Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-7704
Schwab Capital Trust
(Exact name of registrant as specified in charter)
211 Main Street, San Francisco, California 94105
(Address of principal executive offices) (Zip code)
Marie Chandoha
Schwab Capital Trust
211 Main Street, San Francisco, California 94105
(Name and address of agent for service)
Registrant’s telephone number, including area code: (415) 636-7000
Date of fiscal year end: October 31
Date of reporting period: October 31, 2016
Table of Contents
Item 1: Report(s) to Shareholders.
Table of Contents
Annual
Report | October 31, 2016
Laudus MarketMasters Funds™
Laudus Small-Cap MarketMasters
Fund™
Laudus International
MarketMasters Fund™
This page is intentionally left blank.
Two distinct Funds, each combining the expertise of leading
investment managers with CSIM’s overall supervision.
In This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab)
The Sector/Industry classifications in this report use the
Global Industry Classification Standard (GICS), which was developed by, and is the exclusive property of, MSCI and Standard & Poor’s (S&P). GICS is a service mark of MSCI and S& P and has been licensed for use by Schwab. The
Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.
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Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com.
| Total Return for the 12 Months Ended October 31, 2016 | |
| Laudus Small-Cap MarketMasters Fund | |
| Investor Shares (Ticker Symbol: SWOSX) | -0.64% |
| Select Shares® (Ticker Symbol: SWMSX) | -0.50% |
| Russell 2000® Index | 4.11% |
| Fund Category: Morningstar Small Growth | 0.35% |
| Performance Details | pages 8-11 |
| Laudus International MarketMasters Fund | |
| Investor Shares1 (Ticker Symbol: SWOIX) | -0.14% |
| Select Shares®1 (Ticker Symbol: SWMIX) | 0.00% |
| MSCI EAFE® Index (Net)2 | -3.23% |
| Fund Category: Morningstar Foreign Large Growth | -1.81% |
| Performance Details | pages 12-15 |
| Minimum Initial Investment3 | |
| Investor Shares | $ 100 |
| Select Shares® | $ 50,000 |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Fund expenses may have been partially absorbed by CSIM and its
affiliates. Without these reductions, a fund’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
Source for category information: Morningstar, Inc. The
Morningstar Category return represents all active and index mutual funds within the category as of the report date.
Small-company stocks are subject to greater volatility than
other asset categories.
Foreign securities can involve
risks such as political and economic instability and currency risk. These risks may be greater in emerging markets.
| 1 | The fund’s performance relative to the index may be affected by fair-value pricing and timing differences in foreign exchange calculations. See financial note 2 for more information. |
| 2 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 3 | Please see the funds’ prospectus for further detail and eligibility requirements. |
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Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Asset
Class Performance Comparison % returns during the 12 months ended 10/31/2016
Index figures
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Past performance is not an indication of future
results.
For index definitions, please see the
Glossary.
Data source: Index provider websites
and CSIM.
Nothing in this report represents a
recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
1 The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no
deductions for expenses or other taxes.
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Laudus MarketMasters Funds
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Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
The Investment
Environment
Over the 12-month reporting period ended October 31, 2016,
equity markets generated mixed returns, with U.S. stocks performing well and many international stocks in negative territory. The Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade in December 2015, but held
them steady at each subsequent meeting during the reporting period. Concerns surrounding global growth and heightened market volatility weighed on stocks in the first part of the reporting period, especially after the United Kingdom’s
unexpected decision in June to leave the European Union (also known as Brexit). As the reporting period continued, however, some signs of stability emerged, including improving economic data, and many equity markets rebounded. Toward the end of the
reporting period, the U.S. presidential election fueled heightened market volatility and uncertainty. For the reporting period, the S&P 500®
Index, a bellwether for the overall U.S. stock market, returned 4.51%, while the Russell 2000® Index, a U.S. small-cap company performance measure,
returned 4.11%. Internationally, the MSCI EAFE Index (Net), a broad measure of international developed equity performance, returned -3.23% for the 12-month reporting period.
U.S. economic data generally improved over the reporting
period, despite several weak measurements during the 12 months. Corporate earnings were better-than-expected for the second quarter of 2016 but contracted in the third quarter, while U.S. nonfarm payrolls came in near expectations outside of a sharp
drop in May. Consumer confidence measurements were generally below expectations for most of the reporting period, but rebounded in September to reach its highest level since the 2008 recession. However, consumer confidence fell slightly in October
as increasing uncertainty surrounding the U.S. presidential election and the stability of the labor market resulted in more cautious consumers. In addition, U.S. economic growth trended upwards after dipping slightly in the first quarter of 2016,
with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Short-term interest rate policy in the U.S. remained a source
of uncertainty and volatility during the reporting period. The Fed raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, with the possibility of four additional increases in 2016. Inconsistent U.S. economic data, weak
global growth, and persistently low inflation, however, caused the Fed to leave rates unchanged at each meeting during the reporting period. At its meeting in September, the Fed noted that although the case for a rate increase had strengthened, it
had “…decided, for the time being, to wait for further evidence of continued progress toward its objectives.” As of the end of the reporting period, markets continued to expect one rate hike by the end of 2016.
Many central banks outside the U.S. increased accommodative
policy measures over the reporting period to help combat stalling economic growth. Both the Bank of Japan and the European Central Bank increased bond purchases and introduced negative interest rates, while the People’s Bank of China (PBOC)
expanded its lending facilities. Following the June Brexit vote, the Bank of England (BoE) announced its plan to take additional measures if necessary while markets adjusted. Less than two months later in early August, the BoE cut its benchmark rate
and resumed quantitative easing, and also increased lending to consumers and companies. While some of these measures initially appeared to be less effective than the central banks had hoped, the positive performance of many international equities in
the second half of the reporting period suggested that economic conditions outside the U.S. were beginning to improve.
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Laudus MarketMasters Funds
The Investment
Environment (continued)
Concerns around unsteady global growth were present throughout
the first part of the 12-month reporting period, and then lessened as the reporting period continued. In China, fears about the slowing economy declined as stimulative moves by the PBOC helped to reverse downward trends in several economic gauges.
Meanwhile, the results of the June Brexit vote shook markets globally, sending the British pound downward and markedly increasing uncertainty and volatility. However, as Brexit was not driven by liquidity or changes in underlying fundamentals, most
stock markets rebounded and stabilized in the days and weeks that followed.
In January 2016, the price of oil dropped significantly and
remained volatile in the following months, weighing on many global stock markets. Oil prices stabilized at the end of the reporting period, however, and a relatively narrow trading range supported an overall rebound in the performance of many energy
companies and oil-producing countries. A proposed agreement by the Organization of the Petroleum Exporting Countries to limit output also initially helped boost oil prices after the agreement was announced, though the longer-term effects of an
agreement were uncertain and skepticism surrounding the deal tempered optimism among many investors and banks.
Index figures assume dividends and distributions were
reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Past performance is not an
indication of future results.
For index definitions,
please see the Glossary.
Nothing in this report represents
a recommendation of a security by the investment adviser.
Management views may have changed since the report date.
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Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Fund Management
 |
Omar Aguilar, Ph.D. Senior Vice President and Chief Investment Officer of Equities and Multi-Asset Strategies, has overall responsibility for all aspects of the management of the funds. Prior to joining CSIM in 2011, Mr. Aguilar was with Financial Engines, where he was responsible for managing assets from leading retirement plan sponsors in the defined contribution market. Prior to joining Financial Engines in 2009, Mr. Aguilar was the head of quantitative equity for ING Investment Management, where he was responsible for building and developing the firm’s quantitative equity group. He joined ING in 2004 from Lehman Brothers, where he served as the head of quantitative research for its alternative investment management business. Prior to that, he was a director of quantitative research and portfolio manager with Merrill Lynch Investment Management and Bankers Trust. |
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Laudus MarketMasters Funds | Annual Report
Laudus Small-Cap MarketMasters Fund
Performance and Fund
Facts as of 10/31/16
The Laudus MarketMasters
Funds use a multi-manager strategy. Charles Schwab Investment Management, Inc. (CSIM)—the funds’ investment adviser—selects investment sub-advisers with strong long-term track records to manage a portion of each fund’s
assets. In addition to selecting investment sub-advisers and allocating assets among them, CSIM is responsible for monitoring and coordinating the overall management of the funds. Each sub-adviser manages its respective portfolio relative to a
comparative index that reflects its individual process and philosophy. The sub-adviser indexes may differ from a fund’s comparative index.
Market Highlights. Both U.S.
small-cap and U.S. large-cap stocks generated moderate returns over the 12-month reporting period, supported by continued low interest rates and generally improving economic data. The Federal Reserve raised short-term interest rates in December 2015
and then held steady for the remainder of the reporting period, while market volatility spiked in early 2016 around China’s decelerating economy and sharply fluctuation oil and commodity prices. The summer months proved to be relatively calm
and uneventful, then volatility picked up in June after the United Kingdom’s unexpected decision to leave the European Union (also known as Brexit), and again toward the end of the reporting period due to the U.S. presidential election. From a
sector perspective among U.S. small-cap stocks, the Materials and Utilities sectors were the top performers, while the Health Care and Energy sectors lagged behind.
Performance. For the 12-month
reporting period ended October 31, 2016, Investor Shares of the Laudus Small-Cap MarketMasters Fund (the fund) returned -0.64%, underperforming its comparative index, the Russell 2000 Index (the index), returned 4.11%.
Positioning and Strategies.
Over the 12-month reporting period, each of the fund’s underlying sub-advisers underperformed their comparative indexes.
Wellington Management Company, the fund’s value
sub-adviser, detracted from the fund’s relative performance for the reporting period, as a result of Wellington underperforming its comparative index, the Russell 2000 Value Index. Wellington’s stock selection detracted across multiple
sectors, most significantly within the Industrials, Consumer Discretionary, and Information Technology sectors. Its sector allocations also detracted from relative performance, most notably from its underweights of the Real Estate and Utilities
sectors.
BMO Asset Management Corp., a growth-oriented
manager that uses a bottom-up fundamental approach to identify stocks exhibiting strong and improving growth characteristics, posted a negative return for the reporting period, detracting from the fund’s relative performance. Please note that
effective June 9, 2016, BMO Asset Management was terminated as a sub-adviser to the fund.
The Boston Company Asset Management LLC, which employs a
small-mid-cap core strategy, was added as a sub-adviser to the fund in June of this year. From June 9, 2016, to the end of the reporting period, The Boston Company generated a negative return and underperformed its comparative index, detracting from
the fund’s relative performance. This underperformance was primarily due to stock selection in the Industrials, Consumer Discretionary, and Health Care sectors. Its sector allocations positively contributed, most significantly from its
overweight of the Information Technology sector and underweight of the Energy sector, although not enough to offset the drag due to stock selection.
Mellon Capital Management Corp. seeks to track the performance
of the fund’s index, employing a strategic trading approach to minimize transaction costs and preserve value. For the 12-month reporting period, the fund’s allocation to Mellon performed in line with this objective, slightly
underperforming its comparative index.
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Laudus MarketMasters Funds | Annual Report
Laudus Small-Cap MarketMasters Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
Small-company stocks are subject to
greater volatility than many other asset classes.
| 1 | This list is not a recommendation of any security by the investment adviser. |
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Laudus MarketMasters Funds | Annual Report
Laudus Small-Cap MarketMasters Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Performance of Hypothetical $50,000 Investment (October 31, 2006
– October 31, 2016)1
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
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Laudus MarketMasters Funds | Annual Report
Laudus Small-Cap MarketMasters Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Investor Shares (9/16/97) | -0.64% | 8.09% | 4.18% |
| Select Shares® (6/9/04) | -0.50% | 8.27% | 4.34% |
| Russell 2000® Index | 4.11% | 11.51% | 5.96% |
| Fund Category: Morningstar Small Growth | 0.35% | 10.24% | 6.51% |
| Fund Expense Ratios3: Investor Shares: Net 1.35%; Gross 1.55% / Select Shares: Net 1.20%; Gross 1.51% | |||
Investment Managers and Allocations4
| Investment Managers | Investment Style | %
of Net Assets |
| Wellington Management Company, LLP | Small-Cap Value | 51.2% |
| Boston Company Asset Management, LLC | Small-/Mid-Cap Core | 25.5% |
| Mellon Capital Management Corp. | Small-Cap Blend | 21.3% |
| Cash & other assets | 2.0% |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
| 4 | For more information about each of the investment manager’s investment styles, refer to the fund’s prospectus. |
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Laudus MarketMasters Funds | Annual Report
Laudus International MarketMasters Fund
Performance and Fund
Facts as of 10/31/16
The Laudus MarketMasters
Funds use a multi-manager strategy. Charles Schwab Investment Management, Inc. (CSIM)—the funds’ investment adviser—selects investment sub-advisers with strong long-term track records to manage a portion of each fund’s
assets. In addition to selecting investment sub-advisers and allocating assets among them, CSIM is responsible for monitoring and coordinating the overall management of the funds. Each sub-adviser manages its respective portfolio relative to a
comparative index that reflects its individual process and philosophy. The sub-adviser indexes may differ from a fund’s comparative index.
Market Highlights. Developed
international large-cap stocks generated negative returns over the 12-month reporting period, while emerging market stocks posted solid gains. Market volatility spiked in June after the United Kingdom’s vote to leave the European Union (also
known as Brexit) as global stocks sold off and the British pound fell sharply. However, many markets calmed and even rebounded in the following months. Accommodative monetary policies in Europe and Japan contributed to signs of improvement in those
regions, though uncertainty remained surrounding the stability of global economic growth and the lasting effects of Brexit.
Performance. For the 12-month
period ended October 31, 2016, Investor Shares of the Laudus International MarketMasters Fund (the fund) returned -0.14%, outperforming its comparative index, the MSCI EAFE Index (Net) (the index), which returned -3.23%.
Positioning and
Strategies. Over the 12-month reporting period, the fund’s manager selection added value due to the strong performance of two of the fund’s four active sub-advisers.
Among the fund’s four active sub-advisers, Mondrian
posted the strongest absolute return and outperformed its international small-cap value comparative index. Mondrian’s sector allocations contributed positively to its performance relative to its comparative index, primarily due to its
significant underweight of the Financials sector and overweight to the Industrials sector. Mondrian’s stock selection detracted, however, particularly among the Materials and Consumer Staples sectors. From a country standpoint, Mondrian was
strongest in China and Italy and weakest in France and Sweden.
Harris Associates L.P., which focuses on international
large-cap value, also positively contributed to the fund’s relative performance, outperforming its international large-cap value comparative index. This outperformance was primarily due to stock selection within both market sectors and country
segments, as well as from allocations across market sectors. Stock selection within the Materials and Information Technology sectors delivered the strongest contributions from a market sector standpoint, while geographically, stock selection within
the United Kingdom and France also contributed meaningfully. Harris’s overweights of the Industrials and Materials sectors were also positive contributors, though the absence of holdings in the outperforming Energy sector detracted from
relative performance.
The fund’s allocation to
American Century Investment Management, Inc., with its international small-cap growth focus, positively contributed to total return but detracted from performance relative to the index. American Century underperformed its comparative index, largely
due to allocation across sectors, most notably due to overweights to the Consumer Discretionary and Financials sectors, and an underweight to the Information Technology sector. Its stock selection, however, slightly enhanced performance, most
significantly through stock selection within the Energy, Utilities, and Industrials sectors. From a country standpoint, American Century’s allocation to Brazil provided the strongest contribution, while allocation to Japan detracted the
most.
