10A (Aa AA+) 6.50%, 10/01/22 $1,000 $1,033 ------- SOUTH CAROLINA--3.4% Piedmont Municipal Power Agency, South Carolina Electric Revenue Refunding Bonds Series 1992/ (MBIA Insurance) (Aaa AAA) 6.20%, 01/01/08 1,400 1,549 ------- TEXAS--10.4% Copperas Cove, Texas Health Facilities Development Corp. Hospital Revenue Bonds (Adventist Health Systems/Sunbelt Obligated Group) Series 1995/ (MBIA Insurance) (Aaa AAA) 5.88%, 11/15/25 1,500 1,515 San Antonio, Texas Electric & Gas Systems Revenue Refunding Bonds Series 1992 (Aa1 AA) 5.75%, 02/01/11 1,000 1,021 Texas State Public Finance Authority General Obligation Bonds Series 1994B (Aa AA) 5.75%, 10/01/14 1,025 1,052 University of Texas Board of Regents Revenue Refunding Bonds Series 1991B (Aa1 AA+) 6.75%, 08/15/13 1,000 1,096 ------- 4,684 ------- Par Value ------ ------- UTAH--2.0% Intermountain Power Agency, Utah Power Supply Revenue Refunding Bonds Series 1996D (AA AA-) 5.00%, 07/01/21 $1,000 $ 909 ------- VIRGINIA--2.2% Capitol Region, Virginia Airport Commission Airport Revenue Bonds (Richmond International Airport Projects) Series 1995A/ (AMBAC Insurance) (Aaa AA) 5.63%, 07/01/15 1,000 1,006 ------- WASHINGTON--5.2% Seattle, Washington Municipal Light and Power Revenue Refunding Bonds Series 1993 (Aa AA) 5.40%, 05/01/08 2,300 2,337 ------- TOTAL MUNICIPAL BONDS (Cost $37,144) 38,459 ------- Shares ------ SHORT-TERM INVESTMENT--0.0%(c) Provident Institutional Funds - MuniFund 2.79%, 03/07/96 14 14 ------- TOTAL SHORT-TERM INVESTMENT (Cost $14) 14 ------- TOTAL INVESTMENTS--100.0% (Cost $43,663) $44,978 =========
See accompanying Notes to Schedules of Investments. 18 SchwabFunds(R) 6 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB LONG-TERM TAX-FREE BOND FUND SCHEDULES OF INVESTMENTS (in thousands) February 29, 1996 (Unaudited) - -------------------------------------------------------------------------------- NOTES TO SCHEDULES OF INVESTMENTS Parenthetical disclosures which follow each security represent independent bond ratings, where available, as provided by Moody's Investor Services, Inc. and Standard & Poor's Corp. which were in effect at February 29, 1996. (a) Variable rate securities. Interest rates vary periodically based on current market rates. Rates shown are the effective rates on February 29, 1996. Dates shown represent the latter of the demand date or next interest rate change date, which is considered the maturity date for financial reporting purposes. For variable rate securities without demand features and which mature in less than one year the next interest reset date is shown. (b) Interest rates represent coupon rate of security. (c) Interest rates represent the yield on February 29, 1996. Abbreviations AMBAC AMBAC Indemnity Corporation Financial Guaranty Insurance Company FGIC FSA Financial Security Assurance Inc. LOC Letter of Credit Municipal Bond Investors Assurance Corporation MBIA Standby Purchase Agreement SBPA SPA Securities Purchase Agreement Variable Moody's Investment Guide VMIG
See accompanying Notes to Financial Statements. 19 SchwabFunds(R) 7 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB LONG-TERM TAX-FREE BOND FUND STATEMENTS OF ASSETS AND LIABILITIES (in thousands) February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
Schwab Schwab Short/Intermediate Long-Term Tax-Free Tax-Free Bond Fund Bond Fund ------------------ ---------- ASSETS Investments, at value (Cost: $51,312 and $43,663, respectively) $ 52,030 $ 44,978 Interest receivable 689 585 Receivable for fund shares sold 59 192 Deferred organization costs 38 25 Prepaid expenses 17 8 ------- ------- Total assets 52,833 45,788 ------- ------- LIABILITIES Payable for: Dividends 18 18 Investments purchased -- 913 Fund shares redeemed 3 6 Investment advisory and administration fee 5 3 Deferred organization costs -- 4 Other 38 18 ------- ------- Total liabilities 64 962 ------- ------- Net assets applicable to outstanding shares $ 52,769 $ 44,826 ======= ======= NET ASSETS CONSIST OF: Capital paid in $ 52,677 $ 43,871 Accumulated overdistributed net investment income (11) (8) Accumulated net realized loss on investments sold (615) (352) Net unrealized gain on investments 718 1,315 ------- ------- $ 52,769 $ 44,826 ======= ======= PRICING OF SHARES Outstanding shares, $0.00001 par value (unlimited shares authorized) 5,191 4,325 Net asset value, offering and redemption price per share $10.17 $10.36
