0000950149-01-501584.txt : 20011101
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ACCESSION NUMBER: 0000950149-01-501584
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CONFORMED PERIOD OF REPORT: 20010831
FILED AS OF DATE: 20011030
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COMPANY CONFORMED NAME: SCHWAB INVESTMENTS
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1
f75831n-30d.txt
SCHWAB INVESTMENTS ANNUAL REPORT DATED 8/31/01
SCHWAB
BOND INDEX FUNDS
August 31, 2001
Annual Report enclosed
SCHWAB SHORT-TERM BOND MARKET
INDEX FUND
SCHWAB TOTAL BOND MARKET INDEX FUND
[CHARLES SCHWAB LOGO]
IMPORTANT NOTICE REGARDING
DIVIDEND DISTRIBUTION
The dividend payment cycle for Schwab Bond Funds will be moved to the last
business day of every month from the current cycle of paying on the 25th of each
month. Please note that November 2001 will be the last month that dividends will
be paid on the 25th day of the month.
Please contact 800.435.4000 if you have any questions.
SCHWAB
BOND INDEX FUNDS
August 31, 2001
Annual Report
SCHWAB SHORT-TERM BOND MARKET
INDEX FUND
SCHWAB TOTAL BOND MARKET INDEX FUND
[PHOTO OF BUSINESS MEETING]
[CHARLES SCHWAB LOGO]
[PHOTO OF CHARLES SCHWAB]
Dear Shareholder,
The tragic terrorist attacks of September 11, 2001 will weigh on our minds for
years to come. Amid the nation's uncertainties, a few things remain clear. We
must continue to reach out and help the distressed, offer support, and take
steps to rebuild and create the best possible future for generations to come.
It's also clear that America remains strong, as do its institutions. While the
nation's financial system has been deeply impacted, the system's foundation is
strong.
The message for investors remains consistent: the basic rules of investing still
apply. Just as in the past, a long-term strategy and a diversified portfolio are
still the most important factors in achieving your financial future.
By investing in SchwabFunds(R), you have already taken an important step in
building a portfolio that can help you achieve your financial goals. Thank you
for the trust you've placed in SchwabFunds.
Sincerely,
/s/ Charles Schwab
------------------
Charles Schwab
SCHWAB
BOND INDEX FUNDS
ANNUAL REPORT
September 1, 2000 - August 31, 2001
1 Market Overview
5 Schwab Short-Term Bond Market Index Fund
Sharp declines in short-term interest rates and strong demand for bonds
characterized the reporting period.
16 Schwab Total Bond Market Index Fund
Bonds outperformed most other investments during the reporting period.
28 Financial Notes
--------------------------------------------------------------------------
33 HOW TO READ THIS REPORT
An illustrated guide to the financials, along with a glossary.
MARKET OVERVIEW
DECADE OF ECONOMIC GROWTH GIVES WAY TO FEAR OF RECESSION.
After ten years of growth, the U.S. economy cooled dramatically, and is now
struggling to avoid slipping into a recession. During the second quarter of
2001, the nation's Gross Domestic Product (GDP) grew at its slowest pace since
1993 (see chart, page 2). After hitting record highs earlier in 2000, equity
markets slid sharply, and continued to fall throughout the report period.
[PHOTO OF WELDER AT WORK]
In response, the Federal Reserve Bank (the Fed) lowered interest rates
aggressively, making eight cuts in the first nine months of 2001 for a total
reduction of 3.50%, including the September 2001 rate cut after the report
period. Because the main effects of a rate cut typically aren't felt until six
to nine months later, it was still unclear, as of the end of the report period,
what effects the rate cuts would have on economic growth. Many parts of the
economy, especially technology and manufacturing, were hit hard and remain weak.
But consumer spending and the housing market remained relatively strong. By late
August 2001, some indicators suggest that the economy's decline has slowed
significantly. However, a great deal of additional uncertainty now exists due to
the recent terrorist attacks. It will be some time before we are able to assess
the long-term economic effects of the attacks.
ASSET CLASS PERFORMANCE COMPARISON % returns during the report period
This graph compares the performance of various asset classes during the report
period.
[LINE GRAPH]
Lehman Aggregate MSCI EAFE Russell 2000 S&P 500 3 Month
Bond Index Index Small-Cap Index Index T-Bill
8/31/00 0 0 0 0 0
0.24 2.25 0.77 0.2 0.2
0.15 -1.93 -0.5 -1.53 0.33
-0.02 -4.17 -1.23 -3.42 0.45
0.21 -5.57 -3.45 -4.55 0.56
0.63 -4.96 -2.91 -5.29 0.68
0.6 -5.27 -8.55 -7.11 0.78
0.96 -8.6 -10.5 -9.4 0.88
1.5 -9.42 -9.17 -7.9 0.98
10/27/00 1.38 -7.97 -10.57 -9.04 1.08
1.18 -5.08 -5.34 -5.87 1.18
1.39 -7.13 -10.31 -9.88 1.29
1.83 -8.54 -9.94 -9.76 1.41
2.14 -11.04 -11.95 -11.47 1.52
2.7 -9.53 -14.72 -13.1 1.64
3.66 -8.37 -10.55 -9.49 1.78
4.44 -9.33 -14.44 -13.3 1.91
5.12 -10.36 -13.5 -13.71 2.15
12/29/00 4.86 -7.59 -9.61 -12.69 2.17
6.29 -7.37 -13.42 -14.14 2.43
5.23 -8.88 -9.16 -12.8 2.48
5.86 -8.12 -8.72 -11.21 2.58
5.78 -8.63 -6.73 -10.39 2.69
6.56 -8.33 -6.26 -10.69 2.8
6.67 -10.98 -6.98 -12.98 2.88
6.39 -12.2 -4.73 -13.86 2.97
2/23/01 6.56 -15.06 -10.6 -17.55 3.08
7.3 -14.8 -10.69 -18.22 3.18
7.59 -14.08 -11.27 -18.27 3.29
8.34 -20.57 -17.21 -23.76 3.4
8.36 -21.36 -16.91 -24.47 3.51
8.03 -19.81 -15.5 -23.03 3.61
8.43 -18.66 -18.45 -25.15 3.77
7.5 -17.17 -14.61 -21.5 3.81
7.49 -15.24 -12.41 -17.55 3.94
4/27/01 7.49 -14.71 -9.14 -16.88 4
8.47 -13.82 -7.44 -15.92 4.09
7.25 -15.01 -8.44 -17.3 4.15
7.92 -14.74 -4.85 -14.23 4.26
7.63 -15.6 -4.4 -15.16 4.32
8.45 -17.86 -5.67 -16.17 4.38
8.59 -17.57 -3.78 -15.89 4.45
9.2 -20.13 -6.85 -19.25 4.55
9.81 -20.72 -8.05 -18.52 4.62
6/29/01 8.64 -20.94 -3.43 -18.52 4.67
8.98 -23.82 -9.11 -20.77 4.74
9.57 -23.31 -7.74 -19.1 4.8
10.38 -23.57 -8.09 -19.42 4.88
10.71 -23.72 -8.63 -19.76 4.94
10.57 -21.45 -8.21 -19.11 5.01
11.26 -23.26 -10.38 -20.72 5.1
11.79 -22.82 -10.33 -22.6 5.19
11.72 -21.86 -9.34 -21.08 5.25
8/31/01 12.35 -24.35 -11.63 -24.39 5.32
These figures assume dividends and distributions were reinvested. Index figures
don't include trading and management costs, which would lower performance.
Indices are unmanaged and you can't invest in them directly. Remember that past
performance isn't an indication of future results.
Data source: Charles Schwab & Co., Inc. (Schwab).
1
MARKET OVERVIEW CONTINUED
--------------------------------------------------------------------------------
The average amount of time for a laid-off worker to find a new job approximately
doubled during the report period.
--------------------------------------------------------------------------------
Source: Bureau of Labor Statistics.
JOBLESS RATE HITS 4-YEAR HIGH.
After falling so low in 2000 that many feared the return of inflation, the U.S.
unemployment rate began rising rapidly. By mid-2001 it was a full 1% higher than
it had been nine months earlier, and was at its highest level since 1997.
[PHOTO OF PERSON LOOKING FOR JOB IN NEWSPAPER]
Job losses have affected almost every industry in the economy, with
manufacturing among the hardest hit. Shortly after the period, several major
airlines have announced dramatic employment cuts, which will cause unemployment
to rise further. The rapidly rising unemployment rate is likely to slow one of
the economy's remaining strengths -- consumer spending.
On a positive note, the soft economy and falling interest rates kept inflation
very low during the period. Employers continue to benefit from strong worker
productivity, which has helped to control labor costs, and consumer prices have
been relatively stable.
--------------------------------------------------------------------------------
ECONOMIC FACTORS AND THEIR EFFECTS ON THESE FUNDS.
The following charts show recent figures for common measures of the state of the
U.S. economy and the Interest rate environment.
While the relationship of each of these factors to the performance of the funds
is complex, the captions over each chart and the discussion above include
analysis of how we believe these factors may have influenced market behavior
during the report period.
REAL GDP GROWTH
Annualized growth rate for each quarter shown
The U.S. economy has grown steadily for more than 10 years, but the rate of
growth has slowed during the year. Real GDP grew just 0.3% in the second quarter
of 2001, its lowest level since 1993.
[BAR CHART]
Q3 1991 1.3
Q4 2.5
Q1 1992 3.8
Q2 3.8
Q3 3.1
Q4 5.4
Q1 1993 0.1
Q2 2.5
Q3 1.8
Q4 6.2
Q1 1994 3.4
Q2 5.7
Q3 2.2
Q4 5
Q1 1995 1.5
Q2 0.8
Q3 3.1
Q4 3.2
Q1 1996 2.9
Q2 6.8
Q3 2
Q4 4.6
Q1 1997 4.4
Q2 5.9
Q3 4.2
Q4 2.8
Q1 1998 6.1
Q2 2.2
Q3 4.1
Q4 6.7
Q1 1999 3.1
Q2 1.7
Q3 4.7
Q4 8.3
Q1 2000 2.3
Q2 5.7
Q3 1.3
Q4 1.9
Q1 2001 1.3
Q2 0.2
Gross domestic product (GDP), a broad measure of the goods and services produced
in the United States during a given time period, is a prime indicator of the
health of the country's economy. Typically, stock investors see increases in GDP
as a positive, since it indicates stronger demand, production and corporate
earnings. The figures shown here are adjusted for inflation.
Data source: Bloomberg L.P.
--------------------------------------------------------------------------------
2
--------------------------------------------------------------------------------
In the U.S. as well as overseas, stocks generally posted negative returns for
the period. Bonds, however, benefited from many factors.
--------------------------------------------------------------------------------
BONDS BENEFIT FROM RATE CUTS; STOCK PRICES CONTINUE TO FALL.
The bond market continued to perform well. Bond prices benefited from the U.S.
Treasury's decision to use part of the budget surplus to buy back its own bonds,
which reduced the supply of Treasuries. This happened just at a time when stock
market woes were causing many investors to shift assets into bonds, driving up
demand. The Fed's interest rate cuts only helped push bond prices higher,
although they pushed yields lower for money market investments.
In contrast, the dramatic decline of equity markets that began in the last
quarter of 2000 continued during the report period, leaving stocks in bear
market territory for the first time in years. The equity markets suffered
further declines when the markets reopened after the attacks with the Dow Jones
Industrial Average (DJIA) falling 14.26% in one week.
The biggest declines were in the technology sector, where the dot-com boom of
the past several years had driven market valuations to historic highs. As many
of these Internet start-ups began to downsize or fail, the technology sector
collapsed. The Nasdaq Composite Index lost more than a third of its value from
January to April, and in spite of some rallies, it continued to suffer for the
rest of the report period.
U.S. UNEMPLOYMENT RATE
Adjusted for seasonal variations
Unemployment was 4.9% in August 2001. Its highest level since 1997 and 1% above
the low reached last year.
[LINE GRAPH}
Jun-91 6.9
6.8
6.9
6.9
7
7
7.3
7.3
7.4
7.4
7.4
7.6
7.8
7.7
7.6
7.6
7.3
7.4
7.4
7.3
7.1
7
7.1
7.1
Jun-93 7
6.9
6.8
6.7
6.8
6.6
6.5
6.8
6.6
6.5
6.4
6.1
6.1
6.3
6
5.8
5.8
5.6
5.5
5.6
5.4
5.3
5.8
5.8
Jun-95 5.6
5.6
5.7
5.6
5.5
5.7
5.6
5.6
5.5
5.6
5.5
5.6
5.3
5.5
5.1
5.2
5.2
5.3
5.4
5.3
5.3
5.1
5
4.7
Jun-97 5
4.7
4.9
4.7
4.7
4.6
4.7
4.5
4.6
4.6
4.3
4.3
4.5
4.5
4.5
4.5
4.5
4.4
4.4
4.3
4.1
4.2
4.4
4.2
Jun-99 4.3
4.3
4.2
4.2
4.1
4.1
4.1
4
4.1
4
4
4.1
4
4
4.1
3.9
3.9
4
4
4.2
4.2
4.3
4.5
4.4
4.5
4.5
Aug-01 4.9
This measures the portion of the U.S. labor force that is unemployed and is
either seeking a job or waiting to return to one. Low unemployment often
accompanies prosperity and is generally a positive factor for investors,
although very low unemployment may boost inflation as employers raise pay to
compete for workers. Rising unemployment may mean a softening economy.