The fund’s allocation to William Blair
Investment Management, LLC, with its focus on international multi-cap growth, detracted from the fund’s overall relative performance. Stock selection across market sectors detracted, especially in the Consumer Discretionary and Energy sectors.
From a sector allocation standpoint, William Blair’s overweight of the Financials sector and underweight of the Materials sector also detracted from relative performance. Overall stock selection within country segments contributed to relative
performance, most notably in Switzerland and in France, although not enough to offset the drag due to allocation across sectors.
Mellon Capital Management seeks to track the performance of
the fund’s Index by employing a strategic trading approach to minimize transaction costs and preserve value. Over the 12-month reporting period, the fund’s allocation to Mellon performed in line with this objective, outperforming its
comparative index.
Over the 12-month reporting period,
the fund made no active adjustments to its investment manager exposures.
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Laudus MarketMasters Funds | Annual Report
Laudus International MarketMasters Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Management views and portfolio holdings may have
changed since the report date.
Source of Sector
Classification: S&P and MSCI.
International
investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
| 1 | This list is not a recommendation of any security by the investment adviser. |
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Laudus MarketMasters Funds | Annual Report
Laudus International MarketMasters Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Performance of Hypothetical $50,000 Investment (October 31, 2006
– October 31, 2016)1
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
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Laudus MarketMasters Funds | Annual Report
Laudus International MarketMasters Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Investor Shares (10/16/96) | -0.14% | 6.65% | 4.06% |
| Select Shares® (4/2/04) | 0.00% | 6.81% | 4.21% |
| MSCI EAFE® Index (Net)3 | -3.23% | 4.99% | 1.22% |
| MSCI EAFE® Index (Gross) | -2.74% | 5.48% | 1.70% |
| Fund Category: Morningstar Foreign Large Growth | -1.81% | 5.63% | 2.40% |
| Fund Expense Ratios4: Investor Shares: Net 1.40%; Gross 1.59% / Select Shares: Net 1.25%; Gross 1.50% | |||
Investment Managers and Allocations5
| Investment Managers | Investment Style | %
of Net Assets |
| American Century Investment Management, Inc. | International Small-Cap Growth | 24.0% |
| Harris Associates L.P. | International Large-Cap Value | 24.2% |
| William Blair Investment Management, LLC | International Multi-Cap Growth | 22.5% |
| Mondrian Investment Partners Limited | International Small-Cap Value | 23.6% |
| Mellon Capital Management Corp. | International Blend | 4.0% |
| Cash & other assets | 1.7% |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The fund’s performance relative to the index may be
affected by fair-value pricing. See financial note 2 for more information.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 4 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
| 5 | For more information about each of the investment manager’s investment styles, refer to the fund’s prospectus. |
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Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Laudus Small-Cap MarketMasters Fund | ||||
| Investor Shares | ||||
| Actual Return | 1.35% | $1,000.00 | $1,016.30 | $6.84 |
| Hypothetical 5% Return | 1.35% | $1,000.00 | $1,018.31 | $6.85 |
| Select Shares | ||||
| Actual Return | 1.20% | $1,000.00 | $1,017.20 | $6.08 |
| Hypothetical 5% Return | 1.20% | $1,000.00 | $1,019.07 | $6.09 |
| Laudus International MarketMasters Fund | ||||
| Investor Shares | ||||
| Actual Return | 1.40% | $1,000.00 | $1,023.20 | $7.12 |
| Hypothetical 5% Return | 1.40% | $1,000.00 | $1,018.06 | $7.10 |
| Select Shares | ||||
| Actual Return | 1.25% | $1,000.00 | $1,023.70 | $6.36 |
| Hypothetical 5% Return | 1.25% | $1,000.00 | $1,018.82 | $6.34 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12- month period. This ratio does not include certain non-routine expenses, such as proxy expenses. |
| 2 | Expenses for each fund or share class are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year. |
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Laudus MarketMasters Funds | Annual Report
Laudus Small-Cap MarketMasters Fund
Financial Statements
Financial
Highlights
| Investor Shares | 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
|
| Per-Share Data | ||||||
| Net asset value at beginning of period | $17.42 | $18.02 | $17.28 | $13.14 | $11.99 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.01 | (0.05) | (0.05) | (0.02) | (0.10) | |
| Net realized and unrealized gains (losses) | (0.15) | (0.17) 2 | 0.79 | 4.16 | 1.25 | |
| Total from investment operations | (0.14) | (0.22) | 0.74 | 4.14 | 1.15 | |
| Less distributions: | ||||||
| Distributions from net investment income | — | (0.03) | — | — | — | |
| Distributions from net realized gains | (1.06) | (0.35) | — | — | — | |
| Total distributions | (1.06) | (0.38) | — | — | — | |
| Net asset value at end of period | $16.22 | $17.42 | $18.02 | $17.28 | $13.14 | |
| Total return | (0.64%) | (1.18%) | 4.28% | 31.51% | 9.59% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 1.35% | 1.35% | 1.35% | 1.35% | 1.42% 3 | |
| Gross operating expenses | 1.56% | 1.55% | 1.56% | 1.59% | 1.59% | |
| Net investment income (loss) | 0.04% | (0.26%) | (0.26%) | (0.16%) | (0.79%) | |
| Portfolio turnover rate | 85% | 51% | 79% | 97% | 144% | |
| Net assets, end of period (x 1,000,000) | $55 | $62 | $70 | $76 | $65 | |
| Select Shares | 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
|
| Per-Share Data | ||||||
| Net asset value at beginning of period | $17.73 | $18.33 | $17.56 | $13.33 | $12.14 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.03 | (0.02) | (0.02) | (0.00) 4 | (0.08) | |
| Net realized and unrealized gains (losses) | (0.15) | (0.17) 2 | 0.79 | 4.23 | 1.27 | |
| Total from investment operations | (0.12) | (0.19) | 0.77 | 4.23 | 1.19 | |
| Less distributions: | ||||||
| Distributions from net investment income | — | (0.06) | — | — | — | |
| Distributions from net realized gains | (1.06) | (0.35) | — | — | — | |
| Total distributions | (1.06) | (0.41) | — | — | — | |
| Net asset value at end of period | $16.55 | $17.73 | $18.33 | $17.56 | $13.33 | |
| Total return | (0.50%) | (0.99%) | 4.39% | 31.73% | 9.80% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 1.20% | 1.20% | 1.20% | 1.20% | 1.27% 3 | |
| Gross operating expenses | 1.52% | 1.51% | 1.51% | 1.53% | 1.51% | |
| Net investment income (loss) | 0.19% | (0.09%) | (0.13%) | (0.03%) | (0.60%) | |
| Portfolio turnover rate | 85% | 51% | 79% | 97% | 144% | |
| Net assets, end of period (x 1,000,000) | $98 | $107 | $122 | $113 | $88 | |
1
Calculated based on the average shares outstanding during
the period.
2
The per share amount does not accord with the change in
aggregate gains and losses in securities during the period because of the timing of sales and repurchases of fund shares in relation to fluctuating market values.
3
Effective June 6, 2012, the net operating expense limitation
was lowered. The ratio presented for period ended 10/31/12 is a blended ratio.
4
Per-share amount was less than $0.005.
17
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar
quarters on the fund's website at www.csimfunds.com/laudusfunds_prospectus.
18
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
19
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
20
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
21
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
22
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
23
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
24
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
25
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
26
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
27
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
28
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
29
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
30
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
31
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
32
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
33
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $123,962,111 | $— | $— | $123,962,111 | |
| Banks | 19,912,925 | — | 1,873 | 19,914,798 | |
| Consumer Durables & Apparel | 2,164,832 | — | 364 | 2,165,196 | |
| Other Investment Companies1 | 7,032,993 | — | — | 7,032,993 | |
| Rights 1 | — | — | 3,992 | 3,992 | |
| Short-Term Investment1 | — | 29,994 | — | 29,994 | |
| Total | $153,072,861 | $29,994 | $6,229 | $153,109,084 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($18,803) | $— | $— | ($18,803) |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers out of Level 1 to Level 3 due to the result of fair valued securities for which no quoted value was available. There were no transfers between Level 1 and
Level 2 for the period ended October 31, 2016.
34
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $147,458,848) | $153,109,084 | |
| Cash | 27 | |
| Deposit with broker for futures contracts | 234,000 | |
| Receivables: | ||
| Investments sold | 841,766 | |
| Fund shares sold | 155,125 | |
| Dividends | 42,300 | |
| Variation margin on futures contracts | 3,060 | |
| Prepaid expenses | + | 13,525 |
| Total assets | 154,398,887 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 1,241,811 | |
| Investment adviser and administrator fees | 139,995 | |
| Shareholder service fees | 6,209 | |
| Fund shares redeemed | 19,464 | |
| Accrued expenses | + | 64,392 |
| Total liabilities | 1,471,871 | |
| Net Assets | ||
| Total assets | 154,398,887 | |
| Total liabilities | – | 1,471,871 |
| Net assets | $152,927,016 | |
| Net Assets by Source | ||
| Capital received from investors | 145,699,964 | |
| Net investment income not yet distributed | 205,940 | |
| Net realized capital gains | 1,389,679 | |
| Net unrealized capital appreciation | 5,631,433 | |
| Net Asset Value (NAV) by Shares Class | |||||
| Share Class | Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| Investor Shares | $54,945,982 | 3,387,653 | $16.22 | ||
| Select Shares | $97,981,034 | 5,921,190 | $16.55 | ||
35
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $10,337) | $2,186,277 | |
| Expenses | ||
| Investment adviser and administrator fees | 1,839,388 | |
| Shareholder service fees: | ||
| Investor Shares | 137,336 | |
| Select Shares | 197,724 | |
| Custodian fees | 52,924 | |
| Portfolio accounting fees | 48,409 | |
| Professional fees | 43,359 | |
| Registration fees | 29,315 | |
| Transfer agent fees | 25,723 | |
| Shareholder reports | 18,736 | |
| Independent trustees' fees | 8,882 | |
| Proxy fees | 3,086 | |
| Interest expense | 104 | |
| Other expenses | + | 2,933 |
| Total expenses | 2,407,919 | |
| Expense reduction by CSIM and its affiliates | – | 432,153 |
| Net expenses | – | 1,975,766 |
| Net investment income | 210,511 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 698,092 | |
| Net realized gains on futures contracts | + | 470,724 |
| Net realized gains | 1,168,816 | |
| Net change in unrealized appreciation (depreciation) on investments | (2,335,354) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (84,784) |
| Net change in unrealized appreciation (depreciation) | + | (2,420,138) |
| Net realized and unrealized losses | (1,251,322) | |
| Decrease in net assets resulting from operations | ($1,040,811) | |
36
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus Small-Cap MarketMasters Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income (loss) | $210,511 | ($279,682) | ||
| Net realized gains | 1,168,816 | 11,585,861 | ||
| Net change in unrealized appreciation (depreciation) | + | (2,420,138) | (10,711,106) | |
| Increase (decrease) in net assets from operations | (1,040,811) | 595,073 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ||||
| Investor Shares | — | (112,615) | ||
| Select Shares | + | — | (400,670) | |
| Total distributions from net investment income | — | (513,285) | ||
| Distributions from net realized gains | ||||
| Investor Shares | (3,793,537) | (1,348,302) | ||
| Select Shares | + | (6,231,390) | (2,370,239) | |
| Total distributions from net realized gains | (10,024,927) | (3,718,541) | ||
| Total distributions | ($10,024,927) | ($4,231,826) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares Sold | ||||||||
| Investor Shares | 40,792 | $680,024 | 83,739 | $1,529,010 | ||||
| Select Shares | + | 315,043 | 5,053,827 | 1,188,034 | 21,470,184 | |||
| Total shares sold | 355,835 | $5,733,851 | 1,271,773 | $22,999,194 | ||||
| Shares Reinvested | ||||||||
| Investor Shares | 212,542 | $3,368,785 | 76,269 | $1,302,677 | ||||
| Select Shares | + | 378,685 | 6,115,760 | 156,402 | 2,715,136 | |||
| Total shares reinvested | 591,227 | $9,484,545 | 232,671 | $4,017,813 | ||||
| Shares Redeemed | ||||||||
| Investor Shares | (440,313) | ($7,015,212) | (498,439) | ($9,134,342) | ||||
| Select Shares | + | (782,174) | (13,027,787) | (1,995,617) | (38,009,762) | |||
| Total shares redeemed | (1,222,487) | ($20,042,999) | (2,494,056) | ($47,144,104) | ||||
| Net transactions in fund shares | (275,425) | ($4,824,603) | (989,612) | ($20,127,097) | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 9,584,268 | $168,817,357 | 10,573,880 | $192,581,207 | ||||
| Total decrease | + | (275,425) | (15,890,341) | (989,612) | (23,763,850) | |||
| End of period | 9,308,843 | $152,927,016 | 9,584,268 | $168,817,357 | ||||
| Net investment income not yet distributed/Distributions in excess of net investment income | $205,940 | ($4,520) | ||||||
37
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Financial Statements
Financial
Highlights
| Investor Shares | 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
|
| Per-Share Data | ||||||
| Net asset value at beginning of period | $22.71 | $22.95 | $23.68 | $19.03 | $17.45 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.17 1 | 0.18 1 | 0.25 | 0.23 | 0.21 | |
| Net realized and unrealized gains (losses) | (0.24) | (0.10) | (0.66) | 4.85 | 1.52 | |
| Total from investment operations | (0.07) | 0.08 | (0.41) | 5.08 | 1.73 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.27) | (0.32) | (0.32) | (0.43) | (0.15) | |
| Distributions from net realized gains | (1.20) | — | — | — | — | |
| Total distributions | (1.47) | (0.32) | (0.32) | (0.43) | (0.15) | |
| Net asset value at end of period | $21.17 | $22.71 | $22.95 | $23.68 | $19.03 | |
| Total return | (0.14%) | 0.39% | (1.73%) | 27.23% | 10.05% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 1.40% | 1.40% | 1.40% | 1.40% | 1.53% 2 | |
| Gross operating expenses | 1.61% | 1.59% | 1.59% | 1.60% | 1.62% | |
| Net investment income (loss) | 0.81% | 0.76% | 1.06% | 1.10% | 1.19% | |
| Portfolio turnover rate | 69% | 72% | 74% | 65% | 68% | |
| Net assets, end of period (x 1,000,000) | $447 | $536 | $631 | $675 | $592 | |
| Select Shares | 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
|
| Per-Share Data | ||||||
| Net asset value at beginning of period | $22.71 | $22.95 | $23.68 | $19.03 | $17.46 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.19 1 | 0.21 1 | 0.28 | 0.28 | 0.25 | |
| Net realized and unrealized gains (losses) | (0.23) | (0.10) | (0.65) | 4.83 | 1.50 | |
| Total from investment operations | (0.04) | 0.11 | (0.37) | 5.11 | 1.75 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.31) | (0.35) | (0.36) | (0.46) | (0.18) | |
| Distributions from net realized gains | (1.20) | — | — | — | — | |
| Total distributions | (1.51) | (0.35) | (0.36) | (0.46) | (0.18) | |
| Net asset value at end of period | $21.16 | $22.71 | $22.95 | $23.68 | $19.03 | |
| Total return | 0.00% 3 | 0.56% | (1.57%) | 27.43% | 10.20% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 1.25% | 1.25% | 1.25% | 1.25% | 1.37% 2 | |
| Gross operating expenses | 1.54% | 1.50% | 1.47% | 1.44% | 1.47% | |
| Net investment income (loss) | 0.93% | 0.91% | 1.20% | 1.26% | 1.40% | |
| Portfolio turnover rate | 69% | 72% | 74% | 65% | 68% | |
| Net assets, end of period (x 1,000,000) | $1,063 | $1,395 | $1,592 | $1,590 | $1,062 | |
1
Calculated based on the average shares outstanding during
the period.