See accompanying Notes to Financial Statements. 20 SchwabFunds(R) 8 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB LONG-TERM TAX-FREE BOND FUND STATEMENTS OF OPERATIONS (in thousands) For the six months ended February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
Schwab Schwab Short/Intermediate Long-Term Tax-Free Tax-Free Bond Fund Bond Fund ------------------ ---------- Interest income $ 1,183 $ 1,164 -------- -------- Expenses: Investment advisory and administration fee 107 87 Transfer agency and shareholder service fees 65 53 Custodian fees 19 15 Registration fees 8 4 Professional fees 6 6 Shareholder reports 9 7 Trustees' fees 2 1 Amortization of deferred organization costs 7 8 Insurance and other expenses 6 6 -------- -------- 229 187 Less expenses reduced (101) (83) -------- -------- Total expenses incurred by Fund 128 104 -------- -------- Net investment income 1,055 1,060 -------- -------- Net realized gain (loss) on investments: Proceeds from sales of investments 39,911 30,031 Cost of investments sold (39,839) (29,570) -------- -------- Net realized gain on investments sold 72 461 -------- -------- Change in net unrealized gain (loss) on investments: Beginning of period 531 929 End of period 718 1,315 -------- -------- Increase in net unrealized gain on investments 187 386 -------- -------- Net gain on investments 259 847 -------- -------- Increase in net assets resulting from operations $ 1,314 $ 1,907 ======== ========
See accompanying Notes to Financial Statements. 21 SchwabFunds(R) 9 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB LONG-TERM TAX-FREE BOND FUND STATEMENTS OF CHANGES IN NET ASSETS (in thousands) - --------------------------------------------------------------------------------
Schwab Schwab Short/Intermediate Long-Term Tax-Free Bond Fund Tax-Free Bond Fund ------------------------- ------------------------- \--------------------- For the ----------------------\ six months six months ended year ended February 29, ended February 29, year ended 1996 August 31, 1996 August 31, (Unaudited) 1995 (Unaudited) 1995 ------------ ---------- ------------ ---------- Operations: Net investment income $ 1,055 $ 2,261 $ 1,060 $ 2,238 Net realized gain (loss) on investments sold 72 (448) 461 (806) Increase in net unrealized gain on investments 187 1,372 386 1,600 ------- -------- ------- -------- Increase in net assets resulting from operations 1,314 3,185 1,907 3,032 ------- -------- ------- -------- Dividends to shareholders from net investment income (1,079) (2,255) (1,083) (2,232) ------- -------- ------- -------- Capital share transactions: Proceeds from shares sold 7,750 17,344 10,132 21,437 Net asset value of shares issued in reinvestment of dividends 868 1,746 790 1,626 Less payments for shares redeemed (8,588) (31,405) (8,333) (26,425) ------- -------- ------- -------- Increase (decrease) in net assets from capital share transactions 30 (12,315) 2,589 (3,362) ------- -------- ------- -------- Total increase (decrease) in net assets 265 (11,385) 3,413 (2,562) Net assets: Beginning of period 52,504 63,889 41,413 43,975 ------- -------- ------- -------- End of period (including undistributed (overdistributed) net investment income of ($11), $13, ($8) and $15, respectively) $ 52,769 $ 52,504 $ 44,826 $ 41,413 ======= ======== ======= ======== Number of Fund shares: Sold 762 1,754 977 2,196 Reinvested 85 176 76 166 Redeemed (844) (3,185) (804) (2,707) ------- -------- ------- -------- Net increase (decrease) in shares outstanding 3 (1,255) 249 (345) Shares outstanding: Beginning of period 5,188 6,443 4,076 4,421 ------- -------- ------- -------- End of period 5,191 5,188 4,325 4,076 ======= ======== ======= ========