Data source: Bloomberg L.P.
MEASURES OF INFLATION
Annualized figures for the Consumer Price Index (monthly) and Employment Cost
Index (quarterly)
CPI was up 2.7% for the 12 months ended August 31, 2001. ECI rose 3.9% (for the
12 months ended June 30, 2001).
[LINE GRAPH}
Consumer Employment
Price Cost
Index Index
Jun-91 4.7 4.6
4.4 4.3
3.8 4.3
3.4 4.3
2.9 4.3
3 4.3
3.1 4.3
2.6 4
2.8 4
3.2 4
3.2 3.6
3 3.6
Jun-92 3.1 3.6
3.2 3.5
3.1 3.5
3 3.5
3.2 3.5
3 3.5
2.9 3.5
3.3 3.5
3.2 3.5
3.1 3.5
3.2 3.6
3.2 3.6
Jun-93 3 3.6
2.8 3.6
2.8 3.6
2.7 3.6
2.8 3.5
2.7 3.5
2.7 3.5
2.5 3.2
2.5 3.2
2.5 3.2
2.4 3.2
2.3 3.2
Jun-94 2.5 3.2
2.8 3.2
2.9 3.2
3 3.2
2.6 3
2.7 3
2.7 3
2.8 2.9
2.9 2.9
2.9 2.9
3.1 2.9
3.2 2.9
Jun-95 3 2.9
2.8 2.7
2.6 2.7
2.5 2.7
2.8 2.7
2.6 2.7
2.5 2.7
2.7 2.8
2.7 2.8
2.8 2.8
2.9 2.9
2.9 2.9
Jun-96 2.8 2.9
3 2.8
2.9 2.8
3 2.8
3 2.9
3.3 2.9
3.3 2.9
3 2.9
3 2.9
2.8 2.9
2.5 2.8
2.2 2.8
Jun-97 2.3 2.8
2.2 3
2.2 3
2.2 3
2.1 3.3
1.8 3.3
1.7 3.3
1.6 3.3
1.4 3.3
1.4 3.3
1.4 3.5
1.7 3.5
Jun-98 1.7 3.5
1.7 3.7
1.6 3.7
1.5 3.7
1.5 3.4
1.5 3.4
1.6 3.4
1.7 3
1.6 3
1.7 3
2.3 3.2
2.1 3.2
Jun-99 2 3.2
2.1 3.1
2.3 3.1
2.6 3.1
2.6 3.4
2.6 3.4
2.7 3.4
2.7 4.3
3.2 4.3
3.7 4.3
3 4.4
3.1 4.4
3.7 4.4
3.7 4.4
Aug-00 3.4 4.4
3.5 4.3
3.4 4.3
3.4 4.3
3.4 4.1
3.7 4.1
3.5 4.1
2.9 4.1
3.3 4.1
3.6 4.1
3.2 3.9
2.7 3.9
Aug-01
The Consumer Price Index (CPI) tracks changes in the cost of goods and services
and is the most common measure of inflation. The Employment Cost Index (ECI)
measures the cost of employing workers, including benefits costs. Financial
markets are very sensitive to increases in inflation because of the potentially
negative impact on corporate earnings, investors and consumers.
Data source: Bloomberg L.P.
3
MARKET OVERVIEW CONTINUED
--------------------------------------------------------------------------------
While the economic damage and disruption stemming from the attacks will
reverberate for years, the nation's long-term prospects remain bright.
--------------------------------------------------------------------------------
LOOKING AHEAD: OUTLOOK STILL UNCLEAR IN WAKE OF ATTACKS.
[GRAPHIC OF U.S. FLAG]
The tragic terrorist attacks of September 11 are certain to have a profound and
lasting effect on our country. Exactly what this effect is to be, however, will
not be fully known for some time.
Prior to the attacks, the economy was into its eighth month of decline, with
recession a real possibility. By the end of the report period, the Fed had
responded with its interest rate cuts and appeared willing to make further cuts
if necessary. President Bush's proposed tax cuts, also billed as a spur to the
flagging economy, have been passed by Congress.
These factors still have bearing in any assessment of economic and investment
prospects over the coming months. But the near-term outlook for the U.S.
economy, which was not clear before the attacks, is only more clouded now.
YIELDS OF U.S. TREASURY BONDS
Effective yields of five-year and ten-year Treasuries
The volatility in the equity markets increased investor demand for bonds leading
to lower yields and higher prices.
[LINE GRAPH]
Ten Year Five Year
Treasury Bond Yields Treasury Bond Yields
Jun-91 8.23 7.88
8.15 7.74
7.82 7.34
7.45 6.91
7.46 6.74
7.38 6.48
6.7 5.93
7.27 6.43
7.25 6.56
7.53 6.92
7.58 6.88
7.32 6.6
7.12 6.27
6.71 5.82
6.6 5.58
6.35 5.32
6.79 5.89
6.94 6.22
6.69 5.99
6.36 5.55
6.02 5.21
6.02 5.24
6.01 5.11
6.15 5.37
Jun-93 5.78 5.05
5.81 5.15
5.45 4.79
5.38 4.77
5.43 4.85
5.82 5.16
5.79 5.21
5.64 5.02
6.13 5.57
6.74 6.23
7.04 6.64
7.15 6.76
7.32 6.95
7.11 6.73
7.17 6.8
7.6 7.28
7.81 7.49
7.91 7.79
7.82 7.83
7.58 7.51
7.2 7.04
7.2 7.07
7.06 6.88
6.28 6.05
Jun-95 6.2 5.97
6.43 6.16
6.28 6.07
6.18 6.02
6.02 5.81
5.74 5.52
5.57 5.38
5.58 5.24
6.1 5.73
6.33 6.09
6.67 6.41
6.85 6.63
6.71 6.46
6.79 6.57
6.94 6.73
6.7 6.46
6.34 6.07
6.04 5.83
6.42 6.21
6.49 6.25
6.55 6.39
6.9 6.75
6.72 6.57
6.66 6.5
Jun-97 6.5 6.38
6.01 5.9
6.34 6.22
6.1 5.99
5.83 5.71
5.87 5.84
5.74 5.71
5.51 5.38
5.62 5.59
5.65 5.62
5.67 5.64
5.55 5.55
5.45 5.47
5.49 5.5
4.98 4.8
4.42 4.22
4.61 4.23
4.71 4.48
4.65 4.54
4.65 4.55
5.29 5.22
5.24 5.1
5.35 5.21
5.62 5.58
Jun-99 5.78 5.65
5.9 5.79
5.97 5.87
5.88 5.75
6.02 5.96
6.19 6.11
6.44 6.34
6.67 6.68
6.41 6.6
6 6.31
6.21 6.54
6.27 6.52
6.03 6.19
6.03 6.15
5.73 5.97
5.8 5.85
5.75 5.81
5.47 5.43
5.11 4.98
5.11 4.77
4.9 4.66
4.92 4.56
5.34 4.89
5.38 4.91
5.41 4.95
5.05 4.53
Aug-01 4.83 4.38
Yields, or interest rates, represent the cost of borrowing money. Rapid economic
growth or the expectation of higher inflation can drive rates up, while the
opposite conditions can push rates down.
Data source: Bloomberg L.P.
YIELD CURVE
Average yields of AAA securities of six maturities
During the reporting period the yield curve reverted back to its more usual
pattern of offering higher yields for longer maturity.
[LINE GRAPH]
Maturity As of 09/01/00 As of 08/31/01
3 Mos. 6.26 3.36
6 Mos. 6.31 3.29
2 Yrs. 6.07 3.63
5 Yrs. 5.9 4.38
10 Yrs. 5.68 4.83
30 Yrs. 5.66 5.37
This chart shows where yields stood at the beginning of the report period and at
the end of the period. For debt securities of comparable quality, those with
longer maturities typically pay higher interest rates, because they are assumed
to carry higher risk. An inverted yield curve generally means that investors
expect rates to fall.
Data source: Bloomberg L.P.
4
SCHWAB
SHORT-TERM BOND
MARKET INDEX FUND
[PHOTO OF KIM DAIFOTIS]
"Having raised interest rates rapidly during 2000, the Fed lowered them
rapidly in 2001, responding to the deteriorating economy. This recent
lowering of rates helped the fund post strong performance in the report
period."
Portfolio Manager
Kim Daifotis
KIM DAIFOTIS, CFA, a vice president of the investment adviser, has overall
responsibility for management of the fund. Prior to joining the firm in 1997, he
worked for more than 17 years in research and asset management.
TICKER SYMBOL SWBDX
[GRAPHIC]
INTEREST RATE SENSITIVITY 1
CREDIT QUALITY 1 LOW MEDIUM HIGH
HIGH /X/ / / / /
MEDIUM / / / / / /
LOW / / / / / /
Investors who are seeking a diversified source of current income and want
potentially lower volatility and lower returns, compared to a long-term fund,
may want to consider this fund.
THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN BROTHERS
MUTUAL FUND SHORT (1 - 5 YEAR) U.S. GOVERNMENT/CREDIT INDEX.
MANAGER'S PERSPECTIVE
FIXED INCOME MARKETS TURNED IN A STRONG PERFORMANCE DURING THE REPORT PERIOD.
The outlook for weak economic growth prompted the Fed to aggressively lower
short-term rates during the report period. As a result, the yield curve returned
to its more typical configuration with longer term bonds offering higher yields
than short-term bonds. Yields were lower across all maturities of the treasury
curve at the end of the report period.
THE CORPORATE BOND MARKET EXPERIENCED RECORD NEW ISSUANCE DURING THE REPORT
PERIOD. Corporations issued more securities during the first eight months of
2001 than in all of 2000. Attracted by the ability to issue securities at lower
rates, corporations issued approximately $400 billion of fixed income securities
during the first eight months of 2001.
THE RECORD LEVEL OF SUPPLY WAS MET WITH A HIGH DEGREE OF DEMAND FROM ALL TYPES
OF INVESTORS. A weak equity market combined with net negative supply of treasury
securities and a continuing strong dollar were all contributing factors for the
strong demand.
The fund closely tracked its benchmark, the Lehman Brothers Mutual Fund 1-5 Year
U.S. Government/Credit Index, for this period.
1 Source: Morningstar, Inc. Interest rate sensitivity and credit quality are
two main components of bond performance. The assessment reflects the fund's
portfolio as of 8/31/01, which may have changed since then, and is not a
precise indication of risk or performance -- past, present or future.
Definitions of style box categories: Sensitivity (measured as duration): Low,
up to 3.5 years; Medium, more than 3.5 years to less than six years; High,
six years or greater. Credit quality: High, AA or better; Medium, A or BBB;