2
Effective June 6, 2012, the net operating expense limitation
was lowered. The ratio presented for period ended 10/31/12 is a blended ratio.
3
Less than 0.005%.
38
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar
quarters on the fund's website at www.csimfunds.com/laudusfunds_prospectus.
39
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
40
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
41
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
42
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
43
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
44
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
45
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
46
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
47
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
48
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
49
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
50
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
51
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
52
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
53
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
54
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
| Expiration
Date |
Counterparty | Currency
to be Received |
Amount
of Currency to be Received |
Currency
to be Delivered |
Amount
of Currency to be Delivered |
Unrealized
Appreciation (Depreciation) ($) | ||||||
| Forward Foreign Currency Exchange Contracts | ||||||||||||
| 12/21/2016 | State Street Bank & Trust Co. | USD | 1,198,894 | AUD | 1,578,000 | (37,865) | ||||||
| 03/15/2017 | State Street Bank & Trust Co. | USD | 11,445,237 | CHF | 11,236,000 | 212,905 | ||||||
| 01/25/2017 | State Street Bank & Trust Co. | USD | 18,173,405 | NZD | 25,489,000 | 48,681 | ||||||
| Net Unrealized Appreciation on Forward Foreign Currency Exchange Contracts | 223,721 | |||||||||||
55
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $— | $336,950,459 | $— * | $336,950,459 | |
| Argentina 1 | 1,494,953 | — | — | 1,494,953 | |
| Austria 1 | — | 99,944 | — | 99,944 | |
| Materials | 3,626,106 | 19,626 | — | 3,645,732 | |
| Belgium 1 | — | 3,894,160 | — | 3,894,160 | |
| Food, Beverage & Tobacco | 457,358 | — | — | 457,358 | |
| Brazil 1 | 17,827,854 | — | — | 17,827,854 | |
| Canada 1 | 85,871,288 | — | — | 85,871,288 | |
| China 1 | — | 32,331,635 | — | 32,331,635 | |
| Software & Services | 11,988,780 | 6,832,402 | — | 18,821,182 | |
| France 1 | — | 122,076,800 | — | 122,076,800 | |
| Capital Goods | 4,119,223 | 21,557,508 | — | 25,676,731 | |
| Germany 1 | — | 90,788,811 | — | 90,788,811 | |
| Utilities | 24,621 | 109,902 | — | 134,523 | |
| Hong Kong1 | — | 15,438,246 | — * | 15,438,246 | |
| Consumer Services | 5,586,305 | 1,935,508 | — | 7,521,813 | |
| Telecommunication Services | 18,034 | 3,670,284 | — | 3,688,318 | |
| Ireland 1 | — | 3,427,947 | — | 3,427,947 | |
| Capital Goods | 684,872 | 35,066 | — | 719,938 | |
| Food, Beverage & Tobacco | 1,896,084 | 4,675,641 | — | 6,571,725 | |
| Pharmaceuticals, Biotechnology & Life Sciences | 1,261,921 | 3,302,447 | — | 4,564,368 | |
| Israel 1 | — | 102,305 | — | 102,305 | |
| Pharmaceuticals, Biotechnology & Life Sciences | 199,585 | — | — | 199,585 | |
| Software & Services | 2,736,816 | 18,586 | — | 2,755,402 | |
| Japan 1 | — | 223,091,979 | — | 223,091,979 | |
| Media | 537,683 | 86,056 | — | 623,739 | |
| Software & Services | 514,773 | 11,912,683 | — | 12,427,456 | |
| Transportation | 615,820 | 727,513 | — | 1,343,333 | |
| Mexico 1 | 11,056,798 | — | — | 11,056,798 | |
| Netherlands 1 | — | 11,451,895 | — | 11,451,895 | |
| Capital Goods | 34,204 | 6,869,231 | — | 6,903,435 | |
| Semiconductors & Semiconductor Equipment | 1,383,600 | 2,049,122 | — | 3,432,722 | |
| Peru 1 | 1,390,158 | — | — | 1,390,158 | |
| Singapore 1 | — | 15,329,900 | — | 15,329,900 | |
| Capital Goods | 73,640 | 2,006,153 | — | 2,079,793 | |
| Transportation | 6,854,051 | 9,579,766 | — | 16,433,817 | |
| South Africa1 | — | 4,774,288 | — | 4,774,288 | |
| Food & Staples Retailing | 726,675 | 563,956 | — | 1,290,631 | |
| Switzerland 1 | — | 71,828,970 | — | 71,828,970 | |
| Capital Goods | 5,580,840 | 2,828,953 | — | 8,409,793 |
56
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Portfolio Holdings as of October 31, 2016 (continued)
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Food, Beverage & Tobacco | $62,048 | $1,524,274 | $— | $1,586,322 | |
| Software & Services | 387,271 | 4,000,179 | — | 4,387,450 | |
| Taiwan 1 | — | 19,127,908 | — | 19,127,908 | |
| Semiconductors & Semiconductor Equipment | 5,114,177 | 1,092,246 | — | 6,206,423 | |
| Thailand 1 | 1,593,022 | — | — | 1,593,022 | |
| United Kingdom1 | — | 156,961,222 | — | 156,961,222 | |
| Capital Goods | 9,267,054 | 43,608,654 | 513 | 52,876,221 | |
| Technology Hardware & Equipment | 3,973,123 | 10,903,719 | — | 14,876,842 | |
| United States1 | 6,290,719 | — | — | 6,290,719 | |
| Preferred Stock1 | — | 9,817,612 | — | 9,817,612 | |
| Brazil 1 | 1,794,286 | — | — | 1,794,286 | |
| Other Investment Company1 | 52,671,243 | — | — | 52,671,243 | |
| Rights | |||||
| Spain 1 | 5,022 | — | — | 5,022 | |
| Sweden 1 | — | — | 466 | 466 | |
| Short-Term Investments1 | — | 49,989 | — | 49,989 | |
| Total | $247,720,007 | $1,257,453,545 | $979 | $1,505,174,531 | |
| Other Financial Instruments | |||||
| Forward Foreign Currency Exchange Contracts2 | $— | $261,586 | $— | $261,586 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($463,498) | $— | $— | ($463,498) | |
| Forward Foreign Currency Exchange Contracts2 | — | (37,865) | — | (37,865) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts and forward foreign currency exchange contracts are not included in Investments in the schedule of Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
In the above table for significant unobservable inputs (Level
3), amounts include investments determined to have no value at October 31, 2016. See the Portfolio Holdings footnote (Fair-valued by management in accordance with procedures approved by the Board of Trustees) for investment details.
The fund’s policy is to recognize transfers between Level
1, Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016. The transfers in the amount of $29,623,038 and $35,688,395 from Level 1 to Level
2 and from Level 2 to Level 1, respectively, were primarily due to the use of international fair valuation by the fund. The transfers from Level 3 to Level 2 are a result of the availability of current and reliable market-based data provided by
third-party pricing services or other valuation techniques which utilize significant observable inputs.
57
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $1,396,318,527) | $1,505,174,531 | |
| Foreign currency, at value (cost $930,676) | 927,109 | |
| Deposit with broker for futures contracts | 3,610,000 | |
| Receivables: | ||
| Investments sold | 9,437,305 | |
| Dividends | 2,120,673 | |
| Foreign tax reclaims | 2,013,666 | |
| Fund shares sold | 372,208 | |
| Variation margin on futures contracts | 15,210 | |
| Unrealized appreciation on forward foreign currency exchange contracts | 261,586 | |
| Prepaid expenses | + | 25,850 |
| Total assets | 1,523,958,138 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 10,809,938 | |
| Investment adviser and administrator fees | 1,489,915 | |
| Shareholder service fees | 396,473 | |
| Fund shares redeemed | 710,257 | |
| Foreign capital gains tax | 87,240 | |
| Unrealized depreciation on forward foreign currency exchange contracts | 37,865 | |
| Accrued expenses and other liabilities | + | 97,891 |
| Total liabilities | 13,629,579 | |
| Net Assets | ||
| Total assets | 1,523,958,138 | |
| Total liabilities | – | 13,629,579 |
| Net assets | $1,510,328,559 | |
| Net Assets by Source | ||
| Capital received from investors | 1,425,708,579 | |
| Net investment income not yet distributed | 9,070,674 | |
| Net realized capital losses | (32,818,857) | |
| Net unrealized capital appreciation | 108,368,163 | |
| Net Asset Value (NAV) by Shares Class | |||||
| Share Class | Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| Investor Shares | $447,272,458 | 21,129,187 | $21.17 | ||
| Select Shares | $1,063,056,101 | 50,237,895 | $21.16 | ||
58
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $3,597,165) | $35,823,669 | |
| Expenses | ||
| Investment adviser and administrator fees | 20,764,241 | |
| Shareholder service fees: | ||
| Investor Shares | 1,080,079 | |
| Select Shares | 1,883,042 | |
| Custodian fees | 1,040,817 | |
| Professional fees | 222,086* | |
| Portfolio accounting fees | 173,141 | |
| Transfer agent fees | 104,900 | |
| Shareholder reports | 97,212 | |
| Registration fees | 43,260 | |
| Proxy fees | 24,655 | |
| Independent trustees' fees | 17,875 | |
| Interest expense | 1,474 | |
| Other expenses | + | 109,144 |
| Total expenses | 25,561,926 | |
| Expense reduction by CSIM and its affiliates | – | 4,377,766 |
| Net expenses | – | 21,184,160 |
| Net investment income | 14,639,509 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments (net of foreign capital gain tax paid of ($169,206)) | (13,538,127) | |
| Net realized gains on futures contracts | 4,835,300 | |
| Net realized losses on foreign currency transactions | + | (1,151,342) |
| Net realized losses | (9,854,169) | |
| Net change in unrealized appreciation (depreciation) on investments (net of change in foreign capital gains tax of $87,240) | (18,712,752) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | 106,484 | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | (204,355) |
| Net change in unrealized appreciation (depreciation) | + | (18,810,623) |
| Net realized and unrealized losses | (28,664,792) | |
| Decrease in net assets resulting from operations | ($14,025,283) | |
| * | Includes professional fees of $136,485 associated with the filing of tax claims in the European Union deemed to be non-routine expenses of the fund. See financial notes 2 and 4 for additional information. |
59
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus International MarketMasters Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $14,639,509 | $18,349,960 | ||
| Net realized gains (losses) | (9,854,169) | 113,949,202 | ||
| Net change in unrealized appreciation (depreciation) | + | (18,810,623) | (115,270,897) | |
| Increase (decrease) in net assets from operations | (14,025,283) | 17,028,265 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ||||
| Investor Shares | (6,292,923) | (8,584,765) | ||
| Select Shares | + | (18,622,940) | (24,212,500) | |
| Total distributions from net investment income | (24,915,863) | (32,797,265) | ||
| Distributions from net realized gains | ||||
| Investor Shares | (28,099,826) | — | ||
| Select Shares | + | (72,880,802) | — | |
| Total distributions from net realized gains | (100,980,628) | — | ||
| Total distributions | ($125,896,491) | ($32,797,265) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares Sold | ||||||||
| Investor Shares | 751,766 | $15,557,806 | 1,572,262 | $36,357,838 | ||||
| Select Shares | + | 4,875,860 | 100,112,035 | 11,333,727 | 263,224,442 | |||
| Total shares sold | 5,627,626 | $115,669,841 | 12,905,989 | $299,582,280 | ||||
| Shares Reinvested | ||||||||
| Investor Shares | 1,484,420 | $30,682,952 | 358,089 | $7,806,344 | ||||
| Select Shares | + | 2,403,803 | 49,590,453 | 454,613 | 9,896,917 | |||
| Total shares reinvested | 3,888,223 | $80,273,405 | 812,702 | $17,703,261 | ||||
| Shares Redeemed | ||||||||
| Investor Shares | (4,715,236) | ($97,117,882) | (5,819,694) | ($132,991,809) | ||||
| Select Shares | + | (18,470,059) | (379,624,146) | (19,712,757) | (460,500,168) | |||
| Total shares redeemed | (23,185,295) | ($476,742,028) | (25,532,451) | ($593,491,977) | ||||
| Net transactions in fund shares | (13,669,446) | ($280,798,782) | (11,813,760) | ($276,206,436) | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 85,036,528 | $1,931,049,115 | 96,850,288 | $2,223,024,551 | ||||
| Total decrease | + | (13,669,446) | (420,720,556) | (11,813,760) | (291,975,436) | |||
| End of period | 71,367,082 | $1,510,328,559 | 85,036,528 | $1,931,049,115 | ||||
| Net investment income not yet distributed | $9,070,674 | $15,706,816 | ||||||
60
Laudus MarketMasters Funds | Annual Report
See financial notes
Laudus MarketMasters Funds
Financial Notes
1. Business Structure of the Funds:
Each of
the funds in this report is a series of Schwab Capital Trust (the trust), a no-load, open-end management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as
amended (the 1940 Act). The list below shows all the funds in the trust as of the end of the period, including the funds discussed in this report, which are highlighted:
| SCHWAB CAPITAL TRUST (ORGANIZED MAY 7, 1993) | |
| Laudus Small-Cap MarketMasters Fund | Schwab Target 2045 Fund |
| Laudus International MarketMasters Fund | Schwab Target 2050 Fund |
| Schwab ® S&P 500 Index Fund | Schwab Target 2055 Fund |
| Schwab Small-Cap Index Fund® | Schwab Target 2060 Fund |
| Schwab Total Stock Market Index Fund® | Schwab Fundamental US Large Company Index Fund |
| Schwab International Index Fund® | Schwab Fundamental US Small Company Index Fund |
| Schwab MarketTrack All Equity Portfolio™ | Schwab Fundamental International Large Company Index Fund |
| Schwab MarketTrack Growth Portfolio™ | Schwab Fundamental International Small Company Index Fund |
| Schwab MarketTrack Balanced Portfolio™ | Schwab Fundamental Emerging Markets Large Company Index Fund |
| Schwab MarketTrack Conservative Portfolio™ | Schwab Fundamental Global Real Estate Index Fund |
| Schwab Balanced Fund™ | Schwab Target 2010 Index Fund |
| Schwab Core Equity Fund™ | Schwab Target 2015 Index Fund |
| Schwab Dividend Equity Fund™ | Schwab Target 2020 Index Fund |
| Schwab Large-Cap Growth Fund™ | Schwab Target 2025 Index Fund |
| Schwab Small-Cap Equity Fund™ | Schwab Target 2030 Index Fund |
| Schwab Hedged Equity Fund™ | Schwab Target 2035 Index Fund |
| Schwab Health Care Fund™ | Schwab Target 2040 Index Fund |
| Schwab ® International Core Equity Fund | Schwab Target 2045 Index Fund |
| Schwab Target 2010 Fund | Schwab Target 2050 Index Fund |
| Schwab Target 2015 Fund | Schwab Target 2055 Index Fund |
| Schwab Target 2020 Fund | Schwab Target 2060 Index Fund |
| Schwab Target 2025 Fund | Schwab ® Monthly Income Fund - Moderate Payout |
| Schwab Target 2030 Fund | Schwab ® Monthly Income Fund - Enhanced Payout |
| Schwab Target 2035 Fund | Schwab ® Monthly Income Fund - Maximum Payout |
| Schwab Target 2040 Fund | |
Each fund in this report offers two share classes: Investor
Shares and Select Shares®. Shares of each class represent an interest in the same portfolio, but each class has different expenses and investment
minimums.