See accompanying Notes to Financial Statements. 22 SchwabFunds(R) 10 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB LONG-TERM TAX-FREE BOND FUND NOTES TO FINANCIAL STATEMENTS For the six months ended February 29, 1996 (Unaudited) - -------------------------------------------------------------------------------- 1. DESCRIPTION OF THE FUNDS The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund (the "Funds") are series of Schwab Investments (the "Trust"), a no-load, open-end management investment company organized as a Massachusetts business trust on October 26, 1990 and registered under the Investment Company Act of 1940, as amended. In addition to the two funds described above, the Trust also offers -- the Schwab 1000 Fund(R), Schwab Short/Intermediate Government Bond Fund, Schwab Long-Term Government Bond Fund, Schwab California Short/Intermediate Tax-Free Bond Fund and Schwab California Long-Term Tax-Free Bond Fund. The assets of each series are segregated and accounted for separately. The investment objective of the Funds is to seek to provide a high level of current income that is exempt from federal income tax, consistent with preservation of capital. The Funds, which are not "diversified" within the meaning of the Investment Company Act of 1940, as amended, each invest primarily in debt obligations issued by or on behalf of states, territories and possessions of the United States Government, its agencies or instrumentalities, the interest of which is not subject to federal income tax. 2. SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Security valuation -- Bonds and notes are generally valued at prices obtained from an independent bond-pricing service. These securities are valued at the mean between the representative quoted bid and asked prices, or if such prices are not available, at prices for securities of comparable maturity, quality and type. Short-term securities within 60 days or less of maturity are stated at amortized cost which approximates market value. Security transactions and interest income -- Security transactions are accounted for on a trade date basis (date the order to buy or sell is executed). Interest income is recorded on the accrual basis and includes amortization of premium on investments. Realized gains and losses from security transactions are determined on an identified cost basis. For callable bonds purchased at a premium, the excess of the purchase price over the call value is amortized against interest income through the call date. If the call provision is not exercised, any remaining premium is amortized through the final maturity date. 23 SchwabFunds(R) 11 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dividends to shareholders -- Each Fund declares a daily dividend, from net investment income for that day, payable monthly. Distributions of net capital gains, if any, are recorded on ex-dividend date, payable annually on a calendar year basis. Deferred organization costs -- Costs incurred in connection with the organization of the Funds and their initial registration with the Securities and Exchange Commission and with various states are amortized on a straight-line basis over a five-year period from each Fund's commencement of operations. Expenses -- Expenses arising in connection with a Fund are charged directly to that Fund. Expenses common to all series of the Trust are allocated to each series in proportion to their relative net assets. Federal income taxes -- It is each Fund's policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all net investment income and realized net capital gains, if any, to shareholders. Therefore, no federal income tax provision is required. Each Fund is considered a separate entity for tax purposes. At February 29, 1996, (for financial reporting and federal income tax purposes), net unrealized gain for the Schwab Short/Intermediate Tax-Free Bond Fund aggregated $718,000, of which $763,000 related to appreciated securities and $45,000 related to depreciated securities, and net unrealized gain for the Schwab Long-Term Tax-Free Bond Fund aggregated $1,315,000, of which $1,397,000 related to appreciated securities and $82,000 related to depreciated securities. 