Low, BB or lower
2 Source: Lehman Brothers.
5
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS as of 8/31/01
This chart compares performance of the fund with the Lehman Brothers Mutual Fund
Short (1-5 Year) U.S. Government/Credit Index, the fund's benchmark index 1 and
the Morningstar Short-Term Bond Fund category. As of the end of the report
period, the fund's 30-day SEC yield was 4.84%. 2
[BAR CHART]
Lehman 1-5 Peer Group
Fund 2 Benchmark 1 Year Index Average 3
1 YEAR
Total Return 10.84 11.1 11.1 9.83
5 YEAR
Total Return 6.78 6.97 7.18 6.38
SINCE INCEPTION: 11/5/91
Total Return 6.14 6.35 6.71
PERFORMANCE OF A $10,000 INVESTMENT
Shows performance since inception of a hypothetical $10,000 investment in the
fund, compared with a similar investment in two indices: the Lehman Brothers
Mutual Fund Short (1-5 Year) U.S. Government/Credit Index and the fund's
benchmark index. 1
[LINE GRAPH]
Lehman 1-5
Fund Benchmark 1 Year Index
11/5/91 10000 10000 10000
11/30/91 10117 10098 10097
12/31/91 10381 10251 10287
1/31/92 10241 10238 10243
2/29/92 10240 10269 10272
3/31/92 10190 10265 10251
4/30/92 10282 10359 10349
5/31/92 10440 10455 10477
6/30/92 10595 10560 10614
7/31/92 10794 10682 10778
8/31/92 10898 10768 10884
9/30/92 11053 10869 11012
10/31/92 10924 10807 10903
11/30/92 10868 10791 10868
12/31/92 11012 10892 10990
1/31/93 11202 11006 11164
2/28/93 11355 11093 11298
3/31/93 11395 11127 11339
4/30/93 11499 11195 11428
5/31/93 11462 11168 11394
6/30/93 11622 11251 11518
7/31/93 11661 11276 11541
8/31/93 11823 11369 11679
9/30/93 11851 11406 11718
10/31/93 11892 11431 11748
11/30/93 11819 11433 11725
12/31/93 11873 11478 11773
1/31/94 11973 11550 11873
2/28/94 11780 11480 11754
3/31/94 11628 11422 11637
4/30/94 11527 11378 11569
5/31/94 11485 11394 11582
6/30/94 11500 11422 11602
7/31/94 11599 11525 11732
8/31/94 11628 11563 11770
9/30/94 11585 11537 11708
10/31/94 11593 11563 11722
11/30/94 11528 11515 11662
12/31/94 11540 11538 11688
1/31/95 11697 11694 11867
2/28/95 11852 11854 12072
3/31/95 11919 11920 12141
4/30/95 12018 12027 12268
5/31/95 12232 12232 12553
6/30/95 12281 12298 12627
7/31/95 12308 12347 12657
8/31/95 12396 12421 12747
9/30/95 12470 12481 12820
10/31/95 12572 12585 12943
11/30/95 12696 12692 13080
12/31/95 12799 12788 13194
1/31/96 12900 12896 13315
2/29/96 12817 12846 13225
3/31/96 12778 12837 13184
4/30/96 12776 12849 13173
5/31/96 12777 12878 13182
6/30/96 12878 12972 13298
7/31/96 12917 13022 13346
8/31/96 12940 13069 13380
9/30/96 13072 13188 13528
10/31/96 13235 13337 13717
11/30/96 13368 13436 13849
12/31/96 13311 13438 13813
1/31/97 13378 13502 13877
2/28/97 13397 13535 13904
3/31/97 13355 13524 13860
4/30/97 13477 13635 13994
5/31/97 13575 13730 14097
6/30/97 13680 13824 14208
7/31/97 13874 13975 14418
8/31/97 13841 13989 14398
9/30/97 13964 14096 14532
10/31/97 14091 14201 14663
11/30/97 14130 14236 14691
12/31/97 14228 14332 14798
1/31/98 14383 14469 14969
2/28/98 14358 14482 14969
3/31/98 14415 14532 15022
4/30/98 14479 14604 15095
5/31/98 14563 14693 15188
6/30/98 14643 14775 15273
7/31/98 14697 14838 15337
8/31/98 14898 15046 15551
9/30/98 15152 15326 15842
10/31/98 15204 15369 15887
11/30/98 15175 15357 15874
12/31/98 15214 15409 15928
1/31/99 15258 15486 16008
2/28/99 15116 15354 15871
3/31/99 15232 15470 15990
4/30/99 15247 15521 16043
5/31/99 15188 15459 15979
6/30/99 15219 15502 16024
7/31/99 15254 15517 16040
8/31/99 15289 15551 16075
9/30/99 15402 15675 16204
10/31/99 15427 15717 16247
11/30/99 15448 15743 16275
12/31/99 15448 15731 16262
1/31/00 15409 15699 16230
2/29/00 15530 15818 16353
3/31/00 15678 15934 16474
4/30/00 15673 15938 16477
5/31/00 15739 15987 16527
6/30/00 15950 16207 16755
7/31/00 16051 16322 16874
8/31/00 16202 16477 17035
9/30/00 16351 16631 17193
10/31/00 16425 16702 17267
11/30/00 16611 16883 17455
12/31/00 16858 17132 17713
1/31/01 17069 17393 17983
2/28/01 17181 17535 18130
3/31/01 17306 17679 18279
4/30/01 17335 17699 18301
5/31/01 17454 17804 18409
6/30/01 17534 17871 18479
7/31/01 17810 18160 18778
8/31/01 17958 18307 18930
All figures on this page assume dividends and distributions were reinvested.
Index figures do not include trading and management costs, which would lower
performance. The indices are unmanaged, and you cannot invest in them directly.
The fund's share price and principal value changes, and when you sell your
shares they may be worth more or less than what you paid for them. Keep in mind
that past performance isn't an indication of future results.
1 The fund changed its benchmark on 2/28/98, when it changed from being a
government bond fund to its current strategy. Benchmark performance shown
here is the Lehman Brothers Short (1-3 Year) U.S. Government Bond Index from
fund inception through 2/28/98 and the Lehman Brothers Mutual Fund Short (1-5
Year) U.S. Government/Credit Index from 3/1/98 through the end of the report
period. Benchmark performance for the 1 year period is the Lehman 1-5 Year
Index.
2 Fund yield and returns reflect expense reductions by the fund's investment
adviser (CSIM) and Schwab. Without these reductions, the fund's yield and
returns would have been lower.
3 Source: Morningstar, Inc. As of 8/31/01, the total number of funds in the
Short-Term Bond Fund category for the one- and five-year periods was 246 and
153, respectively.
6
FUND FACTS
TOP TEN HOLDINGS 1 as of 8/31/01
PERCENTAGE OF
SECURITY RATE MATURITY DATE INVESTMENTS
(1) U.S. TREASURY NOTES 4.63% 05/15/06 3.4%
(2) U.S. TREASURY NOTES 6.50% 08/15/05 3.1%
(3) FREDDIE MAC 4.75% 03/15/03 2.9%
(4) PROTECTIVE LIFE U.S. FUNDING TRUST, 144A 5.50% 05/14/04 2.6%
(5) U.S. TREASURY NOTES 3.88% 07/31/03 2.6%
(6) U.S. TREASURY NOTES 5.25% 08/15/03 2.3%
(7) FREDDIE MAC 5.25% 01/15/06 2.3%
(8) U.S. TREASURY NOTES 6.50% 10/15/06 2.2%
(9) U.S. TREASURY NOTES 6.00% 08/15/04 2.1%
(10) U.S. TREASURY NOTES 5.88% 11/15/05 2.1%
-----------------------------------------------------------------------------------------------
TOTAL 25.6%
DIVIDENDS PAID in each fiscal year
[BAR CHART]
Income Dividends per Share
1991 yr 2 0.1
1992 yr 0.6
1993 yr 3 0.37
1994 yr 0.54
1995 yr 0.59
1996 yr 0.59
1997 yr 0.59
1998 yr 0.57
1999 yr 0.5
2000 yr 0.57
2001 yr 0.59
1 This list is not a recommendation of any security by the adviser.
2 Period from the fund's inception on 11/5/91 through 12/31/91.
3 For the eight-month period ended 8/31/93.
7
SCHWAB SHORT-TERM BOND MARKET INDEX FUND
FUND FACTS Continued
COMPOSITION OF THE FUND'S PORTFOLIO as of 8/31/01
All figures are shown as a percentage of the fund's investments. Portfolio
holdings may have changed since the report date.
BY SECURITY TYPE
[PIE CHART]
1. 52.2% U.S. Government Securities
2. 47.8% Corporate Bonds
BY CREDIT QUALITY 1
[PIE CHART]
1. 53.6% AAA
2. 2.9% AA
3. 17.5% A
4. 23.6% BBB
5. 2.4% BB
BY MATURITY
[PIE CHART]
1. 4.1% 0-6 Months
2. 56.4% 7-36 Months
3. 38.7% 37-60 Months
4. 0.8% More than 60 Months
FUND FACTS as of 8/31/01
FUND INDEX 2
------------------------------------------------------------------------------
Number of Issues 70 2,039
Yield to Maturity 4.88% 4.47%
Weighted Average Rate 6.09% 6.22%
Weighted Average Maturity 2.9 yrs 2.9 yrs
Weighted Average Duration 2.5 yrs 2.5 yrs
Weighted Average Credit Quality AA AA
EXPENSE RATIO as of 8/31/01
[BAR CHART]
Fund 0.35%
Peer Group Average 0.86%
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are
different, the chart uses the higher rating.
2 Source for Index data: the Lehman Brothers Mutual Fund Short (1-5 Year) U.S.
Government/Credit Index.
3 Source: Morningstar, Inc. As of 8/31/01, the total number of funds in the
Short-Term Bond Fund category for the one- and five-year periods was 246 and
153, respectively.
8
SCHWAB SHORT-TERM BOND MARKET INDEX FUND -- FINANCIALS
FINANCIAL TABLES
These pages provide additional data on the fund's performance, portfolio
holdings, expenses and business operations. These figures have been audited by
PricewaterhouseCoopers LLP.
Two other sections of this report provide context the data in these financials.
The FINANCIAL NOTES section contains information about the fund's business
structure, accounting practices and other matters, completing the data given in
these tables. The final section, HOW TO READ THIS REPORT, includes guides
designed to make the financials easy to read and understand.
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
9/1/00- 9/1/99- 9/1/98- 9/1/97- 9/1/96-
8/31/01 8/31/00 8/31/99 8/31/98 8/31/97
---------------------------------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
---------------------------------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 9.65 9.66 9.90 9.74 9.67
---------------------------------------------------------------------
Income from investment operations:
Net investment income 0.59 0.57 0.50 0.56 0.59
Net realized and unrealized gains or losses 0.43 (0.01) (0.24) 0.17 0.07
---------------------------------------------------------------------
Total income from investment operations 1.02 0.56 0.26 0.73 0.66
Less distributions:
Dividends from net investment income (0.59) (0.57) (0.50) (0.57) (0.59)
---------------------------------------------------------------------
Net asset value at end of period 10.08 9.65 9.66 9.90 9.74
=====================================================================
Total return (%) 10.84 5.97 2.66 7.64 6.96
RATIOS/SUPPLEMENTAL DATA (%)
---------------------------------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.35 0.35 1 0.35 0.46 0.49
Expense reductions reflected in above ratio 0.31 0.32 0.42 0.39 0.33
Ratio of net investment income to
average net assets 5.90 5.91 5.11 5.58 6.02
Portfolio turnover rate 248 129 195 128 71
Net assets, end of period ($ x 1,000,000) 369 219 218 157 127
1 Would have been 0.36% if certain non-routine expenses (proxy fees) had been
included.
See the Financial Notes, which are integral to this information.
9
SCHWAB SHORT-TERM BOND MARKET INDEX FUND -- FINANCIALS
PORTFOLIO HOLDINGS
As of August 31, 2001.
This section shows all the securities in the fund's portfolio and their market
value, as of the report date.
We use the symbol below to designate the top ten holdings; the number in the
circle is the security's rank among the top ten.
(1) Top ten holding
For fixed-rate obligations, the rate shown is the interest rate (the rate
established when the obligation was issued) and the maturity date shown is the
legal stated maturity. For variable-rate obligations, the rate shown is the
rate as of the report date, and the maturity shown is the later of the next
interest rate change date or demand date.
The pie chart below shows the fund's major asset categories and the market
value and cost of the securities in each category.
ALL DOLLAR VALUES ARE THOUSANDS
[PIE CHART]
52.2% U.S. GOVERNMENT SECURITIES
Market Value: $183,768
Cost: $179,995
47.8% CORPORATE BONDS
Market Value: $168,549
Cost: $165,561
-----------------------------------------------
100.0% TOTAL INVESTMENTS
Market Value: $352,317
Cost: $345,556
SECURITY FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
U.S. GOVERNMENT SECURITIES
52.2% of investments
AGENCY OBLIGATIONS 10.2%
------------------------------------------------------------------------------
FANNIE MAE
5.50%, 02/15/06 4,000 4,098
FREDDIE MAC
(3) 4.75%, 03/15/03 10,000 10,150
5.00%, 01/15/04 3,000 3,059
5.05%, 04/02/04 5,000 5,026
6.88%, 01/15/05 5,000 5,357
(7) 5.25%, 01/15/06 8,000 8,118
------
35,808
U.S. TREASURY OBLIGATIONS 42.0%
-------------------------------------------------------------------------------
U.S. TREASURY NOTES
5.13%, 12/31/02 3,000 3,067
4.75%, 01/31/03 6,000 6,107
5.50%, 02/28/03 5,000 5,146
4.25%, 03/31/03 2,000 2,022
4.00%, 04/30/03 3,000 3,022
4.25%, 05/31/03 6,000 6,069
5.50%, 05/31/03 5,800 5,989
3.88%, 06/30/03 5,000 5,026
5.38%, 06/30/03 7,000 7,222
(5) 3.88%, 07/31/03 9,000 9,046
(6) 5.25%, 08/15/03 8,000 8,245
3.63%, 08/31/03 2,000 2,000
4.25%, 11/15/03 6,000 6,067
4.75%, 02/15/04 2,000 2,044
5.25%, 05/15/04 4,000 4,140
(9) 6.00%, 08/15/04 7,100 7,494
5.88%, 11/15/04 6,600 6,949
7.88%, 11/15/04 3,500 3,892
7.50%, 02/15/05 5,000 5,536
6.75%, 05/15/05 5,000 5,426
(2) 6.50%, 08/15/05 10,000 10,811
(10) 5.88%, 11/15/05 6,900 7,315
(1) 4.63%, 05/15/06 12,000 12,128
7.00%, 07/15/06 5,000 5,554
(8) 6.50%, 10/15/06 7,000 7,643
--------
147,960
See the Financial Notes, which are integral to this information.
10
SECURITY
SERIES FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
CORPORATE BONDS 47.8% of investments
FIXED RATE OBLIGATIONS 46.4%
------------------------------------------------------------------------
AES CORP.
8.75%, 12/15/02 5,000 5,131
ALCOA, INC.
7.25%, 08/01/05 5,000 5,377
AMERICAN HEALTH PROPERTIES
7.05%, 01/15/02 1,000 1,005
BANK ONE CORP.
6.50%, 02/01/06 5,000 5,199
CASE CREDIT CORP.
6.13%, 10/15/01 465 462
CENDANT CORP.