Shares are bought and sold (subject to a
redemption fee, see financial note 9) at closing net asset value per share (NAV), which is the price for all outstanding shares of a fund or share class, as applicable. Each share has a par value of 1/1,000 of a cent, and the funds' Board of
Trustees (the Board) may authorize the issuance of as many shares as necessary.
Each fund maintains its own account for purposes of holding
assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the funds use in their preparation of financial statements. The funds follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The funds invest in certain other investment companies
(underlying funds). For more information about the underlying funds’ operations and policies, please refer to those funds’ semiannual and annual reports, which are filed with the U.S. Securities and Exchange Commission (SEC).
(a) Security Valuation:
Under procedures approved by the Board, the investment adviser
has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect fair market value. Among other
things, these procedures allow the funds to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
61
Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Financial Notes (continued)
2. Significant Accounting
Policies (continued):
The funds value the
securities in their portfolios every business day. The funds use the following policies to value various types of securities:
•
Securities traded on an exchange or over-the-counter: Traded securities are valued at the closing value for the day, or, on days when no closing value has been reported, at halfway between the most recent
bid and ask quotes. Securities that are primarily traded on foreign exchanges are valued at the official closing price or the last sales price on the exchange where the securities are principally traded with these values then translated into U.S.
dollars at the current exchange rate, unless these securities are fair valued as discussed below.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable.
For example, a fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is
closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of factors, including unobservable market inputs when
arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market multiples, book values, transactional back-testing,
disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a
fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the funds pursuant to the valuation procedures.
•
Foreign equity security fair valuation: The Board has adopted procedures to fair value foreign equity securities that are traded in markets that close prior to the funds valuing their holdings. By fair
valuing securities whose prices may have been affected by events occurring after the close of trading, each fund seeks to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is
designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of a fund’s portfolio holdings and the NAV of the fund’s shares, and seeks to help ensure that the prices at which the
fund’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders. When fair value pricing is used at the open or close of a reporting period, it may cause a temporary
divergence between the return of a fund and that of its comparative index or benchmark. The Board regularly reviews fair value determinations made by the funds pursuant to these procedures.
•
Futures contracts and forward foreign currency exchange contracts (forwards): Futures contracts are valued at their settlement prices as of the close of their exchanges. Forwards are valued based on that
day's forward exchange rates or by using an interpolated forward exchange rate for contracts with interim settlement dates.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
•
Underlying funds: Mutual funds are valued at their respective NAVs. Exchange-traded funds (ETFs) traded on a recognized securities exchange are valued at the last reported sale price that day or the
official closing price, if applicable.
In accordance
with the authoritative guidance on fair value measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair
value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that
are significant to the valuation (Level 3 measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation.
If the funds determine that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with
orderly transactions, increased analysis and management judgment will be required to estimate fair value.
The three levels of the fair value hierarchy are as
follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities, ETFs and futures contracts. Investments in mutual funds are valued daily at their NAVs,
and investments in ETFs are valued daily at the last reported sale price or the official closing price, which are classified as Level 1 prices, without consideration to the classification level of the specific investments held by an underlying
fund.
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Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations. In addition, international securities whose markets close hours before the funds value their holdings may require fair valuations due to significant movement in
the U.S. markets occurring after the daily close of the foreign markets. The Board has approved a vendor that calculates fair valuations of international equity securities based on a number of factors that appear to correlate to the movements in the
U.S. markets.
•
Level 3—significant unobservable inputs (including the funds' own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3
prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the funds' results of operations.
The inputs or methodology used for valuing securities are
not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the funds' investments
as of October 31, 2016 are disclosed in the Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Futures Contracts: Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed upon price on a stipulated future date. A
fund must give the broker a deposit of cash and/or securities (initial margin) whenever it enters into a futures contract. The amount of the deposit may vary from one contract to another. Subsequent payments (variation margin) are made or received
by a fund depending on the daily fluctuations in the value of the futures contract and are accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized. Futures contracts are
traded publicly on exchanges, and their market value may change daily.
Forward Foreign Currency Exchange Contracts: Forwards are contracts to buy and sell a currency at a set price on a future date. The value of the forwards is accounted for as unrealized appreciation or depreciation until the contracts settle, at which time the
gains or losses are realized.
(c) Security
Transactions:
Security transactions are recorded as
of the date the order to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
Assets and liabilities denominated in foreign currencies
are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and
expense payments, are calculated using exchange rates in effect on the transaction date. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on
securities transactions and the differences between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange appreciation or
depreciation arises from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. These realized and unrealized foreign exchange gains or losses are
reported in foreign currency transactions or translations in the Statement of Operations. The funds do not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in
market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Gains realized by the funds on the sale of securities in
certain foreign countries may be subject to non-U.S. taxes. In those instances, the funds record a liability based on unrealized appreciation to provide for potential non-U.S. taxes payable upon the sale of these securities.
63
Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
When a fund
closes out a futures contract or forward position, it calculates the difference between the value of the position at the beginning and at the end of the contract, and records a realized gain or loss accordingly.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date. Any
distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
Income received from foreign sources may result in
withholding tax. Withholding taxes are accrued at the same time as the related income if the tax rate is fixed and known, unless a tax withheld is reclaimable from the local tax authorities in which case it is recorded as receivable. If the tax rate
is not known or estimable, such expense or reclaim receivable is recorded when the net proceeds are received.
In 2015, the Laudus International MarketMasters Fund filed
claims to recover taxes previously withheld in certain European Union countries on the basis that those countries had purportedly violated certain provisions in the Treaty on the Functioning of the European Union. These filings are subject to
various administrative and judicial proceedings within these countries, and all professional fees associated with these filings have been paid by CSIM. No other amounts for additional tax reclaims are reflected in the financial statements due to the
uncertainty surrounding the ultimate resolution of proceedings, the likelihood of receipt of these claims, and the potential timing of payment.
(e) Expenses:
Expenses that are specific to a fund are charged directly
to the fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.
For funds offering multiple share classes, the net
investment income, other than class specific expenses, and the realized and unrealized gains or losses, are allocated daily to each class in proportion to their average daily net assets.
(f) Distributions to Shareholders:
The funds make distributions from net investment income and
net realized capital gains, if any, once a year.
(g)
Custody Credit:
The funds have an arrangement with
their custodian bank, State Street Bank and Trust Company (State Street), under which the funds may receive a credit for their uninvested cash balance to offset their custody fees and accounting fees. The credit amounts, if any, are disclosed in the
Statement of Operations as a reduction to the funds’ operating expenses.
(h) Accounting Estimates:
The accounting policies described in this report conform to
GAAP. 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 and these differences may be material.
(i) Federal Income Taxes:
The funds intend to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the funds distribute substantially all of their net investment income and net realized 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.
(j) Foreign Taxes:
The funds may be subject to foreign taxes (a portion of
which may be reclaimable) on income, corporate events, foreign currency exchanges and capital gains on investments. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in foreign markets in
which the funds invest. These foreign taxes, if any, are paid by the funds and are disclosed in the Statement of Operations. Foreign taxes payable as of October 31, 2016, if any, are reflected in each fund's Statement of Assets and
Liabilities.
64
Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
(k)
Indemnification:
Under the funds’
organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their
vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect
the risk of loss attributable to these arrangements to be remote.
3. Risk Factors:
Investing in the funds may involve
certain risks, as discussed in the funds' prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Market Risk. Equity markets
rise and fall daily. As with any investment whose performance is tied to these markets, the value of the investment in a fund will fluctuate, which means that investors could lose money.
Equity Risk. The prices of
equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to
fall over short or extended periods of time.
Investment Style Risk. The
funds’ investment managers attempt to reduce the impact of the performance of any given investment style by investing in both value and growth style stocks. But whenever value stocks fall out of favor with investors, they may underperform
growth stocks, and vice versa.
Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse
business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments—bonds or large-cap and mid-cap stocks, for instance—the performance of a fund's investments in small-cap securities will lag these investments.
Large- and Mid-Cap Risk. Both
large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more vulnerable to adverse business or economic events than larger, more established companies. During
a period when large- and mid-cap U.S. stocks fall behind other types of
investments—bonds and small-cap stocks, for instance—the performance of a fund's investment in large- and mid-cap securities will lag these
investments.
Management Risk. As with all actively managed funds, a fund is subject to the risk that its investment adviser and investment managers will select investments or allocate assets in a manner that could cause the fund to underperform or
otherwise not meet its objective. Poor stock selection or a focus on securities in a particular sector may cause a fund to underperform its benchmark or other funds with a similar investment objective.
Foreign Investment Risk. A
fund's investments in securities of foreign issuers involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory and
other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting, auditing,
financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These restrictions may negatively impact the value or liquidity of a fund's investments, and could impair the fund's ability
to meet its investment objective or invest in accordance with its investment strategy. These risks may be heightened in connection with investments in emerging markets.
Emerging Markets Risk. Emerging
market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting requirements and
greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there will tend to be an
increased risk of price volatility associated with a fund's investments in emerging market countries, which may be magnified by currency fluctuations relative to the U.S. dollar, and, at times, it may be difficult to value such
investments.
Currency Risk. As a result of a fund’s investments in securities denominated in, and/or receiving revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that those currencies will decline in
value relative to the U.S. dollar. If such an event occurs, the dollar value of an investment in the fund would be adversely affected.
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Financial Notes (continued)
3. Risk
Factors (continued):
Derivatives Risk. A fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Certain of these risks,
such as liquidity risk, market risk and management risk, are discussed elsewhere in this section. A fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax
risk. Lack of availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not
fulfill its obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately large impact on a fund. Valuation risk is the risk that a particular derivative may be valued incorrectly.
Correlation risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause a fund to realize higher amounts of short-term
capital gain. These risks could cause a fund to lose more than the initial amount invested.
Multi-Manager Risk.
Although CSIM monitors and seeks to coordinate the overall management of a fund, each investment manager makes investment decisions independently, and it is possible that the investment styles of the investment managers may not complement one
another. As a result, a fund's exposure to a given stock, industry or investment style could unintentionally be smaller or larger than if a fund had a single manager.
Liquidity Risk. A fund may
be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or a fund may have to sell them at a loss.
Please refer to the funds’ prospectus for a more
complete description of the principal risks of investing in the funds.
4. Affiliates and Affiliated Transactions:
Charles
Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund's investment adviser and administrator pursuant to an Investment Advisory and Administration
Agreement between CSIM and the trust.
For its advisory
and administrative services to the funds, CSIM is entitled to receive an annual fee, payable monthly, based on a percentage of each fund’s average daily net assets as follows:
| % of Average Daily Net Assets | Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund |
| First $500 million | 1.17% | 1.29% |
| $500 million to $1 billion | 1.13% | 1.275% |
| Over $1 billion | 1.07% | 1.25% |
For the period ended October 31,
2016, the aggregate advisory fee paid to CSIM by the Laudus Small-Cap MarketMasters Fund and the Laudus International MarketMasters Fund were 1.17% and 1.27%, respectively, as a percentage of each fund's average daily net assets.
The Board has adopted a Shareholder Servicing Plan (the Plan)
on behalf of the funds. The Plan enables a fund to bear expenses relating to the provision by financial intermediaries, including Charles Schwab & Co., Inc. (a broker-dealer affiliate of CSIM, Schwab) (together, “service providers”),
of certain account maintenance, customer liaison and shareholder services to the current shareholders of the funds.
Pursuant to the Plan, each fund’s shares are subject to
an annual shareholder servicing fee of up to 0.20% for Select Shares and 0.25% for Investor Shares. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab, as distributor of the
funds (or, in the case of payments made to Schwab acting as a service provider, pursuant to Schwab’s written agreement with the funds), and a fund will pay no more than 0.20% for Select Shares and 0.25% for Investor Shares of the average
annual daily net asset value of the fund shares owned by shareholders holding shares through such service provider. Payments under the Plan are made as described above without regard to whether the fee is more or less than the service
provider’s actual cost of providing the services, and if more, such excess may be retained as profit by the service provider.
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Although
these agreements specify certain fees for these services, CSIM and its affiliates have made an additional agreement with the funds, for so long as CSIM serves as the investment adviser to the funds, which may only be amended or terminated with the
approval of the Board, to limit the total annual fund operating expenses charged, excluding interest, taxes and certain non-routine expenses (expense limitation). The expense limitation as a percentage of average daily net assets is as
follows:
| Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund | |
| Investor Shares | 1.35% | 1.40% |
| Select Shares | 1.20% | 1.25% |
Certain Schwab funds may own shares
of other Schwab funds. The table below reflects the percentage of shares of each fund in this report that are owned by other Schwab funds as of October 31, 2016, as applicable:
| Underlying Funds | |||
| Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund | ||
| Schwab Target 2010 Fund | 0.3% | 0.2% | |
| Schwab Target 2015 Fund | 0.5% | 0.4% | |
| Schwab Target 2020 Fund | 4.0% | 2.6% | |
| Schwab Target 2025 Fund | 4.2% | 2.7% | |
| Schwab Target 2030 Fund | 9.8% | 5.7% | |
| Schwab Target 2035 Fund | 5.2% | 2.8% | |
| Schwab Target 2040 Fund | 14.1% | 7.0% | |
| Schwab Target 2045 Fund | 1.5% | 0.7% | |
| Schwab Target 2050 Fund | 1.4% | 0.6% | |
| Schwab Target 2055 Fund | 0.8% | 0.4% | |
| Schwab Target 2060 Fund | 0.0%* | 0.0%* | |
| Schwab Monthly Income Fund — Moderate Payout | —% | 0.4% | |
| Schwab Monthly Income Fund — Enhanced Payout | —% | 0.5% | |
| Schwab Monthly Income Fund — Maximum Payout | —% | 0.1% | |
| Schwab Balanced Fund | 17.9% | —% | |
| * | Less than 0.05% |
Pursuant to an exemptive order issued
by the SEC, the funds may enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency purposes and the interest rate
to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating funds/portfolios. The
interfund lending facility is subject to the oversight and periodic review by the Board. The funds had no interfund borrowing or lending activity during the period.
The professional fees related to foreign withholding tax claims
discussed in financial note 2 were non-routine expenses. However, the investment adviser agreed to pay these professional fees for this reporting period, subject to reimbursement by the Laudus International MarketMasters Fund to the extent the fund
is able to successfully recover taxes withheld in the future.
5. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations
throughout the report period. The trust did not pay any of these interested persons for their services as trustees, but it did pay non-interested persons (independent trustees), as noted on each fund’s Statement of Operations. For information
regarding the trustees, please refer to the Trustees and Officers table at the end of this report.
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Financial Notes (continued)
6.