3. TRANSACTIONS WITH AFFILIATES Investment advisory and administration agreement -- The Trust has an investment advisory and administration agreement with Charles Schwab Investment Management, Inc. (the "Investment Manager"). For advisory services and facilities furnished, the Funds each pay an annual fee, payable monthly, of .41% of each Fund's average daily net assets. Under this agreement, the Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund incurred investment advisory and administration fees of $107,000 and $87,000, respectively, for the six months ended February 29, 1996, before the Investment Manager reduced its fee (see Note 4). Transfer agency and shareholder service agreements -- The Trust has transfer agency and shareholder service agreements with Charles Schwab & Co., Inc. ("Schwab"). For services provided under these agreements, Schwab receives an annual fee, payable monthly, of .05% of each Fund's average daily net assets for transfer agency services and .20% of such assets for shareholder services. For the six months ended February 29, 1996, the Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund incurred transfer agency and shareholder service fees of $65,000 and $53,000, respectively, before Schwab reduced its fees (see Note 4). 24 SchwabFunds(R) 12 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB LONG-TERM TAX-FREE BOND FUND NOTES TO FINANCIAL STATEMENTS For the six months ended February 29, 1996 (Unaudited) - -------------------------------------------------------------------------------- Officers and trustees -- Certain officers and trustees of the Trust are also officers and/or directors of the Investment Manager and/or Schwab. During the six months ended February 29, 1996, the Trust made no direct payments to its officers or trustees who are "interested persons" within the meaning of the Investment Company Act of 1940, as amended. The Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund incurred fees aggregating $3,000 related to the Trust's unaffiliated trustees. 4. EXPENSES REDUCED BY THE INVESTMENT MANAGER AND SCHWAB The Investment Manager and Schwab reduced a portion of their fees in order to limit the ratio of operating expenses to average net assets for each Fund. During the six months ended February 29, 1996, the total of such fees reduced by the Investment Manager were $35,000 and $30,000 for the Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund, respectively, and the total of such fees reduced by Schwab were $66,000 and $53,000 for the Schwab Short/Intermediate Tax-Free Bond Fund and Schwab Long-Term Tax-Free Bond Fund, respectively. 5. INVESTMENT TRANSACTIONS Purchases, sales and maturities of investment securities, other than short-term obligations, during the six months ended February 29, 1996, were as follows (in thousands):
Schwab Schwab Short/Intermediate Long-Term Tax-Free Bond Fund Tax-Free Bond Fund ------------------ ------------------ Purchases $ 15,518 $ 10,676 Proceeds of sales and maturities $ 12,574 $ 10,822
25 SchwabFunds(R) 13 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6. FINANCIAL HIGHLIGHTS Per share income and capital changes for a share outstanding throughout the period:
Schwab Short/Intermediate Tax-Free Bond Fund ----------------------------------------------- Six months ended February 29, Year ended Period ended 1996 August 31, August 31, (Unaudited) 1995 1994 1993(1) ------------ ------- ------- ------------ Net asset value at beginning of period $ 10.12 $ 9.92 $ 10.15 $ 10.00 Income from investment operations - ---------------------------------- Net investment income .20 .40 .37 .13 Net realized and unrealized gain (loss) on investments .06 .20 (.23) .15 ------- ------- ------- ------- Total from investment operations .26 .60 .14 .28 Less distributions - ----------------- Dividends from net investment income (.21) (.40) (.37) (.13) Distributions from realized gain on investments -- -- -- -- ------- ------- ------- ------- Total distributions (.21) (.40) (.37) (.13) ------- ------- ------- ------- Net asset value at end of period $ 10.17 $ 10.12 $ 9.92 $ 10.15 ======= ======= ======= ======= Total return (%) 2.57 6.23 1.42 2.83 - ---------------- Ratios/Supplemental data - ------------------------- Net assets, end of period (000s) $ 52,769 $52,504 $63,889 $ 54,450 Ratio of expenses to average net assets (%) .49* .49 .48 .45* Ratio of net investment income to average net assets (%) 4.03* 4.06 3.71 3.63* Portfolio turnover rate (%) 23 35 19 11