7.75%, 12/01/03 4,250 4,447
CENDANT CORP., 144A
6.88%, 08/15/06 3,400 3,437
CIT GROUP, INC.
7.38%, 03/15/03 2,000 2,093
COUNTRYWIDE HOME LOAN, INC.
5.25%, 06/15/04 5,000 5,068
CREDIT SUISSE FIRST BOSTON U.S.A., INC.
5.88%, 08/01/06 4,900 4,972
CVS CORP.
5.63%, 03/15/06 5,000 5,030
DANA CREDIT CORP.
7.25%, 12/16/02 5,500 5,413
DILLARDS, INC.
5.79%, 11/15/01 5,000 5,004
ERAC USA FINANCE CO., 144A
6.95%, 03/01/04 6,640 6,838
FORD MOTOR CREDIT
6.88%, 02/01/06 3,900 4,035
GENERAL ELECTRIC CAPITAL CORP.
7.25%, 02/01/05 5,000 5,397
J.C. PENNEY & CO.
7.25%, 04/01/02 5,275 5,302
6.50%, 06/15/02 650 651
KELLOGG COMPANY
Series B
6.00%, 04/01/06 3,500 3,562
MARLIN WATER TRUST II / CAPITAL CORP. II, 144A
6.31%, 07/15/03 6,000 6,062
MASCO CORP.
6.00%, 05/03/04 6,000 6,097
NEWS AMERICA HOLDINGS, INC.
10.13%, 10/15/12 5,500 5,987
NORDSTROM CREDIT, INC.
7.25%, 04/30/02 3,000 3,073
PETRO MEXICANOS
9.50%, 09/15/27 2,500 2,759
PHILLIPS PETROLEUM CO.
8.50%, 05/25/05 2,000 2,219
(4) PROTECTIVE LIFE U.S. FUNDING TRUST, 144A
5.50%, 05/14/04 9,000 9,136
QWEST CAPITAL FUNDING, INC., 144A
5.88%, 08/03/04 6,000 6,066
RAYTHEON CO.
6.45%, 08/15/02 5,483 5,532
ROYAL BANK OF SCOTLAND GROUP, PLC
Series 3
7.82%, 09/01/01 3,000 3,213
ROYAL CARIBBEAN CRUISES
7.13%, 09/18/02 5,150 5,177
SALOMON SMITH BARNEY HOLDINGS, INC.
5.88%, 03/15/06 5,000 5,099
SKANDINAVISKA ENSKILDA, 144A
6.50%, 06/04/03 3,000 3,059
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC.
6.75%, 11/15/05 2,000 1,992
TENET HEALTHCARE CORP.
8.63%, 12/01/03 3,000 3,188
UNION BANK OF NORWAY, 144A
7.35%, 07/09/03 5,000 5,169
VIACOM, INC., 144A
6.40%, 01/30/06 7,000 7,264
WORLDCOM, INC.
7.55%, 04/01/04 4,000 4,195
-------
163,710
See the Financial Notes, which are integral to this information.
11
SCHWAB SHORT-TERM BOND MARKET INDEX FUND -- FINANCIALS
PORTFOLIO HOLDINGS Continued
As of August 31, 2001.
SECURITY FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
VARIABLE RATE OBLIGATIONS 1.4%
--------------------------------------------------------------------------------
AVNET, INC.
4.63%, 10/17/01 3,000 3,001
TXU ELECTRIC CAPITAL IV
4.48%, 11/01/01 2,250 1,838
-------
4,839
================================================================================
END OF PORTFOLIO HOLDINGS. For totals, please turn to the first page of holdings
for this fund.
See the Financial Notes, which are integral to this information.
12
Statement of
ASSETS AND LIABILITIES
As of August 31, 2001. All numbers x 1,000 except NAV.
ASSETS
--------------------------------------------------------------------------------
Investments, at market value (including $109,808 of
securities on loan) $352,317 a
Collateral held for securities on loan 111,433
Receivables:
Fund shares sold 2,156
Interest 4,713
Investments sold 18,500
Prepaid expenses + 13
-----------
TOTAL ASSETS 489,132
LIABILITIES
--------------------------------------------------------------------------------
Collateral held for securities on loan 111,433
Payables:
Fund shares redeemed 426
Dividends to shareholders 204
Investments bought 8,474
Transfer agent and shareholder service fees 3
Accrued expenses + 86
-----------
TOTAL LIABILITIES 120,626
NET ASSETS
--------------------------------------------------------------------------------
TOTAL ASSETS 489,132
TOTAL LIABILITIES - 120,626
-----------
NET ASSETS $368,506
NET ASSETS BY SOURCE
Capital received from investors 369,935
Distributions in excess of net investment income (133)
Net realized capital losses (8,057) b
Net unrealized capital gains 6,761
NET ASSET VALUE (NAV)
SHARES
NET ASSETS / OUTSTANDING = NAV
$368,506 36,564 $10.08
a The fund's amortized cost for these securities was $345,556. Not counting
short-term obligations and government securities, the fund paid $305,465 for
securities during the reporting period, and received $223,264 from securities
it sold or that matured. For long-term government securities, the fund paid
$440,950 during the reporting period and received $361,806 for securities it
sold or that matured. This includes $28,159 in transactions with other
SchwabFunds.(R)
b These derive from investments and short sales.
FEDERAL TAX DATA
--------------------------------------------------------------------------------
COST BASIS OF PORTFOLIO $345,736
NET UNREALIZED GAINS AND LOSSES:
Gains $ 6,848
Losses + (267)
-----------
$ 6,581
UNUSED CAPITAL LOSSES:
Expires 08/31 of: Loss amount
2003 $ 4,246
2004 2,216
2005 174
2008 + 1,241
-----------
$ 7,877
See the Financial Notes, which are integral to this information.
13
SCHWAB SHORT-TERM BOND MARKET INDEX FUND - FINANCIALS
Statement of
OPERATIONS
For September 1, 2000 through August 31, 2001. All numbers x 1,000.
INVESTMENT INCOME
--------------------------------------------------------------------------------
Interest $16,715
Lending of securities + 317
----------
TOTAL INVESTMENT INCOME 17,032
NET REALIZED GAINS AND LOSSES
--------------------------------------------------------------------------------
Net realized gains on investments sold 4,761
Net realized losses on short sales + (355)
==========
NET REALIZED GAINS 4,406
NET UNREALIZED GAINS
--------------------------------------------------------------------------------
Net unrealized gains on investments 7,178
EXPENSES
--------------------------------------------------------------------------------
Investment adviser and administrator fees 818 a
Transfer agent and shareholder service fees 682 b
Trustees' fees 9 c
Custodian and portfolio accounting fees 143
Professional fees 22
Registration fees 60
Shareholder reports 49
Other expenses + 9
----------
Total expenses 1,792
Expense reduction - 837 d
----------
NET EXPENSES 955
INCREASE IN NET ASSETS FROM OPERATIONS
TOTAL INVESTMENT INCOME 17,032
NET EXPENSES - 955
----------
NET INVESTMENT INCOME 16,077
NET REALIZED GAINS 4,406 e
NET UNREALIZED GAINS + 7,178 e
----------
INCREASE IN NET ASSETS FROM OPERATIONS $27,661
a Calculated as a percentage of average daily net assets: 0.30% of the first
$500 million and 0.22% of assets beyond that.
b Calculated as a percentage of average daily net assets: for transfer agent
services, 0.05% of the fund's assets; for shareholder services, 0.20% of the
fund's assets.
c For the fund's independent trustees only.
d Includes $818 from the investment adviser (CSIM) and $19 from the transfer
agent and shareholder service agent (Schwab). These reductions reflect a
guarantee by CSIM and Schwab to limit the operating expenses of this fund
through at least November 15, 2002, to 0.35% of average daily net assets.
This limit doesn't include interest, taxes and certain non-routine expenses.
e These add up to a net gain on investments of $11,584.
See the Financial Notes, which are integral to this information.
14
Statements of
CHANGES IN NET ASSETS
For the current and prior reporting periods. All numbers x 1,000.
OPERATIONS
--------------------------------------------------------------------------------------------
9/1/00-8/31/01 9/1/99-8/31/00
Net investment income $16,077 $12,898
Net realized gains or losses 4,406 (2,110)
Net unrealized gains + 7,178 1,937
---------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 27,661 12,725
DISTRIBUTIONS PAID
--------------------------------------------------------------------------------------------
Dividends from net investment income $16,144 $12,896
TRANSACTIONS IN FUND SHARES
--------------------------------------------------------------------------------------------
9/1/00-8/31/01 9/1/99-8/31/00
QUANTITY VALUE QUANTITY VALUE
Shares sold 23,621 $234,256 8,302 $79,702
Shares reinvested 1,331 13,155 1,058 10,143
Shares redeemed + (11,051) (109,221) (9,277) (88,925)
------------------------------------------------------------
NET INCREASE 13,901 $138,190 83 $920
SHARES OUTSTANDING AND NET ASSETS
--------------------------------------------------------------------------------------------
9/1/00-8/31/01 9/1/99-8/31/00
SHARES NET ASSETS SHARES NET ASSETS
Beginning of period 22,663 $218,799 22,580 $218,050
Total increase + 13,901 149,707 83 749 a
--------------------------------------------------------
END OF PERIOD 36,564 $368,506 22,663 $218,799 b
a Figures for shares represent the net changes in shares from the transactions
described above. Figures for net assets represent the changes in net assets
from operations plus the changes in value from transactions in fund shares,
minus distributions paid.
b Includes cumulative distributions that exceed net investment income by $133
for the current period and $66 for the prior period.
See the Financial Notes, which are integral to this information.
15
SCHWAB
TOTAL BOND MARKET INDEX FUND
[PHOTO OF KIM DAIFOTIS]
"With the continuing strength in bond markets, the fund performed well
during the report period and slightly outperformed its benchmark index."
Portfolio Manager
Kim Daifotis
KIM DAIFOTIS, CFA, a vice president of the investment adviser, has overall
responsibility for management of the fund. Prior to joining the firm in 1997,
he worked for more than 17 years in research and asset management.
TICKER SYMBOL SWLBX
[GRAPHIC]
Interest Rate Sensitivity 1
Credit Quality 1 Low Medium High
High / / / / /X/
Medium / / / / / /
Low / / / / / /
This fund is designed for investors seeking to fill the fixed income component
of their asset allocation plan, and who can accept higher risk in exchange for
potentially higher long-term returns compared to a short-term fund.
THE FUND SEEKS CURRENT INCOME BY TRACKING THE PERFORMANCE OF THE LEHMAN
BROTHERS U.S. AGGREGATE BOND INDEX.
MANAGER'S PERSPECTIVE
FIXED INCOME MARKETS TURNED IN A STRONG PERFORMANCE DURING THE REPORT
PERIOD. The outlook for weak economic growth prompted the Fed to aggressively
lower short term rates during the report period. As a result, the yield curve
returned to its more typical configuration with longer term bondsoffering
higher yields than short term bonds. Yields were lower across all maturities of
the treasury curve at the end of the report period.
THE CORPORATE BOND MARKET EXPERIENCED RECORD NEW ISSUANCE DURING THE REPORT
PERIOD. Corporations issued more bonds during the first eight months of 2001
than all of 2000. Attracted by the ability to issue securities at lower rates,
corporation issued approximately $400 billion of investment grade debt during
the first eight months of 2001.
THE RECORD LEVEL OF SUPPLY WAS MET WITH A HIGH DEGREE OF DEMAND FROM ALL TYPES
OF INVESTORS. A weak equity market combined with net negative supply of treasury
securities and a continuing strong dollar were all contributing factors for the
strong demand.
The fund slightly outperformed its benchmark, the Lehman Brothers U.S. Aggregate
Bond Index, for this report period.
1 Source: Morningstar, Inc. Interest rate sensitivity and credit quality are two
main components of bond performance. The assessment reflects the fund's
portfolio as of 8/31/01, which may have changed since then, and is not a pre-
cise indication of risk or performance--past, present or future. Definitions
of style box categories: Sensitivity (measured as duration): Low, up to 3.5
years; Medium, more than 3.5 years to less than six years; High, six years or
greater. Credit quality: High, AA or better; Medium, A or BBB; Low, BB or
lower
2 Source: Lehman Brothers.
16
PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS as of 8/31/01
This chart compares performance of the fund with the Lehman Brothers U.S.
Aggregate Bond Index, the fund's benchmark index 1 and the Morningstar
Intermediate-Term, Bond Fund category. As of the end of the report period, the
fund's 30-day SEC yield was 5.00%.2
[BAR CHART]
Lehman U.S.