Borrowing from Banks:
During the period, the funds were
participants with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit Facility, in addition
to the interest charged on any borrowings by a fund, each fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, the Credit Facility was amended to run for a new
364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
The funds also have access to custodian overdraft facilities. A
fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
7. Purchases and Sales/Maturities of Investment Securities:
For the period ended October 31, 2016, purchases and
sales/maturities of securities (excluding short-term obligations) were as follows:
| Purchases of Securities | Sales/Maturities of Securities | |
| Laudus Small-Cap MarketMasters Fund | $129,172,375 | $136,972,124 |
| Laudus International MarketMasters Fund | 1,087,948,992 | 1,445,787,947 |
8. Derivatives:
The funds entered into equity index
futures contracts during the report period. The funds invested in futures contracts to equitize available cash. The fair value and variation margin for futures contracts held at October 31, 2016 are presented on the Portfolio Holdings and Statement
of Assets and Liabilities, respectively. The net realized and change in unrealized gains (losses) on futures contracts are presented on the Statement of Operations. Refer to financial note 2(b) for the funds' accounting policies with respect to
futures contracts and financial note 3 for disclosures concerning the risks of investing in futures contracts. During the period ended October 31, 2016, the month-end average contract values of futures contracts held by the funds and the month-end
average number of contracts held were as follows:
| Contract Values | Number of Contracts | |
| Laudus Small-Cap MarketMasters Fund | $1,072,611 | 9 |
| Laudus International MarketMasters Fund | 34,072,653 | 411 |
The Laudus International
MarketMasters Fund invested in forwards during the report period. The fund invested in forwards in connection with the purchase and sale of portfolio securities to minimize the uncertainty of changes in future foreign currency exchange rates and to
hedge exposure to certain currencies. Refer to financial note 2(b) for the fund’s accounting policies with respect to forwards and financial note 3 for disclosures concerning the risks of investing in forwards. During the period ended October
31, 2016, the month-end average forward foreign currency notional amount and the month-end average unrealized depreciation were $26,914,935 and ($58,123) respectively.
As of October 31, 2016, the derivatives contracts held by the
funds, categorized by primary risk exposure, were:
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Financial Notes (continued)
8.
Derivatives (continued):
| Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund | |||
| Asset Derivatives | Fair Value | |||
| Equity Index — Futures Contracts1 | $— | $— | ||
| Forward Foreign Currency Exchange Contracts2 | $— | $261,586 | ||
| Total | $— | $261,586 | ||
| Liability Derivatives | Fair Value | |||
| Equity Index — Futures Contracts3 | ($18,803) | ($463,498) | ||
| Forward Foreign Currency Exchange Contracts4 | — | (37,865) | ||
| Total | ($18,803) | ($501,363) | ||
| 1 | Includes cumulative unrealized appreciation of futures contracts as reported in the Schedule of Portfolio Holdings. Only current day's variation margin is reported within the Statement of Assets and Liabilities. |
| 2 | Statement of Assets and Liabilities location: Unrealized appreciation on forward foreign currency exchange contracts. |
| 3 | Includes cumulative unrealized depreciation of futures contracts as reported in the Schedule of Portfolio Holdings. Only current day's variation margin is reported within the Statement of Assets and Liabilities. |
| 4 | Statement of Assets and Liabilities location: Unrealized depreciation on forward foreign currency exchange contracts. |
The effects of the derivatives held by the funds in the
Statement of Operations for the period ended October 31, 2016 were:
| Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund | |
| Equity Index Futures Contracts | ||
| Realized Gains (Losses)1 | $470,724 | $4,835,300 |
| Change in Unrealized Appreciation (Depreciation)2 | (84,784) | 106,484 |
| Forward Foreign Currency Exchange Contracts | ||
| Realized Gains (Losses)1 | $— | ($1,144,813) |
| Change in Unrealized Appreciation (Depreciation)2 | — | (162,204) |
| 1 | Statement of Operations location: Net realized gains (losses) on futures contracts and net realized gains (losses) on foreign currency transactions. |
| 2 | Statement of Operations location: Net change in unrealized appreciation (depreciation) on futures contracts and net change in unrealized appreciation (depreciation) on foreign currency translations. |
The funds' forwards are entered into pursuant to International
Swaps and Derivatives Association, Inc. (ISDA) agreements which govern certain terms of derivative transactions. ISDA agreements typically contain, among other things, master netting provisions in the event of a default or other termination event.
Master netting provisions allow the funds and the counterparty, in the event of a default or other termination event, to offset payable and receivable amounts for each party related to derivative contracts to one net amount payable by either the
funds or the counterparty. The Laudus International MarketMasters Fund's forwards, which are
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Financial Notes (continued)
8.
Derivatives (continued):
reported gross in the
Statement of Assets and Liabilities, are presented in the table below. The following table presents the fund's forwards, net of amounts available for offset under a master netting agreement and net of any related collateral received by the fund for
assets and pledged by the fund for liabilities as of October 31, 2016.
| Gross
Amounts Not Offset in the Statement of Assets & Liabilities | |||||||
| Counterparty | Net
Amounts of Assets Presented in the Statement of Assets and Liabilities |
Financial
Instruments |
Cash
Collateral Received |
Net
Amounts(a) | |||
| State Street Bank & Trust Co. | $261,586 | ($37,865) | $— | $223,721 | |||
| Total | $261,586 | ($37,865) | $— | $223,721 | |||
| Counterparty | Net
Amounts of Liabilities Presented in the Statement of Assets and Liabilities |
Financial
Instruments |
Cash
Collateral Pledged |
Net
Amounts(b) | |||
| State Street Bank & Trust Co. | ($37,865) | $37,865 | $— | $— | |||
| Total | ($37,865) | $37,865 | $— | $— | |||
| a | Represents the net amount due from the counterparty in the event of default. |
| b | Represents the net amount due to the counterparty in the event of default. |
9. Redemption Fee:
The funds charge a 2.00%
redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods
were as follows:
| Current
Period (11/1/15-10/31/16) |
Prior
Period (11/1/14-10/31/15) | |
| Laudus Small-Cap MarketMasters Fund | $110 | $565 |
| Laudus International MarketMasters Fund | 11,152 | 10,335 |
10. Federal Income Taxes:
As of October 31, 2016, the
components of distributable earnings on a tax-basis were as follows:
| Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund | ||
| Undistributed ordinary income | $210,168 | $12,053,904 | |
| Undistributed long-term capital gains | 1,679,241 | — | |
| Unrealized appreciation on investments | 18,363,881 | 173,944,896 | |
| Unrealized depreciation on investments | (13,026,238) | (87,966,878) | |
| Other unrealized appreciation (depreciation) | — | (251,493) | |
| Net unrealized appreciation (depreciation) | $5,337,643 | $85,726,525 |
The primary differences between
book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments are the tax deferral of losses on wash sales, Passive Foreign Investment Companies (PFIC), partnership investments and non-taxable dividends.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of October 31, 2016, the Laudus International MarketMasters Fund had capital loss carryforwards of $13,160,449 with no expiration* available to offset future net capital gains.
| * | As a result of the passage of the Regulated Investment Company Modernization Act of 2010, capital losses incurred after December 31, 2010 may now be carried forward indefinitely, but must retain the character of the original loss. |
For the year ended October 31, 2016, the Laudus International
MarketMasters Fund had no capital loss carryforwards utilized.
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Financial Notes (continued)
10. Federal Income
Taxes (continued):
The tax-basis components of
distributions paid during the current and prior fiscal years were as follows:
| Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund | |
| Current period distributions | ||
| Ordinary income | $1,923,995 | $24,918,086 |
| Long-term capital gains | 8,100,932 | 100,978,405 |
| Prior period distributions | ||
| Ordinary income | $513,285 | $32,797,265 |
| Long-term capital gains | 3,718,541 | — |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements.
Permanent book and tax basis differences may result in
reclassifications between components of net assets as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2016, the funds made the following reclassifications:
| Laudus
Small-Cap MarketMasters Fund |
Laudus
International MarketMasters Fund | |
| Capital shares | $— | $— |
| Undistributed net investment income | (51) | 3,640,212 |
| Net realized capital gains (losses) | 51 | (3,640,212) |
As of October 31, 2016, management
has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) as applicable to the funds, and has determined that no provision for income tax is
required in the funds’ financial statements. The funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended October 31, 2016, the funds did
not incur any interest or penalties.
11. Recent Regulatory Development:
In October 2016,
the SEC adopted new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require
standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact
that the adoption of the amendments to Regulation S-X will have on the funds' financial statements and related disclosures.
12. Subsequent Events:
On December 13, 2016, the Board
of Trustees for Schwab Capital Trust approved the hiring of Voya Investment Management Co. LLC (Voya) as a new investment manager to Laudus Small-Cap MarketMasters Fund (the Fund). Voya will begin managing Fund assets on or around January 9,
2017.
Other than the investment manager changes to the
Laudus Small-Cap MarketMasters Fund as discussed above, management has determined there are no other subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements
as presented.
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Report of
Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Laudus Small-Cap MarketMasters Fund
Laudus International MarketMasters Fund
Laudus Small-Cap MarketMasters Fund
Laudus International MarketMasters 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 Laudus Small-Cap MarketMasters Fund
and Laudus International MarketMasters Fund (two of the funds constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2016, and 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian
and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2016
San Francisco, California
December 16, 2016
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Laudus MarketMasters Funds
Other Federal Tax
Information (unaudited)
The Laudus International MarketMasters Fund elects to pass
through, under section 853 of the Internal Revenue Code, the foreign tax credit of $3,491,767 to its shareholders for the year ended October 31, 2016. The respective foreign source income on the fund is $39,311,644.
For corporate shareholders, the following percentage of the
funds' dividend distributions paid during the fiscal year ended October 31, 2016, qualify for the corporate dividends received deduction:
| Percentage | |
| Laudus Small-Cap MarketMasters Fund | 59.05 |
| Laudus International MarketMasters Fund | — |
For the fiscal year ended October
31, 2016, the funds designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2017 via IRS form 1099
of the amounts for use in preparing their 2016 income tax return.
| Laudus Small-Cap MarketMasters Fund | $1,923,995 |
| Laudus International MarketMasters Fund | 28,407,630 |
Under Section 852 (b)(3)(C) of the
Internal Revenue Code, the funds hereby designate the following amounts as long-term capital gain dividends for the fiscal year ended October 31, 2016:
| Laudus Small-Cap MarketMasters Fund | $8,100,932 |
| Laudus International MarketMasters Fund | 100,978,405 |
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Approval of
Renewal of Investment Advisory and Sub-Advisory Agreements
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Laudus MarketMasters Funds
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Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic
Trust and Laudus Trust. The Fund Complex includes 108 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the funds’ Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 108 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 108 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 108 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 108 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 108 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 108 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 108 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 108 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 108 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
79
Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); and Director, Schwab Holdings, Inc. (May 2008 – present). | 108 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 108 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer, Schwab Holdings, Inc. (May 2007 – present). | 108 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
80
Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
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Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Glossary
82
Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
83
Laudus MarketMasters Funds | Annual Report
Laudus MarketMasters Funds
Access to a select
group of investment managers –
all in one fund family.
all in one fund family.
Laudus Funds offer investors access to some of the world's
leading investment managers. With a rigorous manager selection process and ongoing oversight by Charles Schwab Investment Management, Laudus Funds offer single and multi-manager strategies as a complement to other funds managed by Charles Schwab
Investment Management. The list below shows all currently available Laudus Funds.
An investor should consider a fund’s investment
objectives, risks, charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-877-824-5615 for a prospectus and brochure for any Laudus Fund.
Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Laudus Funds’ website at www.csimfunds.com/laudusfunds_prospectus, the SEC’s
website at www.sec.gov, or by contacting Laudus Funds at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/laudusfunds_prospectus or the SEC’s
website at www.sec.gov.
The Laudus Funds include the Laudus U.S. Large Cap Growth Fund and
the Laudus Mondrian Funds, which are part of the Laudus Trust and distributed by ALPS Distributors Inc.; and the Laudus MarketMasters Funds, which are part of the Schwab Capital Trust, and distributed by Charles Schwab & Co., Inc. Charles Schwab
& Co., Inc. and ALPS Distributors Inc. are unaffiliated entities.
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MFR13812-19
00186669
00186669
Table of Contents
Annual
Report | October 31, 2016
Schwab Active Equity Funds
Schwab Core Equity Fund™
Schwab Dividend Equity Fund™
Schwab Large-Cap Growth Fund™
Schwab Small-Cap Equity Fund™
Schwab Hedged Equity Fund™
Schwab Health Care Fund™
Schwab® International Core
Equity Fund
Equity Fund
This page is intentionally left blank.
Schwab Active Equity Funds
In
This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab)
The Sector/Industry classifications in this report use the
Global Industry Classification Standard (GICS), which was developed by, and is the exclusive property of, MSCI and Standard & Poor’s (S&P). GICS is a service mark of MSCI and S& P and has been licensed for use by Schwab. The
Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.
1
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com.
All total returns on this page assume dividends
and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized.
Performance data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Fund expenses may have been partially absorbed by
CSIM and its affiliates. Without these reductions, a fund’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
Source for category information: Morningstar, Inc.
The Morningstar Category return represents all active and index mutual funds within the category as of the report date.
| 1 | The fund’s performance relative to the index may be affected by fair-value pricing and timing differences in foreign exchange calculations. See financial note 2 for more information. |
| 2 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 3 | Please see the funds’ prospectus for further detail and eligibility requirements. |
2
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
Asset
Class Performance Comparison % returns during the 12 months ended 10/31/2016
Index figures
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Past performance is not an indication of future
results.
For index definitions, please see the
Glossary.
Data source: Index provider websites
and CSIM.
Nothing in this report represents a
recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
1 The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no
deductions for expenses or other taxes.
3
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
4
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
The Investment
Environment
Over the 12-month reporting period ended October 31, 2016,
equity markets generated mixed returns, with U.S. stocks performing well and many international stocks in negative territory. The Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade in December 2015, but held
them steady at each subsequent meeting during the reporting period. Concerns surrounding global growth and heightened market volatility weighed on stocks in the first part of the reporting period, especially after the United Kingdom’s
unexpected decision in June to leave the European Union (also known as Brexit). As the reporting period continued, however, some signs of stability emerged, including improving economic data, and many equity markets rebounded. Toward the end of the
reporting period, the U.S. presidential election fueled heightened market volatility and uncertainty. For the reporting period, the S&P 500®
Index, a bellwether for the overall U.S. stock market, returned 4.51%, while the Russell 2000® Index, a U.S. small-cap company measure, returned
4.11% for the reporting period. Internationally, the MSCI EAFE Index (Net), a broad measure of international developed equity performance, returned -3.23% for the same time period.
U.S. economic data generally improved over the reporting
period, despite several weak measurements during the 12 months. Corporate earnings were better-than-expected for the second quarter of 2016 but contracted in the third quarter, while U.S. nonfarm payrolls came in near expectations outside of a sharp
drop in May. Consumer confidence measurements were generally below expectations for most of the reporting period, but rebounded in September to reach its highest level since the 2008 recession. However, consumer confidence fell slightly in October
as increasing uncertainty surrounding the U.S. presidential election and the stability of the labor market resulted in more cautious consumers. In addition, U.S. economic growth trended upwards after dipping slightly in the first quarter of 2016,
with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Short-term interest rate policy in the U.S. remained a source
of uncertainty and volatility during the reporting period. The Fed raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, with the possibility of four additional increases in 2016. Inconsistent U.S. economic data, weak
global growth, and persistently low inflation, however, caused the Fed to leave rates unchanged at each meeting during the reporting period. At its meeting in September, the Fed noted that although the case for a rate increase had strengthened, it
had “…decided, for the time being, to wait for further evidence of continued progress toward its objectives.” As of the end of the reporting period, markets continued to expect one rate hike by the end of 2016.