The Investment Manager and Schwab have reduced a portion of their fees and absorbed certain expenses in order to limit each Fund's ratio of operating expenses to average net assets. Had these fees and expenses not been reduced and absorbed, the ratio of expenses to average net assets for the Schwab Short/Intermediate Tax-Free Bond Fund for the periods ended February 29, 1996, August 31, 1995, 1994 and 1993 would have been .87%*, .89%, .91% and 1.26%*, respectively, and the ratio of net investment income to average net assets would have been 3.65%*, 3.66%, 3.28% and 2.82%*, respectively. (1) For the period April 21, 1993 (commencement of operations) to August 31, 1993. * Annualized 26 SchwabFunds(R) 14 - -------------------------------------------------------------------------------- SCHWAB SHORT/INTERMEDIATE TAX-FREE BOND FUND & SCHWAB LONG-TERM TAX-FREE BOND FUND NOTES TO FINANCIAL STATEMENTS For the six months ended February 29, 1996 (Unaudited) - --------------------------------------------------------------------------------
Schwab Long-Term Tax-Free Bond Fund -------------------------------------------------------- Six months Eight ended months Period February 29, Year ended ended ended 1996 August 31, August 31, December 31, (Unaudited) 1995 1994 1993 1992(1) ------------ ------- ------- ---------- ------------ Net asset value at beginning of period $ 10.16 $ 9.95 $ 10.59 $ 9.92 $ 10.00 Income from investment - ---------------------- operations ----------- Net investment income .27 .53 .52 .36 .17 Net realized and unrealized gain (loss) on investments .19 .21 (.56) .67 (.08) ------- ------- ------- ------- ------- Total from investment operations .46 .74 (.04) 1.03 .09 Less distributions - ---------------- Dividends from net investment income (.26) (.53) (.52) (.36) (.17) Distributions from realized gain on investments -- -- (.08) -- -- ------- ------- ------- ------- ------- Total distributions (.26) (.53) (.60) (.36) (.17) ------- ------- ------- ------- ------- Net asset value at end of period $ 10.36 $ 10.16 $ 9.95 $ 10.59 $ 9.92 ======= ======= ======= ======= ======= Total return (%) 4.59 7.76 (.42) 10.56 .92 - --------------- Ratios/Supplemental data - ------------------------ Net assets, end of period (000s) $ 44,826 $41,413 $43,975 $ 50,413 $ 28,034 Ratio of expenses to average net assets (%) .49* .54 .51 .45* .45* Ratio of net investment income to average net assets (%) 5.00* 5.40 5.05 5.30* 5.61* Portfolio turnover rate (%) 28 70 62 91 54
The Investment Manager and Schwab have reduced a portion of their fees and absorbed certain expenses in order to limit each Fund's ratio of operating expenses to average net assets. Had these fees and expenses not been reduced and absorbed, the ratio of expenses to average net assets for the Schwab Long-Term Tax-Free Bond Fund for the periods ended February 29, 1996, August 31, 1995, 1994, 1993 and December 31, 1992 would have been .89%*, .93%, .99%, 1.18%* and 1.53%*, respectively, and the ratio of net investment income to average net assets would have been 4.60%*, 5.01%, 4.57%, 4.57%* and 4.53%*, respectively. (1) For the period September 11, 1992 (commencement of operations) to December 31, 1992. * Annualized 27 SCHWABFUNDS FAMILY(R) The SchwabFunds Family includes a variety of funds to help meet your investment needs. You can diversify your portfolio with one investment in any of the three Asset Director(R) Funds, or choose several different equity markets with our three equity index funds. You can also select from different maturities with our bond fund choices, and take advantage of an array of money market funds. SCHWAB ASSET DIRECTOR FUNDS - - HIGH GROWTH FUND seeks to provide high capital growth with less volatility than an all-stock portfolio. This Fund has the largest stock component and offers the highest risk and return potential. - - BALANCED GROWTH FUND seeks to provide maximum total return, including capital growth and income. This Fund invests in a more balanced mix of stocks and bonds and offers moderate risk and return potential. - - CONSERVATIVE GROWTH FUND seeks to provide income with growth potential. This Fund has the smallest stock component, which is designed to help offset inflation, and generally keeps the majority of its assets invested in bonds. It offers the lowest risk and return potential. SCHWAB INDEX FUNDS - - SCHWAB 1000 FUND(R) is designed to match the total return of the Schwab 1000 Index(R), composed of the largest 1,000 publicly traded U.S. companies -- the stocks of which represent about 85% of the total market capitalization of the U.S. stock market. 