Aggregate Peer Group
Fund 2 Benchmark 1 Bond Index Average 3
1 YEAR
Total Return 12.68 12.35 12.35 11.23
5 YEAR
Total Return 8.33 8.18 8.18 7.13
SINCE INCEPTION: 3/5/93
Total Return 6.92 6.84 6.95 --
PERFORMANCE OF A $10,000 INVESTMENT
Shows performance since inception of a hypothetical $10,000 investment in the
fund, compared with a similar investment in two indices: the Lehman Brothers
U.S. Aggregate Bond Market Index and the fund's benchmark index.1
[LINE GRAPH]
Lehman
U.S. Aggregate
Fund 2 Bond Index Benchmark 1
10000 10000 10000
9784 9979 10000
9890 10048 10077
9927 10061 10066
10314 10244 10289
10441 10302 10352
10863 10482 10583
10901 10511 10623
10952 10550 10663
10688 10460 10546
10738 10517 10587
10938 10659 10732
10544 10474 10505
10220 10216 10269
10112 10134 10188
10060 10133 10175
10027 10110 10151
10239 10311 10338
10233 10324 10340
10050 10172 10194
10036 10163 10187
10031 10140 10168
10122 10210 10230
10347 10412 10420
10647 10660 10645
10718 10726 10711
10887 10875 10851
11429 11296 11289
11445 11379 11376
11348 11354 11334
11566 11491 11467
11711 11602 11577
11931 11753 11754
12173 11929 11937
12395 12096 12106
12438 12176 12180
12075 11964 11932
11934 11881 11833
11766 11814 11757
11722 11790 11737
11885 11948 11889
11890 11981 11918
11830 11960 11892
12112 12168 12089
12451 12439 12355
12763 12651 12570
12537 12534 12442
12533 12572 12455
12556 12604 12473
12353 12464 12340
12606 12651 12519
12732 12771 12627
12918 12923 12768
13363 13272 13131
13152 13159 13001
13397 13354 13196
13687 13548 13425
13700 13610 13493
13778 13747 13634
13977 13923 13838
13938 13912 13828
13964 13959 13876
14035 14032 13948
14166 14165 14080
14263 14286 14200
14306 14316 14230
14575 14549 14462
14930 14890 14800
14844 14811 14722
14866 14895 14805
14937 14940 14850
15061 15046 14956
14770 14783 14695
14870 14864 14776
14874 14911 14823
14703 14780 14693
14649 14733 14646
14614 14671 14584
14594 14664 14577
14790 14834 14746
14832 14889 14800
14841 14887 14799
14782 14816 14728
14719 14767 14680
14886 14945 14857
15112 15143 15053
15019 15099 15010
14962 15091 15003
15300 15405 15315
15435 15545 15454
15666 15771 15678
15764 15870 15777
15852 15975 15881
16114 16237 16141
16420 16539 16440
16640 16808 16709
16784 16955 16855
16909 17039 16939
16855 16968 16869
16974 17070 16971
17069 17135 17035
17457 17518 17416
17653 17720 17615
All figures on this page assume dividends and distributions were reinvested.
Index figures do not include trading and management costs, which would lower
performance. The indices are unmanaged, and you cannot invest in them directly.
The fund's share price and principal value changes, and when you sell your
shares they may be worth more or less than what you paid for them. Keep in mind
that past performance isn't an indication of future results.
1 The fund changed its benchmark on 2/28/98, when it changed from being a
government bond fund to its current strategy. Benchmark performance shown
here is the Lehman Brothers General U.S. Government Bond Index from fund
inception through 2/28/98 and the Lehman Brothers U.S. Aggregate Bond Index
from 3/1/98 through the end of the report period. Benchmark performance for
the 1 year period is the Lehman U.S. Aggregate Bond Index.
2 Fund yield and returns reflect expense reductions by the fund's investment
adviser (CSIM) and Schwab. Without these reductions, the fund's yield and
returns would have been lower.
3 Source: Morningstar, Inc. As of 08/31/01, the total number of funds in the
Intermediate-Term Bond Fund category for the one- and five-year periods was
620 and 361, respectively.
17
SCHWAB TOTAL BOND MARKET INDEX FUND
FUND FACTS
TOP TEN HOLDINGS 1 as of 8/31/01
PERCENTAGE OF
SECURITY RATE MATURITY DATE INVESTMENTS
----------------------------------------------------------------------------------
(1) FANNIE MAE 6.50% 09/01/31 4.7%
(2) FANNIE MAE 7.00% 09/01/31 3.5%
(3) FANNIE MAE 6.00% 09/01/31 2.3%
(4) FANNIE MAE 7.50% 09/01/31 2.1%
(5) FANNIE MAE 8.00% 09/01/31 1.7%
(6) GINNIE MAE 7.00% 09/01/31 1.4%
(7) CENDANT CORP. 7.75% 12/01/03 1.4%
(8) DRESDNER FUNDING TRUST I, 144A 8.15% 06/30/31 1.4%
(9) ALLETE 4.61% 10/22/01 1.3%
(10) GINNIE MAE 8.00% 09/01/31 1.3%
----------------------------------------------------------------------------------
TOTAL 21.1%
DIVIDENDS PAID in each fiscal year
[BAR CHART]
INCOME DIVIDENDS
PER SHARE
1993 2 0.31
1994 0.6
1995 0.69
1996 0.65
1997 0.65
1998 0.6
1999 0.55
2000 0.61
2001 0.6
1 This list is not a recommendation of any security by the adviser.
2 Period from the fund's inception on 3/5/93 through 8/31/93.
18
COMPOSITION OF THE FUND'S PORTFOLIO as of 8/31/01
All figures are shown as a percentage of the fund's investments. Holdings may
have changed since the report date.
BY SECURITY TYPE
[PIE CHART]
1. 47.2% Corporate Bonds
2. 46.9% U.S. Government Securities
3. 4.1% Asset-Backed Obligations
4. 1.5% Commercial Paper & Other
Corporate Obligations
5. 0.3% Preferred Stock
BY CREDIT QUALITY 1
[PIE CHART]
1. 49.7% AAA
2. 2.8% AA
3. 25.6% A
4. 20.1% BBB
5. 0.3% BB
6. 1.5% Short-Term Ratings
BY MATURITY
[PIE CHART]
1. 26.6% 0-1 Year
2. 60.2% 2-10 Years
3. 6.7% 11-20 Years
4. 6.5% 21-30 Years
FUND FACTS as of 8/31/01
FUND INDEX 2
---------------------------------------------------------------------
Number of Issues 150 6,665
---------------------------------------------------------------------
Yield to Maturity 5.95% 5.64%
---------------------------------------------------------------------
Weighted Average Rate 7.06% 6.73%
---------------------------------------------------------------------
Weighted Average Maturity 8.2 yrs 8.2 yrs
---------------------------------------------------------------------
Weighted Average Duration 4.6 yrs 4.6 yrs
---------------------------------------------------------------------
Weighted Average Credit
Quality AA AA
--------------------------------------------------
EXPENSE RATIO as of 8/31/01
[BAR CHART]
PEER GROUP
FUND AVERAGE
0.35% 1.11% 3
1 Based on ratings by Standard & Poor's and Moody's. Where ratings are
different, the chart uses the higher rating.
2 Source for Index data: The Lehman Brothers U.S. Aggregate Bond Index.
3 Source: Morningstar, Inc. As of 8/31/01, the total number of funds in the
Intermediate-Term Bond Fund category for the one- and five-year periods was
620 and 361, respectively.
19
SCHWAB TOTAL BOND MARKET INDEX FUND -- FINANCIALS
FINANCIAL TABLES
These pages provide additional data on the fund's performance, portfolio
holdings, expenses and business operations. These figures have been audited by
PricewaterhouseCoopers LLP.
Two other sections of this report provide context for the data in these
financials. The FINANCIAL NOTES section contains information about the fund's
business structure, accounting practices and other matters, completing the data
given in these tables. The final section, HOW TO READ THIS REPORT, includes
guides designed to make the financials easy to read and understand.
FINANCIAL HIGHLIGHTS
9/1/00 - 9/1/99 - 9/1/98 - 9/1/97 - 9/1/96 -
8/31/01 8/31/00 8/31/99 8/31/98 8/31/97
----------------------------------------------------------------------------------------------------------
PER-SHARE DATA ($)
----------------------------------------------------------------------------------------------------------
Net asset value at beginning of period 9.65 9.58 10.18 9.75 9.38
--------------------------------------------------------
Income from investment operations:
Net investment income 0.60 0.61 0.55 0.60 0.65
Net realized and unrealized gains or
losses 0.59 0.07 (0.53) 0.43 0.37
--------------------------------------------------------
Total income from investment
operations 1.19 0.68 0.02 1.03 1.02
Less distributions:
Dividends from net investment income (0.60) (0.61) (0.55) (0.60) (0.65)
Distributions from net realized gains - - (0.07) - -
--------------------------------------------------------
Total distributions (0.60) (0.61) (0.62) (0.60) (0.65)
--------------------------------------------------------
Net asset value at end of period 10.24 9.65 9.58 10.18 9.75
========================================================
Total return (%) 12.68 7.36 0.14 10.83 11.18
RATIOS/SUPPLEMENTAL DATA (%)
----------------------------------------------------------------------------------------------------------
Ratio of net operating expenses to
average net assets 0.35 0.35 1 0.35 0.31 0.20
Expense reductions reflected in above ratio 0.23 0.27 0.39 0.51 0.98
Ratio of net investment income to
average net assets 6.00 6.42 5.55 5.86 6.74
Portfolio turnover rate 153 135 174 285 51
Net assets, end of period ($ x 1,000,000) 926 647 480 294 25
1 Would have been 0.36% if non-routine expenses (proxy fees) had been included.
See the Financial Notes, which are integral to this information.
20
PORTFOLIO HOLDINGS
As of August 31, 2001.
This section shows all the securities in the fund's portfolio and their market
value, as of the report date.
We use the symbols below to designate certain characteristics. With the top ten
holdings, the number in the circle is the security's rank among the top ten.
(1) Top ten holding
= Delayed-delivery security
For fixed-rate obligations, the rate shown is the interest rate (the rate
established when the obligation was issued) and the maturity date shown is the
stated legal maturity. For variable-rate obligations, the rate shown is the rate
as of the report date, and the maturity shown is the later of the next interest
rate change date or demand date.
The pie chart below shows the fund's major asset categories and the market value
and cost of the securities in each category.
ALL DOLLAR VALUES ARE IN THOUSANDS.
[PIE CHART]
47.2% CORPORATE BONDS
Market Value: $570,960
Cost: $557,432
46.9% U.S. GOVERNMENT SECURITIES
Market Value: $566,994
Cost: $559,359
4.1% ASSET-BACKED OBLIGATIONS
Market Value: $50,138
Cost: $49,938
1.5% COMMERCIAL PAPER & OTHER
CORPORATE OBLIGATIONS
Market Value: $17,994
Cost: $17,994
0.3% PREFERRED STOCK
Market Value: $3,777
Cost: $3,500
====================================
100.0% TOTAL INVESTMENTS
Market Value: $1,209,863
Cost: $1,188,223
SECURITY
SERIES FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
CORPORATE BONDS
47.2% of investments
FIXED RATE
OBLIGATIONS 28.9%
----------------------------------------------------------------
ALCOA INC.
7.38%, 08/01/10 5,000 5,487
ANDERSON EXPLORATION, LTD.
6.75%, 03/15/11 7,000 7,130
AOL TIME WARNER, INC.
6.75%, 04/15/11 7,000 7,183
APOGENT TECH
Series B
8.00%, 04/01/11 5,000 5,361
ATHENA NEUROSCIENCES
FINANCE, L.L.C.
7.25%, 02/21/08 7,500 7,886
AXA FINANCIAL, INC.
7.75%, 08/01/10 4,000 4,408
BANK OF AMERICA CORP.
7.80%, 02/15/10 5,000 5,508
BCHS ISSUANCES, LTD.
7.63%, 09/14/10 7,000 7,481
CARDINAL HEALTHCARE, INC.
6.75%, 02/15/11 10,000 10,473
(7) CENDANT CORP.
7.75%, 12/01/03 16,600 17,370
CENDENT CORP., 144A
6.88%, 08/15/06 3,500 3,538
CIT HOLDINGS, L.L.C.
6.88%, 02/16/05 9,900 10,383
CREDIT SUISSE FIRST
BOSTON U.S.A., INC.
5.88%, 08/01/06 5,000 5,073
CSC HOLDINGS, INC.
8.13%, 07/15/09 4,000 4,158
CVS CORP.
5.63%, 03/15/06 9,900 9,960
DANA CREDIT CORP., 144A
7.25%, 12/16/02 5,000 4,921
(8) DRESDNER FUNDING TRUST I, 144A
8.15%, 06/30/31 16,000 17,286
ERAC USA FINANCE CO., 144A
7.35%, 06/15/08 7,000 7,240
FORD MOTOR CREDIT
6.88%, 02/01/06 6,000 6,207
See the Financial Notes, which are integral to this information.
21
SCHWAB TOTAL BOND MARKET INDEX FUND -- FINANCIALS
PORTFOLIO HOLDINGS Continued
As of August 31, 2001
SECURITY
SERIES FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
GENERAL ELECTRIC
CAPITAL CORP.
7.50%, 06/05/03 9,900 10,472
GOLDMAN SACHS GROUP,
INC.
6.88%, 01/15/11 5,000 5,176
ITT CORP.
7.38%, 11/15/15 3,400 3,223
J.C. PENNEY CO., INC.
7.25%, 04/01/02 3,320 3,337
6.50%, 06/15/02 4,450 4,456
KELLOGG CO.