Many central banks outside the U.S. increased accommodative
policy measures over the reporting period to help combat stalling economic growth. Both the Bank of Japan and the European Central Bank increased bond purchases and introduced negative interest rates, while the People’s Bank of China (PBOC)
expanded its lending facilities. Following the June Brexit vote, the Bank of England (BoE) announced its plan to take additional measures if necessary while markets adjusted. Less than two months later in early August, the BoE cut its benchmark rate
and resumed quantitative easing, and also increased lending to consumers and companies. While some of these measures initially appeared to be less effective than the central banks had hoped, the positive performance of many international equities in
the second half of the reporting period suggested that economic conditions outside the U.S. were beginning to improve.
5
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
The Investment
Environment (continued)
Concerns around unsteady global growth were present throughout
the first part of the 12-month reporting period, and then lessened as the reporting period continued. In China, fears about the slowing economy declined as stimulative moves by the PBOC helped to reverse downward trends in several economic gauges.
Meanwhile, the results of the June Brexit vote shook markets globally, sending the British pound downward and markedly increasing uncertainty and volatility. However, because Brexit was not driven by liquidity or changes in underlying fundamentals,
most stock markets rebounded and stabilized in the days and weeks that followed.
In January 2016, the price of oil dropped significantly and
remained volatile in the following months, weighing on many global stock markets. Oil prices stabilized at the end of the reporting period, however, and a relatively narrow trading range supported an overall rebound in the performance of many energy
companies and oil-producing countries. A proposed agreement by the Organization of the Petroleum Exporting Countries to limit output also initially helped boost oil prices after the agreement was announced, though the longer-term effects of an
agreement were uncertain and skepticism surrounding the deal tempered optimism among many investors and banks.
Index figures assume dividends and distributions were
reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Past performance is not an
indication of future results.
For index definitions,
please see the Glossary.
Nothing in this report represents
a recommendation of a security by the investment adviser.
Management views may have changed since the report date.
6
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
Fund Management
 |
Jonas Svallin, CFA, Vice President and Head of Active Equities, has overall responsibility for all aspects of the management of the funds and leads the Active Equity portfolio management and research team. Prior to joining CSIM in 2012, Mr. Svallin spent nearly three years as a partner and a director of quantitative analytics and research at Fiduciary Research & Consulting, where he provided oversight of quantitative analytics and risk management efforts. From 2003 to 2009, Mr. Svallin was a principal and head portfolio manager at Algert Coldiron Investors LLC (now known as Algert Global). Prior to joining Algert, Mr. Svallin worked as a quantitative research associate at RCM Capital Management and a senior consultant at FactSet Research Systems. |
 |
Wei Li, Ph.D., CFA, Managing Director and Senior Portfolio Manager, is responsible for the day-to-day co-management of the funds. Prior to joining CSIM in 2012, Ms. Li spent more than ten years at BlackRock, Inc. (formerly Barclays Global Investors), where she held a number of positions. From 2001 to 2009, she worked in various roles in the Global Advanced Active group, including portfolio management and quantitative research for both U.S. and international equity markets. After 2009, she worked in the defined contribution research and product development area for almost two years. |
 |
Iain Clayton, CFA, FRM, Managing Director and Senior Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Core Equity Fund, Schwab International Core Equity Fund and Schwab Health Care Fund. Prior to joining CSIM in 2013, Mr. Clayton spent more than five years at SSI Investment Management, where he was a portfolio manager and director of quantitative research. In these roles, Mr. Clayton co-managed multiple investment strategies and developed quantitative models and valuation approaches. From 2004 to 2008, he worked as a portfolio manager and director at RCM Capital Management (now known as Allianz Global Investors) and helped manage various equity portfolios and developed fundamental-based stock selection models. Prior to that, he was a vice president at Eureka Investment Advisors for almost three years and also served as a senior quantitative analyst/assistant portfolio manager. He has also worked as a quantitative research analyst at RCM Capital Management. |
7
Schwab Active Equity Funds | Annual Report
Schwab Core Equity Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Core Equity Fund
(the fund) seeks long-term capital growth. To pursue its investment objective, the fund invests primarily in U.S. stocks. The fund expects to hold the common stocks of U.S companies that have market capitalizations
of approximately $500 million or more. To aid its stock selection, the fund uses Schwab Equity Ratings®. For more information concerning the
fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. U.S. stocks
performed moderately well over the reporting period, supported by continued low short-term interest rates and generally improving economic data. The Federal Reserve (Fed) raised the federal funds rate in December 2015 and then left rates unchanged
for the remainder of the reporting period, while concerns lessened surrounding China’s decelerating economy and overall global growth.
Performance. The
fund returned -0.50% for the 12-month reporting period ended October 31, 2016, underperforming the S&P 500® Index (the index), which the fund
uses for performance comparisons. The index returned 4.51% for the reporting period.
Positioning and Strategies.
Stock selection was the largest overall detractor from the fund’s performance relative to the index, especially in the Energy, Financials, and Information Technology sectors.
From a sector standpoint, the Financials sector was among the
weakest performers within the fund and was the largest detractor from the fund’s total return, falling more than 7% over the reporting period. One example from this sector is retirement, investment and insurance company Voya Financial, Inc.
With uncertainty around Fed interest rate policy weighing on the performance of many financial companies, the fund’s position in Voya Financial, Inc. returned approximately -25% for the reporting period. Stock selection in the Energy sector
also detracted from the fund’s performance relative to the index. The fund’s holdings in the Energy sector, representing an average weight similar to that of the index, returned approximately -16% amid excess oil supply and volatile oil
and commodity prices. The Information Technology sector, despite contributing to the total return of the fund, underperformed the same sector in the index and therefore detracted from relative performance.
In contrast, the Utilities sector was the strongest performer
within the fund and positively contributed to the fund’s total return. With heightened market volatility and continued low interest rates, many investors sought safety and higher-yielding assets, boosting the returns of companies in the
traditionally defensive Utilities sector. One example from this sector is UGI Corporation, a holding company that distributes, stores, transports, and markets energy products and related services. The fund’s position in UGI Corporation
returned approximately 29%, in part due to the addition of over 16,000 new customers and record earnings. The fund’s holdings in the Consumer Discretionary and the Telecommunication Services sectors also contributed to both total return and
relative performance, as the fund’s holdings in these sectors outperformed those of the index.
At the security level, the fund’s largest detractor from
total return was Marathon Petroleum Corporation, a company engaged in petroleum product refining, marketing, retail, and transportation businesses. Marathon’s almost -27% return for the reporting period was driven by a decrease in the
differences between crude oil and wholesale petroleum product prices, as well as an increase in refined product inventories. By comparison, global information technology provider Computer Sciences Corporation contributed the most to the
fund’s total return. The fund’s holdings of Computer Sciences Corporation returned approximately 69%, in large part due to a company reorganization that resulted in the spin-off of certain assets.
8
Schwab Active Equity Funds | Annual Report
Schwab Core Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
9
Schwab Active Equity Funds | Annual Report
Schwab Core Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Core Equity Fund (7/1/96) | -0.50% | 12.19% | 5.72% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Large Blend | 2.12% | 11.90% | 5.80% |
| Fund Expense Ratio4: 0.74% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On May 21, 2009 and September 7, 2012, respectively, the Laudus U.S. MarketMasters Fund and the Schwab Premier Equity Fund merged into the fund. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
10
Schwab Active Equity Funds | Annual Report
Schwab Dividend Equity Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Dividend Equity
Fund (the fund) seeks current income and capital appreciation. Under normal circumstances, the fund invests at least 80% of its net assets in dividend-paying common and preferred stocks. To aid its stock selection,
the fund uses Schwab Equity Ratings®. For more information concerning the fund’s investment objective, strategies, and risks, please see the
fund’s prospectus.
Market Highlights. U.S. stocks performed moderately well over the reporting period, supported by continued low short-term interest rates and generally improving economic data. The Federal Reserve raised the federal funds rate in December
2015 and then left rates unchanged for the remainder of the reporting period, while concerns lessened surrounding China’s decelerating economy and overall global growth.
Performance. The
fund returned 0.26% for the 12-month reporting period ended October 31, 2016, underperforming the Russell 1000 Value Index (the index), which the fund uses for performance comparisons. The index returned 6.37% for the reporting period.
As of October 31, 2016, the fund’s dividend yield was
2.19%, lower than the 2.63% dividend yield of the index. As of October 31, 2016, the fund’s 30-Day SEC yield was 1.58%.
Positioning and Strategies.
Stock selection detracted from the fund’s performance relative to the index, especially in the Energy, Financials, and Health Care sectors.
From a sector standpoint, the Energy sector was the weakest
performer within the fund and detracted the most from the fund’s return relative to the index. Representing an average weight of approximately 13% of the fund’s investments, the fund’s Energy holdings fell 9% versus the
index’s Energy sector gain of 3%. With oil prices falling sharply in early 2016 and then stabilizing later in the reporting period, the volatility in oil prices weighed on the performance of many oil companies during the reporting period.
Among the fund’s Energy sector holdings, CVR Energy, Inc., a company engaged in petroleum refining and nitrogen fertilizer manufacturing, detracted the most from total return, down more than 59% for the reporting period. A sharp decline in net
income and free cash flow generation over the 12–month reporting period weighed on the performance of CVR Energy, Inc., as did concerns around high long-term debt levels and the company’s ability to service it. The fund’s holdings
in the Financials and Health Care sectors also detracted from relative performance, as the fund’s holdings in those sectors underperformed those of the index.
The Utilities sector was the strongest contributor to the
fund’s total return, and both strong stock selection and sector allocation helped the fund outperform the index’s holdings in this sector. Representing an average weight of approximately 8% of the fund, the fund’s position in the
Utilities sector returned 20% over the reporting period. Within the sector, the fund’s overweight position in UGI Corporation, a holding company that distributes, stores, transports, and markets energy products and related services,
contributed the most to total return. The fund’s holdings of UGI Corporation returned 29% for the reporting period, driven in part by the addition of over 16,000 new customers and record earnings. The Materials sector, representing an average
weight of approximately 4% of the fund, also boosted the fund’s total return, with the fund’s holdings in the sector up over 16% for the reporting period.
11
Schwab Active Equity Funds | Annual Report
Schwab Dividend Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
12
Schwab Active Equity Funds | Annual Report
Schwab Dividend Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Dividend Equity Fund (9/2/03) | 0.26% | 10.58% | 5.40% |
| Russell 1000® Value Index | 6.37% | 13.31% | 5.35% |
| Dividend Equity Spliced Index | 6.37% | 13.31% | 6.58% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Large Value | 3.72% | 11.34% | 4.91% |
| Fund Expense Ratio4: 0.88% | |||
Yields1
| 30-Day SEC Yield | 1.58% |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 7, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to October 7, 2009 is that of the fund’s former Select Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
13
Schwab Active Equity Funds | Annual Report
Schwab Large-Cap Growth Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Large-Cap Growth Fund (the fund) seeks long-term capital growth. To pursue its investment objective, the fund invests primarily in U.S. common stocks. Under normal circumstances, the fund invests at least 80% of its net assets in large-cap
stocks of U.S. companies. To aid its stock selection, the fund uses Schwab Equity Ratings®. For more information concerning the fund’s
investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Both U.S.
small- and large-cap stocks performed moderately well over the reporting period, supported by continued low short-term interest rates and generally improving economic data. The Federal Reserve raised the federal funds rate in December 2015 and then
left rates unchanged for the remainder of the reporting period, while concerns lessened surrounding China’s decelerating economy and overall global growth.
Performance. The fund returned
0.54% for the 12-month reporting period ended October 31, 2016, underperforming the Russell 1000 Growth Index (the index), which the fund uses for performance comparisons. The index returned 2.28% for the reporting period.
Positioning and Strategies.
The fund’s allocation across market sectors as compared with the index detracted from the fund’s relative performance, while effective stock selection helped to partially offset these allocations.
From a sector standpoint, the Health Care sector was among the
weakest performers within the fund and was the largest detractor from the fund’s total return, falling roughly 14% over the reporting period. One example from this sector is research-based biopharmaceutical company Gilead Sciences, Inc., which
performed poorly during the reporting period, largely due to declining sales of its hepatitis C drug. The fund’s position in Gilead Sciences, Inc. returned approximately -26%. Stock selection in the Financials sector also detracted from the
fund’s performance relative to the index. The fund’s holdings in the Financials sector, representing an average weight of approximately 5% of the fund’s investments, returned approximately -15% for the reporting period. The Energy
sector also detracted from total return and relative performance, with the fund’s investments in this sector losing approximately 25%.
While the Consumer Discretionary sector underperformed the
broader market within the index, effective stock selection resulted in the outperformance of the same sector in the fund. The Consumer Discretionary sector was the strongest contributor to both total return and relative performance, with the
fund’s investments in this sector returning approximately 11%. One example from this sector is online merchandise and content provider Amazon.com, Inc., with the fund’s position in Amazon returning approximately 26% for the reporting
period. Amazon’s performance was largely driven by gains in retail market share and continued expansion of Amazon Web Services in the cloud storage space. The fund’s holdings in the Materials and the Utilities sectors also contributed to
both total return and relative performance, as the fund’s holdings in these sectors outperformed those of the index.
14
Schwab Active Equity Funds | Annual Report
Schwab Large-Cap Growth Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
15
Schwab Active Equity Funds | Annual Report
Schwab Large-Cap Growth Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Large-Cap Growth Fund (10/3/05) | 0.54% | 12.55% | 6.43% |
| Russell 1000® Growth Index | 2.28% | 13.65% | 8.22% |
| Fund Category: Morningstar Large Growth | -0.07% | 11.98% | 6.96% |
| Fund Expense Ratios4: Net 0.99%; Gross 1.03% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 7, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to October 7, 2009 is that of the fund’s former Select Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
16
Schwab Active Equity Funds | Annual Report
Schwab Small-Cap Equity Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Small-Cap Equity Fund (the fund) seeks long-term capital growth. Under normal circumstances, the fund invests at least 80% of its net assets in small-cap equity securities. To aid its stock selection, the fund uses Schwab Equity Ratings®. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Both U.S.
small- and large-cap stocks performed moderately well over the reporting period, supported by continued low short-term interest rates and generally improving economic data. The Federal Reserve raised the federal funds rate in December 2015 and then
left rates unchanged for the remainder of the reporting period, while concerns lessened surrounding China’s decelerating economy and overall global growth.
Performance. The fund returned
1.47% for the 12-month reporting period ended October 31, 2016, underperforming the Russell 2000 Index (the index), which the fund uses for performance comparisons. The index returned 4.11% for the reporting period.
Positioning and Strategies.
Stock selection was the largest overall detractor from the fund’s performance relative to the index, and its allocation across market sectors as compared with the index also detracted from the fund’s
performance.