1 - - SCHWAB SMALL-CAP INDEX FUND(R) is designed to track the total return of the Schwab Small-Cap Index(TM), which tracks the performance of small-capitalization companies. The Schwab Small-Cap Index is composed of the second 1,000 largest publicly traded companies in the U.S. 1 - - SCHWAB INTERNATIONAL INDEX FUND(TM) is designed to track the total return of the Schwab International Index(R), composed of 350 of the largest companies, based on market capitalization, in foreign countries with developed securities markets. 2 SCHWAB BOND FUNDS - - SCHWAB GOVERNMENT BOND FUNDS include two Funds designed to offer high current yields with the credit safety of U.S. government securities. The income level you are seeking and your tolerance for fluctuation in share price should determine your selection of either our Short/Intermediate Fund or our Long-Term Fund. 3 - - SCHWAB TAX-FREE BOND FUNDS help investors take advantage of one of the last remaining tax breaks: tax-free municipal bonds. We offer a national Short/Intermediate Fund and a Long-Term Fund, both of which pay monthly income free from federal personal income tax. 4, 5 - - SCHWAB CALIFORNIA TAX-FREE BOND Funds give California taxpayers two different opportunities to earn double tax-free income -- free from both federal and California state personal income taxes. 5 SCHWAB MONEY MARKET FUNDS Schwab offers an array of money funds that seek high current income with safety and liquidity. Choose from taxable or tax-exempt alternatives. Many can be linked to your Schwab account to "sweep" cash balances automatically when you're between investments. Or, for your larger cash reserves, choose one of our Value Advantage Investments(TM). 6 We will be happy to provide you with a free prospectus and brochure on any of the SchwabFunds(R). Each prospectus provides more complete information, including charges and expenses. Please read it carefully before investing. 1-800-2 NO-LOAD (1-800-266-5623) 1. The Schwab 1000 Index and the Schwab Small-Cap Index consist of publicly traded companies ranked by market capitalization. These indices do not include privately held companies, investment companies and companies incorporated outside of the United States. 2. The Schwab International Index is composed of publicly traded companies ranked by market capitalization in countries with developed securities markets. Currently invested in 15 countries, the Index does not include privately held companies, investment companies or companies from the United States. 3. Investors in the Schwab Government Bond Funds may experience a decline in share price due to prepayment of obligations held by the Funds. 4. Income may be subject to state and local taxes. 5. Income may be subject to the Alternative Minimum Tax (AMT). Capital appreciation from discounted bonds may be subject to state and federal income tax. 6. Investments in money market funds are neither insured nor guaranteed by the U.S. government, and there is no assurance that the Funds will be able to maintain a stable share price of $1. 28 -------------- BULK RATE U.S. POSTAGE PAID CHARLES SCHWAB -------------- [SCHWABFUNDS FAMILY(R) LOGO] 101 Montgomery Street San Francisco, California 94104 INVESTMENT ADVISER Charles Schwab Investment Management, Inc. 101 Montgomery Street, San Francisco, CA 94104 DISTRIBUTOR Charles Schwab & Co., Inc. 101 Montgomery Street, San Francisco, CA 94104 This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. TF4032R (4/96) CRS 10407 Printed on recycled paper. -----END PRIVACY-ENHANCED MESSAGE-----