Series B
7.45%, 04/01/31 7,400 7,825
MARLIN WATER TRUST II
/ CAPITAL CORP. II, 144A
6.31%, 07/15/03 8,000 8,082
MERITA BANK
7.15%, 09/11/02 12,425 12,725
MORGAN STANLEY DEAN
WITTER & CO.
6.75%, 04/15/11 5,000 5,158
NEWS AMERICA
HOLDINGS, INC.
10.13%, 10/15/12 13,500 14,697
PEARSON, PLC, 144A
7.00%, 06/15/11 15,000 15,283
PETROLEOS MEXICANOS
9.50%, 03/15/06 5,000 5,519
PHILLIPS PETROLEUM CO.
9.38%, 02/15/11 4,900 5,933
QWEST COMMUNICATIONS
INTERNATIONAL
Series B
7.50%, 11/01/08 4,900 5,082
RAYTHEON CO.
6.45%, 08/15/02 4,500 4,540
ROYAL BANK OF SCOTLAND
GROUP, PLC
7.82%, 09/01/01 7,000 7,497
7.65%, 09/30/31 7,400 7,503
SALOMON SMITH BARNEY
HOLDINGS, INC.
5.88%, 03/15/06 12,900 13,156
STANDARD CHARTERED BANK
8.00%, 05/30/31 5,000 5,277
STARWOOD HOTELS &
RESORTS WORLDWIDE, INC.
6.75%, 11/15/05 2,000 1,992
BAE SYSTEMS ASSET TRUST,
144A
Series 2001 Class B
7.16%, 12/15/11 6,000 6,238
SECURITY FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
VERIZON COMMUNICATIONS
8.75%, 11/01/21 5,000 5,996
VERIZON NEW ENGLAND, INC.
6.50%, 09/15/11 7,000 7,167
VIACOM, INC.
6.63%, 05/15/11 12,000 12,342
WASTE MANAGEMENT, INC.
7.38%, 08/01/10 5,000 5,238
WORLDCOM, INC.
6.50%, 05/15/04 8,000 8,205
8.25%, 05/15/31 10,000 10,254
---------
349,426
VARIABLE RATE OBLIGATIONS 18.3%
------------------------------------------------------------
(9) ALLETE
4.61%, 10/22/01 16,000 16,024
AMERICAN ELECTRIC
POWER
4.13%, 11/23/01 2,300 2,301
AVNET INC.
4.63%, 10/17/01 10,000 10,003
BEAR STEARNS CO., INC.
4.42%, 09/04/01 5,635 5,640
4.15%, 09/21/01 15,500 15,505
3.95%, 10/29/01 4,650 4,648
COASTAL CORP., 144A
4.45%, 09/04/01 10,000 10,000
CONSTELLATION ENERGY
GROUP, 144A
4.38%, 10/15/01 5,000 5,002
COX COMMUNICATIONS, INC.
4.36%, 11/07/01 12,840 12,886
ENRON CORP., 144A
4.37%, 09/10/01 7,000 7,000
ERP OPERATING, L.P.
4.18%, 11/21/01 10,000 10,059
FORD CREDIT CANADA,
LTD., 144A
4.04%, 09/17/01 2,000 1,999
FORD MOTOR CREDIT CORP.
4.73%, 09/10/01 5,000 5,034
4.45%, 10/17/01 10,000 10,036
FORENINGS SPARRBANKEN
AB, 144A
4.63%, 12/18/01 13,650 13,697
See the Financial Notes which are integral to this information
22
SECURITY FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
GENERAL MOTORS
ACCEPTANCE CORP.
4.26%, 10/17/01 10,000 10,019
4.45%, 11/06/01 10,000 10,076
GULF STATES UTILITIES
4.83%, 11/01/01 5,000 4,998
INDIANA MICHIGAN POWER
4.62%, 09/04/01 6,500 6,506
INTERNATIONAL PAPER CO.
4.62%, 10/08/01 6,500 6,508
LEHMAN BROTHERS
HOLDINGS, INC.
4.57%, 10/15/01 3,200 3,216
MBNA CORP.
4.61%, 11/16/01 12,000 12,016
NORDBANKEN
4.41%, 09/27/01 2,950 2,951
PSEP CAPITAL CORP.
5.02%, 09/10/01 10,500 10,491
PUBLIC SERVICE
ENTERPRISE
4.42%, 11/21/01 8,000 8,007
QWEST CAPITAL
FUNDING, INC.
4.27%, 10/08/01 4,000 4,006
RAYTHEON CO.
4.63%, 09/01/01 5,900 5,901
UTILICORP UNITED,
INC., 144A
4.95%, 11/15/01 7,000 7,005
--------
221,534
U.S. GOVERNMENT SECURITIES
46.9% of investments
U.S. TREASURY OBLIGATIONS 18.9%
------------------------------------------------------------
U.S. TREASURY BONDS
10.38%, 11/15/12 5,000 6,483
9.88%, 11/15/15 5,000 7,278
9.00%, 11/15/18 10,000 14,003
7.63%, 11/15/22 4,000 5,076
6.13%, 08/15/29 4,000 4,378
6.25%, 05/15/30 13,630 15,250
U.S. TREASURY NOTES
5.75%, 10/31/02 1,000 1,027
5.63%, 11/30/02 3,000 3,081
5.13%, 12/31/02 3,000 3,067
4.75%, 01/31/03 5,300 5,395
5.50%, 02/28/03 3,000 3,087
4.25%, 03/31/03 4,000 4,044
4.00%, 04/30/03 2,200 2,216
5.75%, 04/30/03 4,000 4,142
4.25%, 05/31/03 5,000 5,057
3.88%, 06/30/03 2,300 2,312
5.38%, 06/30/03 2,700 2,786
3.88%, 07/31/03 6,350 6,382
3.63%, 08/31/03 4,500 4,501
4.25%, 11/15/03 9,000 9,101
4.75%, 02/15/04 8,000 8,176
5.25%, 05/15/04 5,500 5,692
6.00%, 08/15/04 5,500 5,806
5.88%, 11/15/04 5,000 5,265
7.88%, 11/15/04 5,000 5,560
7.50%, 02/15/05 7,000 7,750
6.75%, 05/15/05 3,000 3,256
5.75%, 11/15/05 2,000 2,108
5.88%, 11/15/05 2,000 2,120
5.63%, 02/15/06 2,000 2,107
4.63%, 05/15/06 9,100 9,197
7.00%, 07/15/06 5,000 5,554
6.50%, 10/15/06 3,000 3,275
6.25%, 02/15/07 7,000 7,586
6.63%, 05/15/07 8,000 8,827
6.13%, 08/15/07 3,000 3,239
5.63%, 05/15/08 3,000 3,158
4.75%, 11/15/08 4,250 4,248
5.50%, 05/15/09 5,000 5,223
5.75%, 08/15/10 7,000 7,432
5.00%, 02/15/11 3,500 3,524
5.00%, 08/15/11 10,000 10,135
--------
227,904
MORTGAGE-BACKED OBLIGATIONS 23.7%
------------------------------------------------------------
FANNIE MAE
= 5.50%, 09/01/16 9,000 8,876
= 6.00%, 09/01/16 9,000 9,037
= 6.50%, 09/01/16 15,000 15,286
= 7.00%, 09/01/16 9,000 9,270
= 7.50%, 09/01/16 7,000 7,260
=(3) 6.00%, 09/01/31 28,000 27,545
=(1) 6.50%, 09/01/31 57,000 57,267
=(2) 7.00%, 09/01/31 41,000 41,923
=(4) 7.50%, 09/01/31 25,000 25,781
=(5) 8.00%, 09/01/31 20,000 20,794
= 8.50%, 09/01/31 3,000 3,158
See the Financial Notes, which are integral to this information.
23
SCHWAB TOTAL BOND MARKET INDEX FUND -- FINANCIALS
PORTFOLIO HOLDINGS Continued
As of August 31, 2001.
SECURITY FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
GINNIE MAE
= 6.00%, 09/01/31 3,000 2,977
= 6.50%, 09/01/31 9,000 9,093
=(6) 7.00%, 09/01/31 17,000 17,446
= 7.50%, 09/01/31 15,000 15,534
=(10) 8.00%, 09/01/31 15,000 15,652
--------
286,899
AGENCY OBLIGATIONS 4.3%
----------------------------------------------------
FANNIE MAE
6.38%, 10/15/02 5,000 5,155
5.75%, 04/15/03 5,000 5,153
5.13%, 02/13/04 5,000 5,106
5.50%, 02/15/06 6,000 6,147
6.00%, 05/15/08 5,000 5,209
FREDDIE MAC
5.05%, 04/02/04 10,000 10,052
6.88%, 01/15/05 5,000 5,357
5.63%, 03/15/11 10,000 10,012
--------
52,191
ASSET-BACKED OBLIGATIONS
4.1% of investments
SECURITY
SERIES FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
AIRPLANES PASS
THROUGH TRUST
Series 1R Class A8
4.21%, 09/17/01 15,000 14,999
COUNTRYWIDE ASSET-
BACKED CERTIFICATES
Series 2001-3 Class M1
4.08%, 09/25/01 3,000 2,996
Series 2001-BC3 Class M1
4.13%, 09/25/01 5,000 4,997
MBNA MASTER CREDIT
CARD TRUST II
Series 2000-C Class A
3.99%, 09/17/01 10,000 10,024
PEGASUS AVIATION LEASE
SECURITIZATION
Series 2001-1A Class A3
4.39%, 09/10/01 11,547 11,726
PROVIDENT BANK HOME
EQUITY LOAN TRUST
Series 1997-2 Class A5
3.81%, 09/25/01 5,399 5,396
--------
50,138
SECURITY FACE VALUE MKT. VALUE
RATE, MATURITY DATE ($ x 1,000) ($ x 1,000)
COMMERCIAL PAPER &
OTHER CORPORATE OBLIGATIONS
1.5% of investments
CONAGRA FOODS, INC.
3.66%, 09/04/01 8,000 7,997
DUKE ENERGY FIELD
SERVICE, L.L.C.
3.80%, 09/04/01 3,000 2,999
KINDER MORGAN
ENERGY PARTNERS
3.85%, 09/04/01 7,000 6,998
---------
17,994
PREFERRED STOCK 0.3% of investments
SECURITY AND NUMBER OF SHARES MKT. VALUE
($ x 1,000)
COBANK, 144A 70,000 3,777
--------------------------------------------------------------------------------
END OF PORTFOLIO HOLDINGS. For totals, please turn to the first page of holdings
for this fund.
See the Financial Notes, which are integral to this information.
24
Statement of
ASSETS AND LIABILITIES
As of August 31, 2001. All numbers x 1,000 except NAV.
ASSETS
------------------------------------------------------------------------
Investments, at market value (including $161,954 of
securities on loan) $1,209,863 a
Cash 292
Collateral held for securities on loan 164,318
Receivables:
Fund shares sold 1,713
Interest 11,757
Prepaid expenses + 64
----------------
TOTAL ASSETS 1,388,007
LIABILITIES
------------------------------------------------------------------------
Collateral held for securities on loan 164,318
Payables:
Fund shares redeemed 9,976
Dividends to shareholders 513
Investments bought 286,696
Investment adviser and administrator fees 2
Transfer agent and shareholder service fees 13
Accrued expenses + 52
----------------
TOTAL LIABILITIES 461,570
NET ASSETS
------------------------------------------------------------------------
TOTAL ASSETS 1,388,007
TOTAL LIABILITIES - 461,570
----------------
NET ASSETS $ 926,437
NET ASSETS BY SOURCE
Capital received from investors 895,831
Distributions in excess of net investment income (232)
Net realized capital gains 9,198 b
Net unrealized capital gains 21,640
NET ASSET VALUE (NAV)
SHARES
NET ASSETS / OUTSTANDING = NAV
$926,437 90,513 $10.24
FEDERAL TAX DATA
------------------------------------------------------------------------
COST BASIS OF PORTFOLIO $1,188,817
NET UNREALIZED GAINS
AND LOSSES:
Gains $ 21,070
Losses + (24)
------------
$ 21,046
a The fund's amortized cost for these securities was $1,188,223. Not
counting short-term obligations and government securities, the fund
paid $517,664 for securities during the reporting period, and received
$395,611 from securities it sold or that matured. For long-term
government securities, the fund paid $936,851 during the reporting
period and received $818,460 for securities it sold or that matured.
This includes $22,039 in transactions with other SchwabFunds(R).
b These derive from investments, swap agreements and short sales.
See the Financial Notes, which are integral to this information.
25
SCHWAB TOTAL BOND MARKET INDEX FUND -- Financials
Statement of
OPERATIONS
For September 1, 2000 through August 31, 2001. All numbers x 1,000.