From a sector standpoint, the Health
Care sector was among the weakest performers and was the largest detractor from the fund’s total return, falling roughly 12% over the reporting period. One example from this sector is molecular diagnostic company Myriad Genetics, Inc. which
performed poorly during the reporting period amid concerns about the stability of revenues from the company’s hereditary cancer tests. The fund’s position in Myriad Genetics, Inc. returned approximately -51%. Stock selection in the
Energy sector also detracted from the fund’s performance relative to the index. The fund’s holdings in the Energy sector, representing an average weight similar to that of the index, returned approximately -36% amid excess oil supply and
volatile oil and commodity prices. The Information Technology sector, despite contributing to the total return of the fund, underperformed the same sector in the index and therefore detracted from relative performance.
In contrast, the Materials sector was the strongest performer
within the fund and positively contributed to the fund’s total return. Lessening concerns about China’s economic slowdown and the relative stability in commodities prices supported the performance of many companies in this sector, which
gained approximately 54% for the reporting period. One example from this sector is Trinseo S.A., a company engaged in the manufacture and marketing of synthetic rubber, latex and plastics, including various specialty and technologically
differentiated products. The fund’s position in Trinseo S.A. returned almost 64% for the reporting period. The fund’s holdings in the Industrials and the Real Estate sectors contributed to both total return and relative performance, as
the fund’s holdings in these sectors outperformed those of the index.
At the security level, one of the fund’s largest
detractors from total return was Alon USA Energy, Inc., an independent refiner and marketer of petroleum products. Alon’s loss of approximately 57% for the reporting period was driven by exposure to crude oil, low profitability, and a large
debt burden. By comparison, print and marketing services provider Quad Graphics, Inc. contributed the most to the fund’s total return. The fund’s Class A holdings of Quad Graphics, Inc. returned approximately 99%, in large part due to
better-than expected third quarter revenue growth and the realization of cost synergies and economies of scale that resulted in improving cash flows.
17
Schwab Active Equity Funds | Annual Report
Schwab Small-Cap Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
Small-company stocks are subject to
greater volatility than many other asset classes.
| 1 | This list is not a recommendation of any security by the investment adviser. |
18
Schwab Active Equity Funds | Annual Report
Schwab Small-Cap Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Small-Cap Equity Fund (7/1/03) | 1.47% | 13.34% | 5.82% |
| Russell 2000® Index | 4.11% | 11.51% | 5.96% |
| Fund Category: Morningstar Small Blend | 2.91% | 10.53% | 5.71% |
| Fund Expense Ratio4: 1.09% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On September 28, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to September 28, 2009 is that of the fund’s former Select Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
19
Schwab Active Equity Funds | Annual Report
Schwab Hedged Equity Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Hedged Equity Fund
(the fund) seeks long-term capital appreciation over market cycles with lower volatility than the broad equity market. To pursue its investment objective, the fund establishes long and short positions in equity securities issued by U.S. companies.
The fund typically purchases or sells short stocks of companies that have market capitalizations of $1 billion or more at the time the stock is purchased or sold short. To aid its stock selection, the fund uses Schwab Equity Ratings®. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Both U.S.
small- and large-cap stocks performed moderately well over the reporting period, supported by continued low short-term interest rates and generally improving economic data. The Federal Reserve raised the federal funds rate in December 2015 and then
left rates unchanged at subsequent meetings, while volatility remained heightened in the first part of the reporting period, but lessened in recent months as concerns subsided around global economic growth.
Performance. The fund returned
3.55% for the 12-month reporting period ended October 31, 2016, underperforming the S&P 500® Index (the index), which the fund uses for
performance comparisons. The index returned 4.51% for the reporting period.
Positioning and Strategies.
Effective stock selection contributed to the fund’s relative performance, while its allocation across market sectors compared with the index detracted.
From a market sector standpoint, the Energy sector detracted
the most from both total and relative performance, primarily due to stock selection. Highly volatile oil and commodity prices in the first half of the reporting period contributed to excess supply and increased uncertainty, resulting in both the
fund’s long and short positions in the Energy sector posting negative returns, significantly underperforming the index. An underweight of the sector, however, contributed somewhat to relative performance. Within the sector, CVR Energy, Inc., a
company engaged in petroleum refining and nitrogen fertilizer manufacturing, was the largest detractor, down more than 62% for the reporting period. A sharp decline in net income and free cash flow generation over the 12 months weighed on the
performance of CVR Energy, Inc., as did concerns around high long-term debt levels and the company’s ability to service it. As of the end of the second quarter of 2016, the fund had eliminated its entire position of CVR Energy, Inc. The
fund’s holdings in the Financials sector also detracted from both total return and relative performance, with the fund’s long positions in this sector down approximately 5%.
The Consumer Discretionary sector contributed the most to both
the fund’s total return and its relative performance. The fund’s long positions within the sector returned approximately 3%, and its short positions fell close to 10%, further boosting the fund’s return. The fund’s
underweight to this sector as compared to the index also contributed positively. Within the sector, the fund’s long position in Amazon.com, Inc. contributed the most, returning more than 26% for the reporting period on strong sales growth,
especially relative to its size. The Materials sector also contributed to the fund’s total and relative returns, a result of effective stock selection. The fund’s long positions within the sector were particularly helpful—as a
group, up almost 28%—as the Materials sector was particularly strong for the reporting period. Both stock selection and underweight to the Health Care sector also contributed notably to the fund’s relative performance. Although the
fund’s long Health Care positions resulted in negative returns, its short positions were down by more than 10%, contributing positively to total return.
20
Schwab Active Equity Funds | Annual Report
Schwab Hedged Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Short Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
21
Schwab Active Equity Funds | Annual Report
Schwab Hedged Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Hedged Equity Fund (9/3/02) | 3.55% | 7.94% | 3.62% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Long-Short Equity | -2.25% | 4.41% | 4.41% |
| Fund Expense Ratios4: Net 1.82%; Gross 1.84% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The Schwab Hedged Equity Fund’s long positions can decline
in value at the same time the value of its shorted stocks increases, thereby increasing the potential for loss. The potential loss associated with short positions is much greater than the original value of the securities sold. The use of borrowing
and short sales may cause the fund to have higher expenses than those of equity funds that do not use such techniques.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On September 28, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to September 28, 2009 is that of the fund’s former Select Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
22
Schwab Active Equity Funds | Annual Report
Schwab Health Care Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Health Care Fund
(the fund) seeks long-term capital growth. To pursue its goal, the fund primarily invests in equity securities issued by companies in the Health Care sector. The fund uses Schwab Equity Ratings® to aid its U.S. stock selection and Schwab’s proprietary international stock research to aid its international stock selection. For more
information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Both U.S.
small- and large-cap stocks performed moderately well over the reporting period, supported by continued low short-term interest rates and generally improving economic data. The Federal Reserve raised the federal funds rate in December 2015 and then
left rates unchanged at subsequent meetings. Health care stocks experienced heightened volatility, in part due to uncertainty around how a new administration in the White House will address the Affordable Care Act.
Performance. The fund returned
-5.78% for the 12-month reporting period ended October 31, 2016, outperforming the Dow Jones Global Health Care Index (the index), which the fund uses for performance comparisons. The index returned -6.05% for the reporting period.
Positioning and Strategies.
Effective stock selection was the largest contributor to the fund’s outperformance of the index, while its allocation across industries as compared with the index detracted slightly.
From an industry standpoint, the fund’s positions in the
Life Sciences Tools & Services industry provided the greatest contribution to total return and were among the largest contributors to relative performance, primarily the result of effective stock selection, but further boosted by a strategic
overweight of the industry. Constituting an average weight of roughly 8% of the fund, the fund’s Life Sciences Tools & Services holdings returned approximately 26% for the period. Among the fund’s Life Sciences Tools & Services
holdings, its position in Lonza Group AG was its strongest single contributor. Lonza Group AG’s 30% gain for the period was driven by the company’s strong sales and earnings growth over the reporting period. The fund’s holdings in
Health Care Equipment also boosted both total return and performance relative to the index, primarily due to strategic underweights and overweights to select stocks within the industry. In addition, stock selection within the Pharmaceuticals
industry contributed significantly to the fund’s relative performance, despite an overall negative return for that industry within both the fund and the index.
By comparison, the fund’s holdings in the Biotechnology
industry provided the largest drag on the fund’s total return and relative performance, with the fund’s positions down over 18% for the reporting period. The fund’s position in Gilead Sciences, Inc., which resides in the
Biotechnology industry, detracted the most from the total return of the fund. Gilead’s loss of approximately 30% over the reporting period was largely due to declining sales of its hepatitis C drug. The fund’s positions within the Health
Care Providers & Services industry also dampened total return, as they significantly underperformed those of the index.
23
Schwab Active Equity Funds | Annual Report
Schwab Health Care Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
24
Schwab Active Equity Funds | Annual Report
Schwab Health Care Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Health Care Fund (7/3/00) | -5.78% | 15.88% | 9.65% |
| Dow Jones Global Health Care Index | -6.05% | 14.12% | 8.08% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Health | -11.09% | 16.56% | 9.85% |
| Fund Expense Ratio3: 0.79% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The fund’s performance relative to the index may be
affected by fair-value pricing, see financial note 2 for more information.
Since the Schwab Health Care Fund focuses its investments on
companies involved in specific sectors, this fund may involve a greater degree of risk than an investment in mutual funds that do not concentrate their investments.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
25
Schwab Active Equity Funds | Annual Report
Schwab International Core Equity Fund
Performance and Fund
Facts as of 10/31/16
The Schwab International Core Equity Fund (the fund) seeks long-term capital growth. To pursue its investment objective, the fund invests primarily in the stocks of publicly traded companies located in developed countries, excluding the U.S. To aid its stock
selection, the fund uses Schwab’s proprietary international stock research. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. Stocks in
developed international markets generated negative performance over the reporting period. Global economic growth remained weak, despite some signs of improvement, and the United Kingdom’s decision in June to leave the European Union (also
known as Brexit) triggered a selloff in equities across the globe. Many central banks outside the U.S. increased accommodative policy measures over the reporting period, while the Federal Reserve held short-term interest rates steady after its
initial rate hike in December 2015. Toward the end of the reporting period, oil and commodity prices stabilized after dropping sharply in early 2016, helped by a tentative agreement by the Organization of the Petroleum Exporting Countries to cut
production in November.
Performance. The fund returned -2.41% for the 12-month reporting period ended October 31, 2016, outperforming the MSCI EAFE Index (Net) (the index), which the fund uses for performance comparisons. The index returned -3.23% for the
reporting period.
Positioning and Strategies. Over the reporting period, both country allocation and strong stock selection contributed to the fund’s outperformance of the index.
From a country standpoint, Switzerland was a positive
contributor to the fund’s total return and the top contributor to relative performance, driven primarily by strong stock selection. Among the fund’s Swiss holdings, consumer finance bank Cembra Money Bank AG provided the biggest boost,
up more than 34% for the period. Its performance was driven by excess capital relative to other banks, as well as a stable business model with a well-diversified portfolio of assets. During the period, the fund’s holdings in Finland also
significantly outperformed those of the index (approximately 43% versus -7%), contributing positively to both total and relative returns.
Japanese stocks were the largest detractors from performance
relative to the index. Representing approximately 23% of the fund’s investments, the fund’s holdings in Japan dropped slightly more than 2% for the reporting period, even while the Japanese yen rose to its highest level in recent years
against the U.S. dollar. (Returns on overseas investments are generally enhanced in U.S. dollar terms when foreign currencies appreciate versus the U.S. dollar.) Within the Japanese country segment, the fund’s holdings of financial services
company Resona Holdings, Inc. detracted the most from the return of the fund and relative performance. Falling interest rates weighed on the performance of many commercial banks in Japan, as did declining confidence in the ability of the Bank of
Japan to revive the economy. The fund’s United Kingdom stocks also detracted from total return amid heightened volatility and uncertainty surrounding the June Brexit vote.
26
Schwab Active Equity Funds | Annual Report
Schwab International Core Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Management views and portfolio holdings may have
changed since the report date.
Source of Sector
Classification: S&P and MSCI.
International
investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
27
Schwab Active Equity Funds | Annual Report
Schwab International Core Equity Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (May 30, 2008
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab International Core Equity Fund (5/30/08) | -2.41% | 7.64% | 1.43% |
| MSCI EAFE® Index (Net)4 | -3.23% | 4.99% | -0.10% |
| MSCI EAFE® Index (Gross) | -2.74% | 5.48% | 0.36% |
| Fund Category: Morningstar Foreign Large Blend | -2.08% | 4.69% | -0.46% |
| Fund Expense Ratios5: Net 0.86%; Gross 0.92% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The fund’s performance relative to the index may be
affected by fair-value pricing, see financial note 2 for more information.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 7, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund. The performance history of the fund prior to October 7, 2009 is that of the fund’s former Institutional Shares. On December 3, 2009, the Laudus Rosenberg International Equity Fund merged into the fund. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 5 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
28
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Schwab Core Equity Fund | ||||
| Actual Return | 0.73% | $1,000.00 | $1,039.10 | $3.74 |
| Hypothetical 5% Return | 0.73% | $1,000.00 | $1,021.43 | $3.71 |
| Schwab Dividend Equity Fund | ||||
| Actual Return | 0.88% | $1,000.00 | $1,017.70 | $4.46 |
| Hypothetical 5% Return | 0.88% | $1,000.00 | $1,020.68 | $4.47 |
| Schwab Large-Cap Growth Fund | ||||
| Actual Return | 0.99% | $1,000.00 | $1,041.80 | $5.08 |
| Hypothetical 5% Return | 0.99% | $1,000.00 | $1,020.12 | $5.03 |
| Schwab Small-Cap Equity Fund | ||||
| Actual Return | 1.09% | $1,000.00 | $1,048.50 | $5.61 |
| Hypothetical 5% Return | 1.09% | $1,000.00 | $1,019.62 | $5.53 |
| Schwab Hedged Equity Fund | ||||
| Actual Return | 1.89% | $1,000.00 | $1,049.70 | $9.74 |
| Hypothetical 5% Return | 1.89% | $1,000.00 | $1,015.60 | $9.58 |
| Schwab Health Care Fund | ||||
| Actual Return | 0.79% | $1,000.00 | $ 965.50 | $3.90 |
| Hypothetical 5% Return | 0.79% | $1,000.00 | $1,021.13 | $4.01 |
| Schwab International Core Equity Fund | ||||
| Actual Return | 0.86% | $1,000.00 | $1,018.80 | $4.36 |
| Hypothetical 5% Return | 0.86% | $1,000.00 | $1,020.78 | $4.37 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12- month period. This ratio does not include certain non-routine expenses, such as proxy expenses. |
| 2 | Expenses for each fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year. |
29
Schwab Active Equity Funds | Annual Report
Schwab Core Equity Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $23.10 | $25.48 | $23.46 | $18.80 | $16.81 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.38 1 | 0.30 1 | 0.30 | 0.32 | 0.26 | |
| Net realized and unrealized gains (losses) | (0.52) | 1.05 | 3.60 | 4.51 | 2.07 | |
| Total from investment operations | (0.14) | 1.35 | 3.90 | 4.83 | 2.33 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.36) | (0.33) | (0.22) | (0.17) | (0.34) | |
| Distributions from net realized gains | (2.95) | (3.40) | (1.66) | — | — | |
| Total distributions | (3.31) | (3.73) | (1.88) | (0.17) | (0.34) | |
| Net asset value at end of period | $19.65 | $23.10 | $25.48 | $23.46 | $18.80 | |
| Total return | (0.50%) | 5.61% | 17.88% | 25.89% | 13.99% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.73% | 0.74% | 0.72% | 0.72% | 0.72% | |
| Gross operating expenses | 0.73% | 0.74% | 0.72% | 0.73% | 0.73% | |
| Net investment income (loss) | 1.93% | 1.29% | 1.19% | 1.51% | 1.37% | |
| Portfolio turnover rate | 80% | 81% | 63% | 80% | 45% 2 | |
| Net assets, end of period (x 1,000,000) | $2,075 | $2,363 | $2,317 | $2,247 | $1,880 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover excludes the impact of investment
activities from mergers with other funds.