INVESTMENT INCOME
-----------------------------------------------------------------------
Interest $48,536
Lending of securities + 496
------------
TOTAL INVESTMENT INCOME 49,032
NET REALIZED GAINS AND LOSSES
-----------------------------------------------------------------------
Net realized gains on investments sold 25,850
Net realized gains on short sales 37
Net realized losses on swap agreements + (479)
-------------
NET REALIZED GAINS 25,408
NET UNREALIZED GAINS
-----------------------------------------------------------------------
Net unrealized gains on investments 20,972
EXPENSES
-----------------------------------------------------------------------
Investment adviser and administrator fees 2,100 a
Transfer agent and shareholder service fees 1,932 b
Trustees' fees 10 c
Custodian and portfolio accounting fees 222
Professional fees 24
Registration fees 94
Shareholder reports 55
Other expenses + 17
-------------
Total expenses 4,454
Expense reduction - 1,749 d
-------------
NET EXPENSES 2,705
INCREASE IN NET ASSETS FROM OPERATIONS
-----------------------------------------------------------------------
TOTAL INVESTMENT INCOME 49,032
NET EXPENSES - 2,705
-------------
NET INVESTMENT INCOME 46,327
NET REALIZED GAINS 25,408 e
NET UNREALIZED GAINS + 20,972 e
-------------
INCREASE IN NET ASSETS FROM OPERATIONS $92,707
a Calculated as a percentage of average daily net assets: 0.30% of the first
$500 million and 0.22% of assets beyond that.
b Calculated as a percentage of average daily net assets: for transfer agent
services, 0.05% of the fund's assets; for shareholder services, 0.20% of the
fund's assets.
c For the fund's independent trustees only.
d This reduction was made by the investment adviser (CSIM). It reflects a
guarantee by CSIM and the transfer agent and shareholder service agent
(Schwab) to limit the operating expenses of this fund through at least
November 15, 2002, to 0.35% of average daily net assets. This limit doesn't
include interest, taxes and certain non-routine expenses.
e These add up to a net gain on investments of $46,380.
See the Financial Notes, which are integral to this information.
26
Statements of
CHANGES IN NET ASSETS
For the current and prior reporting periods. All numbers x 1,000.
OPERATIONS
--------------------------------------------------------------------------
9/1/00 - 8/31/01 9/1/99 - 8/31/00
Net investment income $46,327 $36,051
Net realized gains or losses 25,408 (5,924)
Net unrealized gains + 20,972 10,991
----------------------------------
INCREASE IN NET ASSETS
FROM OPERATIONS 92,707 41,118
DISTRIBUTIONS PAID
--------------------------------------------------------------------------
Dividends from net
investment income $46,451 $36,076
TRANSACTIONS IN FUND SHARES
--------------------------------------------------------------------------
9/1/00 - 8/31/01 9/1/99 - 8/31/00
Quantity Value Quantity Value
Shares sold 40,081 $398,466 28,519 $272,107
Shares reinvested 4,360 43,287 3,469 33,062
Shares redeemed + (20,933) (208,107) (15,074) (143,615)
---------------------------------------------------
NET INCREASE 23,508 $233,646 16,914 $161,554
SHARES OUTSTANDING AND NET ASSETS
--------------------------------------------------------------------------
9/1/00 - 8/31/01 9/1/99 - 8/31/00
Shares Net Assets Shares Net Assets
Beginning of period 67,005 $646,535 50,091 $479,939
Total increase + 23,508 279,902 16,914 166,596 a
--------------------------------------------------
END OF PERIOD 90,513 $926,437 67,005 $646,535 b
a Figures for shares represent the net changes in shares from the transactions
described above. Figures for net assets represent the changes in net assets
from operations plus the changes in value from transactions in fund shares,
minus distributions paid.
b Includes cumulative distributions that exceed net investment income by $232
for the current period and $108 for the prior period.
Percent of fund shares owned by other SchwabFunds(R) as of the end of the
current period:
SCHWAB MARKETTRACK PORTFOLIOS(R)
Growth Portfolio 9.3%
Balanced Portfolio 20.1%
Conservative Portfolio 12.73%
SCHWAB ANNUITY PORTFOLIOS
Growth Portfolio II 0.4%
See the Financial Notes, which are integral to this information.
27
FINANCIAL NOTES
FINANCIAL NOTES
BUSINESS STRUCTURE OF THE FUNDS
EACH OF THE FUNDS DISCUSSED IN THIS REPORT IS A SERIES OF SCHWAB INVESTMENTS, A
NO-LOAD, OPEN-END MANAGEMENT INVESTMENT COMPANY. The company is organized as a
Massachusetts business trust and is registered under the Investment Company Act
of 1940, as amended. The sidebar shows the funds in this report and their trust.
THE FUNDS OFFER ONE SHARE CLASS. Shares are bought and sold at net asset value,
or 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 issue as many shares as
necessary.
FUND OPERATIONS
Most of the funds' investments are described in the fund-by-fund sections
earlier in this report. However, there are certain other investments and
policies that may affect a fund's financials. The most significant of these are
described below. Other policies concerning the funds' business operations also
are described here.
THE FUNDS DECLARE DIVIDENDS EVERY DAY THEY ARE OPEN FOR BUSINESS. These
dividends, which are substantially equal to a fund's net investment income for
that day, are paid out to shareholders once a month. The funds may make
distributions from any net realized capital gains once a year.
THE FUNDS MAY ENTER INTO SWAP AGREEMENTS. In these transactions, a fund and a
counterparty agree to swap payments that are based on two different rates. The
counterparty is typically a large financial institution, and the term of the
swap is specified in advance. For example, a fund may agree that for six months
it will pay the counterparty the equivalent of the interest on a given amount
invested at LIBOR (the London Interbank Offered Rate). In exchange, the
counterparty might agree to pay a fund the equivalent of the same amount
invested in a certain bond index during this same six months.
Swap agreements carry certain risks. Because the net gains or losses stemming
from a swap agreement depend on the movements of one rate relative to another, a
fund could experience unanticipated losses if one or both rates failed to behave
as expected. A fund also could lose money if a counterparty failed to honor the
terms of a swap agreement.
THE TRUST AND ITS FUNDS
-------------------------------------------------------------------------------
This list shows all of the funds included in Schwab Investments. The funds
discussed in this report are highlighted.
SCHWAB INVESTMENTS
Organized October 26, 1990
Schwab 1000 Fund(R)
Schwab Short-Term Bond Market Index Fund
Schwab Total Bond Market Index Fund
Schwab California Short/Intermediate
Tax-Free Bond Fund
Schwab California Long-Term Tax-Free Bond Fund
Schwab Short/Intermediate Tax-Free Bond Fund
Schwab Long-Term Tax-Free Bond Fund
Schwab YieldPlus Fund(R)
-------------------------------------------------------------------------------
28
THE FUNDS MAY LOAN SECURITIES TO CERTAIN BROKERS, DEALERS AND OTHER FINANCIAL
INSTITUTIONS WHO PAY THE FUNDS NEGOTIATED FEES. The funds receive cash, letters
of credit or U.S. Government securities as collateral on these loans. The value
of the collateral must be at least 102% of the market value of the loaned
securities as of the first day of the loan, and at least 100% each day
thereafter.
THE FUNDS MAY BUY SECURITIES ON A DELAYED-DELIVERY BASIS. In these transactions,
a fund agrees to buy a security for a stated price, with settlement generally
occurring within two weeks. If the security's value falls before settlement
occurs, a fund could end up paying more for the security than its market value
at the time of settlement. The funds have set aside sufficient securities as
collateral for those securities bought on a delayed-delivery basis.
THE FUNDS MAY ALSO SELL SECURITIES SHORT (SELL SECURITIES THEY DO NOT OWN). When
they do so, the funds also place assets worth at least 100% of the value of the
shorted securities into segregated accounts, as collateral. If the market value
of the shorted securities subsequently falls, the funds can realize a gain.
However, if the value rises, the funds typically would have to add to their
collateral or close out their short position at a loss.
THE SCHWAB TOTAL BOND MARKET INDEX FUND MAY ENTER INTO MORTGAGE DOLLAR ROLL
TRANSACTIONS. In these transactions, the fund sells mortgage-backed securities
for delivery in the current month and simultaneously agrees to buy back, on a
given date in the future, securities of a similar type, coupon rate and
maturity.
THE FUNDS PAY FEES FOR VARIOUS SERVICES. Through their trust, the funds have
agreements with Charles Schwab Investment Management, Inc. (CSIM) to provide
investment advisory and administrative services and with Charles Schwab & Co.,
Inc. (Schwab) to provide transfer agent and shareholder services.
Although these agreements specify certain fees for these services, CSIM and
Schwab have made additional agreements with the funds that may limit the total
expenses charged. The rates and limitations for these fees vary from fund to
fund, and are described in each fund's Statement of Operations.
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 reporting period. The trust did
not pay any of these persons for their service as trustees, but it did pay
non-interested persons (independent trustees), as noted in each fund's Statement
of Operations.
THE FUNDS MAY ENGAGE IN CERTAIN TRANSACTIONS INVOLVING AFFILIATES. For instance,
a fund may let other SchwabFunds(R) buy and sell fund shares, particularly
Schwab MarketTrack Portfolios(R).
The funds may make direct transactions with certain other SchwabFunds when
practical. When one fund is seeking to sell a security that another is seeking
to buy, an interfund transaction can allow both funds to benefit by reducing
transaction costs. This practice is limited to funds that share the same
investment adviser, trustees and officers.
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.
29
FINANCIAL NOTES
ACCOUNTING POLICIES
The following are the main policies the funds use in preparing their financial
statements.
THE FUNDS VALUE THE SECURITIES IN THEIR PORTFOLIOS EVERY BUSINESS DAY. The funds
use the following policies to value various types of securities:
BONDS AND NOTES: valued at halfway between the most recent bid and asked
quotes or, if such quotes are unavailable, at prices for securities of
comparable maturity, credit quality and type. Valuations for bonds and notes
are provided by an independent bond-pricing service.
SECURITIES FOR WHICH NO QUOTED VALUE IS AVAILABLE, INCLUDING RESTRICTED
SECURITIES: valued at fair value, as determined in good faith by the fund's
investment adviser using guidelines adopted by the fund's Board of Trustees.
SWAP AGREEMENTS: each open contract is valued at a formula that varies with
the specific terms of the agreement.
SHORT-TERM SECURITIES (60 DAYS OR LESS TO MATURITY): valued at amortized
cost.
IF A FUND SELLS SECURITIES SHORT, it records the proceeds received as an asset
and the obligation to buy back the securities as a liability. At the time a
short sale is initiated, the asset and the liability are of equal value and
effectively cancel each other out. Subsequently, the fund values the liability
side of the transaction according to the market price of the securities sold
short, and values the asset side according to the value of the proceeds. When
the fund closes out a short position (buys the security), it records the outcome
as a realized gain or loss. Interest accrued on securities sold short is
recorded as an expense on the fund's records.
SECURITY TRANSACTIONS are recorded as of the date the order to buy or sell the
security is executed.
INTEREST INCOME is recorded as it accrues. If a fund bought a debt instrument at
a discount (that is, for less than its face value) or a premium (more than face
value), it amortizes the discount or premium from the current date up to
maturity. The fund then increases (in the case of discounts) or reduces (in the
case of premiums) the income it records from the security. If the security is
callable (meaning that the issuer has the option to pay it off before its
maturity date), then the fund amortizes the premium to the security's call date
and price, rather than the maturity date and price.
REALIZED GAINS AND LOSSES from security transactions are based on the identified
costs of the securities involved.
A revised AICPA Audit and Accounting Guide, Audits of Investment Companies, was
issued in November 2000 and is effective for fiscal years beginning after
December 15, 2000. The revised guide will require a fund to classify paydown
gains and losses on asset-backed securities, presently included in realized
gains and losses, as part of interest income on the Statement of Operations.
Each fund expects that the adoption of these principles will not be material to
its financial statements.
EXPENSES that are specific to a fund are charged directly to that fund. Expenses
that are common to all funds within the trust generally are allocated among the
funds in proportion to their net assets.
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 keeps certain assets in segregated accounts, as may be
required by securities law.
30
FINANCIAL NOTES
THE ACCOUNTING POLICIES DESCRIBED ABOVE CONFORM WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES. 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.
31
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF:
Schwab Short-Term Bond Market Index Fund
Schwab Total Bond Market Index Fund
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 Short-Term Bond Market Index Fund and
Schwab Total Bond Market Index Fund (two of the portfolios constituting Schwab
Investments, hereafter referred to as the "Funds") at August 31, 2001, the
results of each of their operations for the year then ended, the changes in each
of their net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Funds' management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 2001 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PRICEWATERHOUSECOOPERS LLP
San Francisco, CA
October 12, 2001
32
HOW TO READ THIS REPORT
This report, including the financial tables, has been designed to be EASY TO
READ. The next few pages provide additional information that can help you more
fully understand the financial tables and why they are important to ALL FUND
INVESTORS.
In this section, we take a closer look at the types of information presented in
the financial tables.
Brief CALLOUTS add context to some of the most important elements in the tables,
and help explain certain fund operations and accounting principles.
At the end, a GLOSSARY defines many of the financial terms that are used in this
report.
33
HOW TO READ THIS REPORT Continued
[GRAPHIC OF SAMPLE OF FINANCIAL HIGHLIGHTS TABLE]
The financial highlights summarize the fund's activities over the past five
years (or since inception, if the fund doesn't yet have five years of operating
history).
The figures in the first part of the table are for a single share of the fund
that was "outstanding," or in existence, during the periods indicated.
These lines show how much the fund earned per share, and where these earnings
came from: how much was from interest and dividends, and how much from capital
appreciation (that is, price increases of investments the fund owned). A fund
may show losses in this section if its expenses exceeded its income or its
capital losses exceeded its capital gains.
Some funds, such as money funds, typically receive all their earnings as
interest, while some equity funds may have only appreciation, or may receive
interest and dividends only occasionally.
Total return shows what an investor in the fund would have earned or lost during
each period indicated, assuming that all dividends and distributions were
reinvested. Because the numbers in the financial highlights are for a fund's
fiscal year, they will be different from calendar year numbers, except for funds
whose fiscal year is the same as the calendar year.
34
[GRAPHIC OF SAMPLE OF FINANCIAL HIGHLIGHTS TABLE]
Table is for illustration only.
In some cases, such as with funds that started partway through their planned
fiscal year or have changed their fiscal year, the financial highlights may
contain a "stub period" that is less than 12 months.
In financial tables, parentheses around numbers are used to indicate a negative
number, such as a loss, or a number that is being subtracted, such as a
distribution paid by a fund to its shareholders.
The figures in this part of the table disclose a fund's annual operating
expenses. The expenses are shown as a percentage of a fund's average net assets,
because they are paid from these assets.
For some funds, the annual expenses are capped at a certain level. With these
funds, there are two sets of expense figures: net expenses and the amounts of
any expense reductions. The net figures reflect what the expenses actually were,
after the reductions.
This shows you how much a fund netted in dividend and interest income (i.e.,
total dividends and interest minus expenses), expressed as a percentage of the
fund's average net assets.
The turnover rate tells you how actively a fund has traded securities. A rate of
100% would be the equivalent of replacing every security in the portfolio over
the period of a year.
Consistently high turnover can result in taxable distributions, which can lower
after-tax performance -- although this is not a concern if your investment is
held in an IRA, 401(k) or other tax-deferred account.
35
HOW TO READ THIS REPORT Continued
[GRAPHIC OF SAMPLE OF PORTFOLIO HOLDINGS TABLE]
Table is for illustration only.
The Portfolio Holdings (sometimes also called the Schedule of Investments) is a
snapshot of all securities a fund held on the last day of the report period.
Symbols that may appear in the Portfolio Holdings:
(1) Top ten holding -- shows a fund's ten largest positions, as measured by
market value.
+ Credit-enhanced security -- indicates a security that is backed by the
credit of a third party (usually a large financial institution). An issuer
uses credit enhancement to give its securities a higher credit rating,
which means that the issuer can pay a lower interest rate. From a fund's
standpoint, credit enhancements can help lower the risk of default on
those securities that carry them and may also make a security more liquid.
= Delayed-delivery security -- indicates a security a fund has arranged to
buy but has not yet received. A fund may incur a gain or loss if the value
of the security rises or falls between the time the purchase was arranged
and the time the security is delivered.
o Certificate of participation -- indicates a security that offers
"participation" in municipal lease revenues. A certificate of
participation typically is associated with a facility that is leased to
(and was built for) a municipal entity, and is generally considered
somewhat riskier than a general obligation bond.
/ Collateral for open futures contracts -- indicates a security the fund has
set aside in a separate account to cover possible losses that may result
from a futures contract. The fund is not permitted to sell a security
while it is pledged as collateral.
With most types of bonds (and other debt obligations), the interest rate is set
at the time of issue and doesn't change. However, some types of obligations are
structured so that the rate may be reset at certain times, typically to reflect
changes in market interest rates. A fund may own some of both types of
securities.
This shows a breakdown of holdings by asset type. To the right of the pie chart
are figures showing the total market value of securities of each asset type, and
also what a fund paid for those securities.
36
[GRAPHIC OF SAMPLE TABLE]
Table is for illustration only.
During its lifetime, a bond may trade at a premium or a discount to its face
value, depending on interest rate trends and other factors. When a bond begins
to approach maturity, its market value typically moves closer to its face value.
For all bonds, the report shows the issuer, the rate the security pays and the
maturity date. The maturity date is the date when the bond is retired and the
issuer returns the money borrowed ("principal" or "face value") to the
bondholder.
Most equity and bond funds keep at least a small percentage of assets in high
quality, liquid investments, in order to manage their cash flow needs.
In this example, the investment shown is one that seeks to maintain a stable
$1.00 share price, so the number of shares is typically the same as the market
value (allowing for rounding in the value column).
In some cases, securities are organized into sub-groups. For each sub-group,
there are figures showing the percentage of investments represented and the
total market value of the securities in the sub-group. Note that for all dollar
values, you need to add three zeroes after each number to get the approximate
value.
37
HOW TO READ THIS REPORT Continued
[GRAPHIC OF SAMPLE OF ASSETS AND LIABILITIES TABLE]
Table is for illustration only.
The Statement of Assets and Liabilities is a snapshot of a fund's balance sheet
on the last day of the report period.
At any given time, a fund is likely to be owed money from various sources that
it has not yet received, and to owe money it hasn't yet paid.
This section gathers the totals from the first two sections in order to compute
net assets.
This section shows where the assets described above came from. "Capital received
from investors" is money a fund received from investors buying its shares during
the report period, and is a net figure (meaning that money the fund remitted to
investors who redeemed their shares has already been subtracted from it).
As with the Portfolio Holdings, the figures in these statements need to be
multiplied by 1,000. This includes the figures in the notes.
The collateral is simultaneously counted as an asset (because the fund held it
as of the report date) and as a liability (because it is owned by the
institutions that provided it as collateral).
A fund may treat capital losses that are realized after October 31 of a given
year as occurring at the beginning of the following fiscal year. This can help
avoid certain unintentional tax consequences created by the required timing of
dividend payments relative to the fund's fiscal year end.
Although a mutual fund doesn't expect to pay federal income tax, it does have to
file a return with the IRS. In some cases, the requirements of tax accounting
differ from the requirements of the accounting practices used in keeping a
fund's books, so the figures in this box may differ from those shown elsewhere
in the financials. These differences may require that some values be
reclassified in the financials, but this does not affect a fund's NAV.
[GRAPHIC OF SAMPLE OF FEDERAL TAX TABLE]
Table is for illustration only.
38
[GRAPHIC OF SAMPLE OF STATEMENT OF OPERATIONS TABLE]
Table is for illustration only.
The Statement of Operations tells you how much money a fund earned and spent
over the course of the report period, and how much it gained and lost on its
investments.
These are the capital gains or losses resulting from securities a fund sold
during the report period.
These represent the change in unrealized gains or losses over the report period.
To safeguard the interests of shareholders, mutual funds must keep their
portfolio securities in accounts at a financial institution, whose tasks include
maintaining records of a fund's holdings.
Covers most activities related to managing a fund's portfolio.
Covers most activities associated with shareholders, including processing
transactions in fund shares and providing services such as account statements
and information.
This section gathers the totals from the first four sections in order to compute
the net earnings or losses that resulted from a fund's operations during the
report period. These figures also appear, in summary form, on the Statements of
Changes in Net Assets.
39
HOW TO READ THIS REPORT Continued
[GRAPHIC OF SAMPLE OF CHANGE IN NET ASSETS TABLE]
Table is for illustration only.
The Statements of Changes in Net Assets compare a fund's performance during the
current report period with its performance from the previous report period.
Keep in mind that if the current report is a semiannual report, its figures are
only for six months, whereas the figures for the previous period are generally
for a full year.
From this section, you can see how the size of a fund was affected by investors
buying and selling shares (as opposed to changes due to fund performance, shown
above in "Operations").
The information shows how many shares the fund sold to investors, how many
shares the fund issued in connection with investors who reinvested their
dividends or distributions, and how many shares the fund redeemed (bought back
from investors).
In funds with more than one share class, these figures are reported by class.
These are the figures for the current report period.
These are the figures for the previous report period.
For mutual funds, the number of "shares outstanding" is the number of shares in
existence.
40
GLOSSARY
ALTERNATIVE MINIMUM TAX (AMT) A federal income tax designed to limit the extent
to which high-income taxpayers (including individuals, estates, trusts and
corporations) can benefit from certain deductions and exemptions. For example,
some types of income that are exempt from regular federal income tax are not
exempt from the AMT.
ASSET ALLOCATION The practice of dividing a portfolio among different asset
classes, with each asset class assigned a particular percentage.
ASSET-BACKED SECURITY A bond or other debt security that represents ownership in
a pool of debt obligations such as credit card debt.
ASSET CLASS A group of securities with similar structure and basic
characteristics. Stocks, bonds and cash are the three main examples of asset
classes.
AVERAGE RATE The average rate of interest paid annually by the fixed income
securities in a fund or portfolio.
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."
CALL An early repayment of a bond's principal by the issuer, usually done
because the issuer is able to refinance its bond debt at a lower rate.
CALL PROTECTION A term used in reference to a bond that cannot be called by the
issuer before maturity, or at least for many years from the present date. A bond
that offers call protection can more reliably be expected to provide a given
yield over a given number of years than a bond that could be called (assuming
both bonds are of the same credit quality).
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.
COUPON, COUPON RATE The annual rate of interest paid until maturity by the
issuer of a debt security.
CREDIT QUALITY The capacity of an issuer to make its interest and principal
payments. See sidebar.
CREDIT RISK The risk that a bond issuer may be unable to pay interest or
principal to its bondholders.
DISCOUNT RATE The implied rate on a debt security that does not pay interest but
is bought at a discount and redeemed at face value when it matures.
CREDIT RATINGS
--------------------------------------------------------------------------------
Most major bond issuers arrange with a recognized independent rating
organization, such as Standard & Poor's (S&P) or Moody's Investors Service, to
rate the creditworthiness of their bonds. The spectrum of these ratings is
divided into two major categories: investment grade and below investment grade
(sometimes called "junk bonds"). Bonds rated below investment grade range from
those that are considered to have some vulnerability to default to those that
appear on the brink of default or are in default.
[CREDIT RATINGS CHART]
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41
GLOSSARY Continued
DIVIDEND Money from earnings that is distributed to shareholders as a given
amount per share.
DURATION A measure of a bond investment's sensitivity to interest rates.
Calculations of duration take into account the investment's yield, interest
payments, maturity date and call features. Like maturity, duration is expressed
in years, but typically is more accurate than maturity in determining the effect
of interest rate movements on a bond investment's price.
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.
GENERAL OBLIGATION BOND A municipal bond that is secured by the issuer's full
faith and credit, which typically is backed by the power of the issuer to levy
taxes.
INTEREST Payments to bondholders (usually made twice a year) as compensation for
loaning the bond principal to the issuer.
INTEREST RATE RISK The risk that a bond's value will fluctuate if market
interest rates change or are expected to change. Bond prices tend to move in the
opposite direction of interest rates: when interest rates rise, bond prices tend
to fall.
MARKET RISK Those elements of risk that are common to all securities in an asset
class, and therefore cannot be significantly reduced by diversification within
the asset class. Also known as "systematic risk."
MATURITY The date a bond is scheduled to be "retired" and its principal amount
returned to the bondholder.
MORTGAGE-BACKED SECURITY A bond or other debt security that represents ownership
in a pool of mortgage loans.
MUNI, MUNICIPAL BOND, MUNICIPAL SECURITY A bond or other debt security that is
issued by a municipality, or is issued by a third party on behalf of a
municipality or under its aegis. Municipal bonds are issued to fund civic
projects, such as building or improving roads, bridges, schools and other
facilities. The interest paid by munis typically is free from regular federal
income tax; for taxpayers in a given state who buy bonds issued in their state,
the interest may also be free from state and local income taxes. Interest from
some munis is subject to the AMT.
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.
PREPAYMENT RISK The risk that a mortgage-backed security may be paid off early,
typically because interest rates have fallen and the homeowners who hold the
underlying mortgages have refinanced those mortgages at lower rates. In this
type of situation, the investor who held the mortgage-backed security will
usually have to settle for a lower rate when reinvesting the principal.
REVENUE BOND A municipal bond that is issued to finance public works and is
secured by revenue from a public works project (such as a highway or stadium)
rather than the full faith and credit of the issuer.
TAXABLE-EQUIVALENT YIELD The yield an investor would need to get from a taxable
investment in order to match the yield paid by a given tax-exempt investment,
once the effect of all applicable taxes is taken into account. For example, if
your tax rate were 25%, a tax-exempt investment paying 4.5% would have a
taxable-equivalent yield for you of 6.0% (4.5% / [1 - 0.25%] = 6.0%).
TOTAL RETURN The overall performance of an investment over a given period,
including any expenses, any income or distributions paid out and any capital
gain or loss (increases or decreases in portfolio value).
WEIGHTED AVERAGE For mutual funds, an average that gives the same weight to each
security as the security represents in the fund's portfolio.
WEIGHTED AVERAGE MATURITY For mutual funds, the maturity of all the bonds in its
portfolio, calculated as a weighted average. As a rule, the longer a fund's
weighted average maturity, the greater its interest rate risk.
YIELD The income paid out by an investment, expressed as a percentage of the
investment's market value.
YIELD TO MATURITY The annualized rate of return a bondholder could expect if the
bond were held to maturity. In addition to interest payments, yield to maturity
also factors in any difference between a bond's current price and its principal
amount, or face value.
42
CONTACT SCHWAB
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