30
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Core Equity Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
31
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Core Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
32
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Core Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $2,065,597,732 | $— | $— | $2,065,597,732 | |
| Other Investment Company1 | 8,544,366 | — | — | 8,544,366 | |
| Total | $2,074,142,098 | $— | $— | $2,074,142,098 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($57,970) | $— | $— | ($57,970) |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between
Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
33
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Core Equity Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $1,849,146,835) | $2,074,142,098 | |
| Deposit with broker for futures contracts | 1,827,000 | |
| Receivables: | ||
| Investments sold | 393,256 | |
| Dividends | 1,215,764 | |
| Fund shares sold | 491,983 | |
| Income from securities on loan | 1,788 | |
| Prepaid expenses | + | 28,211 |
| Total assets | 2,078,100,100 | |
| Liabilities | ||
| Payables: | ||
| Investment adviser and administrator fees | 837,745 | |
| Shareholder service fees | 388,095 | |
| Fund shares redeemed | 1,513,941 | |
| Variation margin on futures contracts | 11,100 | |
| Accrued expenses | + | 104,396 |
| Total liabilities | 2,855,277 | |
| Net Assets | ||
| Total assets | 2,078,100,100 | |
| Total liabilities | – | 2,855,277 |
| Net assets | $2,075,244,823 | |
| Net Assets by Source | ||
| Capital received from investors | 1,825,603,961 | |
| Net investment income not yet distributed | 27,905,265 | |
| Net realized capital losses | (3,201,696) | |
| Net unrealized capital appreciation | 224,937,293 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $2,075,244,823 | 105,624,998 | $19.65 | ||
34
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Core Equity Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends | $57,295,226 | |
| Securities on loan | + | 196,867 |
| Total investment income | 57,492,093 | |
| Expenses | ||
| Investment adviser and administrator fees | 10,153,297 | |
| Shareholder service fees | 5,254,635 | |
| Shareholder reports | 99,338 | |
| Portfolio accounting fees | 64,367 | |
| Registration fees | 54,271 | |
| Transfer agent fees | 46,600 | |
| Custodian fees | 40,823 | |
| Proxy fees | 40,427 | |
| Professional fees | 37,807 | |
| Independent trustees' fees | 20,938 | |
| Interest expense | 468 | |
| Other expenses | + | 30,494 |
| Total expenses | 15,843,465 | |
| Expense reduction by CSIM and its affiliates | – | 46,600 |
| Net expenses | – | 15,796,865 |
| Net investment income | 41,695,228 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 1,371,024 | |
| Net realized gains on futures contracts | + | 1,613,699 |
| Net realized gains | 2,984,723 | |
| Net change in unrealized appreciation (depreciation) on investments | (59,443,415) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (762,033) |
| Net change in unrealized appreciation (depreciation) | + | (60,205,448) |
| Net realized and unrealized losses | (57,220,725) | |
| Decrease in net assets resulting from operations | ($15,525,497) | |
35
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Core Equity Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $41,695,228 | $30,380,445 | ||
| Net realized gains | 2,984,723 | 307,255,040 | ||
| Net change in unrealized appreciation (depreciation) | + | (60,205,448) | (207,380,437) | |
| Increase (decrease) in net assets from operations | (15,525,497) | 130,255,048 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (37,055,587) | (30,311,016) | ||
| Distributions from net realized gains | + | (299,452,225) | (308,068,333) | |
| Total distributions | ($336,507,812) | ($338,379,349) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 9,848,997 | $188,207,369 | 12,845,696 | $293,750,932 | ||||
| Shares reinvested | 12,520,076 | 244,391,884 | 10,461,915 | 236,857,753 | ||||
| Shares redeemed | + | (19,037,976) | (368,198,142) | (11,947,882) | (276,936,418) | |||
| Net transactions in fund shares | 3,331,097 | $64,401,111 | 11,359,729 | $253,672,267 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 102,293,901 | $2,362,877,021 | 90,934,172 | $2,317,329,055 | ||||
| Total increase or decrease | + | 3,331,097 | (287,632,198) | 11,359,729 | 45,547,966 | |||
| End of period | 105,624,998 | $2,075,244,823 | 102,293,901 | $2,362,877,021 | ||||
| Net investment income not yet distributed | $27,905,265 | $22,957,023 | ||||||
36
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Dividend Equity Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $16.43 | $19.17 | $18.22 | $14.52 | $13.15 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.31 1 | 0.29 1 | 0.27 | 0.32 | 0.27 | |
| Net realized and unrealized gains (losses) | (0.29) | (0.21) | 2.16 | 3.70 | 1.38 | |
| Total from investment operations | 0.02 | 0.08 | 2.43 | 4.02 | 1.65 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.32) | (0.27) | (0.29) | (0.32) | (0.28) | |
| Distributions from net realized gains | (1.74) | (2.55) | (1.19) | — | — | |
| Total distributions | (2.06) | (2.82) | (1.48) | (0.32) | (0.28) | |
| Net asset value at end of period | $14.39 | $16.43 | $19.17 | $18.22 | $14.52 | |
| Total return | 0.26% | 0.12% | 14.26% | 27.99% | 12.65% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.88% | 0.88% | 0.89% | 0.89% | 0.89% | |
| Gross operating expenses | 0.89% | 0.88% | 0.89% | 0.89% | 0.89% | |
| Net investment income (loss) | 2.18% | 1.71% | 1.47% | 1.97% | 1.89% | |
| Portfolio turnover rate | 74% | 73% | 72% | 64% | 55% | |
| Net assets, end of period (x 1,000,000) | $1,560 | $1,872 | $2,053 | $1,804 | $1,390 | |
1
Calculated based on the average shares outstanding during
the period.
37
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Dividend Equity Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
38
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Dividend Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
39
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Dividend Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $1,554,675,721 | $— | $— | $1,554,675,721 | |
| Short-Term Investment1 | — | 5,891,825 | — | 5,891,825 | |
| Total | $1,554,675,721 | $5,891,825 | $— | $1,560,567,546 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($65,112) | $— | $— | ($65,112) |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between
Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
40
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Dividend Equity Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $1,465,460,481) | $1,560,567,546 | |
| Deposit with broker for futures contracts | 202,500 | |
| Receivables: | ||
| Dividends | 1,301,018 | |
| Fund shares sold | 468,904 | |
| Interest | 25 | |
| Prepaid expenses | + | 20,800 |
| Total assets | 1,562,560,793 | |
| Liabilities | ||
| Payables: | ||
| Investment adviser and administrator fees | 831,986 | |
| Shareholder service fees | 329,684 | |
| Fund shares redeemed | 1,625,335 | |
| Variation margin on futures contracts | 8,325 | |
| Accrued expenses | + | 87,132 |
| Total liabilities | 2,882,462 | |
| Net Assets | ||
| Total assets | 1,562,560,793 | |
| Total liabilities | – | 2,882,462 |
| Net assets | $1,559,678,331 | |
| Net Assets by Source | ||
| Capital received from investors | 1,472,380,749 | |
| Net investment income not yet distributed | 1,273,539 | |
| Net realized capital losses | (9,017,910) | |
| Net unrealized capital appreciation | 95,041,953 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $1,559,678,331 | 108,349,853 | $14.39 | ||
41
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Dividend Equity Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $1,467) | $51,352,393 | |
| Interest | + | 7,689 |
| Total investment income | 51,360,082 | |
| Expenses | ||
| Investment adviser and administrator fees | 10,403,635 | |
| Shareholder service fees | 4,093,569 | |
| Shareholder reports | 88,412 | |
| Portfolio accounting fees | 60,877 | |
| Custodian fees | 40,123 | |
| Professional fees | 40,114 | |
| Proxy fees | 36,526 | |
| Transfer agent fees | 33,940 | |
| Registration fees | 32,348 | |
| Independent trustees' fees | 18,081 | |
| Interest expense | 1,479 | |
| Other expenses | + | 25,146 |
| Total expenses | 14,874,250 | |
| Expense reduction by CSIM and its affiliates | – | 33,940 |
| Net expenses | – | 14,840,310 |
| Net investment income | 36,519,772 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments | (10,161,536) | |
| Net realized gains on futures contracts | + | 607,854 |
| Net realized losses | (9,553,682) | |
| Net change in unrealized appreciation (depreciation) on investments | (25,307,648) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (546,839) |
| Net change in unrealized appreciation (depreciation) | + | (25,854,487) |
| Net realized and unrealized losses | (35,408,169) | |
| Increase in net assets resulting from operations | $1,111,603 | |
42
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Dividend Equity Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $36,519,772 | $33,911,486 | ||
| Net realized gains (losses) | (9,553,682) | 194,016,375 | ||
| Net change in unrealized appreciation (depreciation) | + | (25,854,487) | (221,097,083) | |
| Increase in net assets from operations | 1,111,603 | 6,830,778 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (35,938,370) | (31,258,036) | ||
| Distributions from net realized gains | + | (195,568,378) | (272,348,613) | |
| Total distributions | ($231,506,748) | ($303,606,649) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 8,869,700 | $124,506,020 | 14,692,885 | $248,859,127 | ||||
| Shares reinvested | 11,191,095 | 160,580,768 | 12,419,993 | 210,709,144 | ||||
| Shares redeemed | + | (25,625,568) | (366,896,176) | (20,322,510) | (344,140,463) | |||
| Net transactions in fund shares | (5,564,773) | ($81,809,388) | 6,790,368 | $115,427,808 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 113,914,626 | $1,871,882,864 | 107,124,258 | $2,053,230,927 | ||||
| Total increase or decrease | + | (5,564,773) | (312,204,533) | 6,790,368 | (181,348,063) | |||
| End of period | 108,349,853 | $1,559,678,331 | 113,914,626 | $1,871,882,864 | ||||
| Net investment income not yet distributed | $1,273,539 | $587,212 | ||||||
43
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Large-Cap Growth Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $17.68 | $18.38 | $15.66 | $12.48 | $11.18 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.20 1 | 0.13 1 | 0.11 | 0.14 | 0.07 | |
| Net realized and unrealized gains (losses) | (0.12) | 1.08 | 2.70 | 3.17 | 1.29 | |
| Total from investment operations | 0.08 | 1.21 | 2.81 | 3.31 | 1.36 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.20) | (0.09) | (0.09) | (0.13) | (0.06) | |
| Distributions from net realized gains | (2.36) | (1.82) | — | — | — | |
| Total distributions | (2.56) | (1.91) | (0.09) | (0.13) | (0.06) | |
| Net asset value at end of period | $15.20 | $17.68 | $18.38 | $15.66 | $12.48 | |
| Total return | 0.54% | 7.00% | 18.06% | 26.76% | 12.18% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 1.00% 2 | 0.99% | 0.99% | 0.99% | 0.99% | |
| Gross operating expenses | 1.04% | 1.03% | 1.04% | 1.05% | 1.05% | |
| Net investment income (loss) | 1.32% | 0.75% | 0.60% | 1.00% | 0.53% | |
| Portfolio turnover rate | 84% | 90% | 82% | 87% | 79% | |
| Net assets, end of period (x 1,000,000) | $219 | $251 | $256 | $253 | $217 | |
1
Calculated based on the average shares outstanding during
the period.
2
The ratio of net operating expenses would have been 0.99%,
if certain non-routine expenses had not been incurred.
44
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Large-Cap Growth Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
45
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Large-Cap Growth Fund
Portfolio Holdings as of October 31, 2016 (continued)
46
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Large-Cap Growth Fund
Portfolio Holdings as of October 31, 2016 (continued)
In addition to the above, the fund held the following at
10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Appreciation ($) | ||||
| Futures Contracts | ||||||
| S&P 500 Index, e-mini, Long, expires 12/16/16 | 4 | 424,020 | 814 | |||
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $218,153,913 | $— | $— | $218,153,913 | |
| Short-Term Investment1 | — | 900,426 | — | 900,426 | |
| Total | $218,153,913 | $900,426 | $— | $219,054,339 | |
| Other Financial Instruments | |||||
| Futures Contracts2 | $814 | $— | $— | $814 |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
47
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Large-Cap Growth Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $197,231,762) | $219,054,339 | |
| Deposit with broker for futures contracts | 40,500 | |
| Receivables: | ||
| Fund shares sold | 227,044 | |
| Dividends | 119,726 | |
| Prepaid expenses | + | 12,082 |
| Total assets | 219,453,691 | |
| Liabilities | ||
| Payables: | ||
| Investment adviser and administrator fees | 136,187 | |
| Shareholder service fees | 46,093 | |
| Fund shares redeemed | 301,032 | |
| Variation margin on futures contracts | 1,512 | |
| Accrued expenses | + | 49,059 |
| Total liabilities | 533,883 | |
| Net Assets | ||
| Total assets | 219,453,691 | |
| Total liabilities | – | 533,883 |
| Net assets | $218,919,808 | |
| Net Assets by Source | ||
| Capital received from investors | 188,024,110 | |
| Net investment income not yet distributed | 1,950,703 | |
| Net realized capital gains | 7,121,604 | |
| Net unrealized capital appreciation | 21,823,391 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $218,919,808 | 14,405,609 | $15.20 | ||
48
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Large-Cap Growth Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends | $5,236,976 | |
| Interest | 1,252 | |
| Securities on loan | + | 40,055 |
| Total investment income | 5,278,283 | |
| Expenses | ||
| Investment adviser and administrator fees | 1,637,344 | |
| Shareholder service fees | 554,030 | |
| Portfolio accounting fees | 38,379 | |
| Professional fees | 35,767 | |
| Shareholder reports | 30,789 | |
| Registration fees | 23,067 | |
| Transfer agent fees | 17,090 | |
| Proxy fees | 13,836 | |
| Custodian fees | 11,312 | |
| Independent trustees' fees | 9,312 | |
| Interest expense | 203 | |
| Other expenses | + | 3,317 |
| Total expenses | 2,374,446 | |
| Expense reduction by CSIM and its affiliates | – | 109,059 |
| Net expenses | – | 2,265,387 |
| Net investment income | 3,012,896 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 7,361,291 | |
| Net realized losses on futures contracts | + | (82,836) |
| Net realized gains | 7,278,455 | |
| Net change in unrealized appreciation (depreciation) on investments | (9,527,674) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (60,946) |
| Net change in unrealized appreciation (depreciation) | + | (9,588,620) |
| Net realized and unrealized losses | (2,310,165) | |
| Increase in net assets resulting from operations | $702,731 | |
49
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Large-Cap Growth Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $3,012,896 | $1,929,006 | ||
| Net realized gains | 7,278,455 | 32,941,638 | ||
| Net change in unrealized appreciation (depreciation) | + | (9,588,620) | (17,462,462) | |
| Increase in net assets from operations | 702,731 | 17,408,182 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (2,760,714) | (1,230,983) | ||
| Distributions from net realized gains | + | (33,117,333) | (25,103,219) | |
| Total distributions | ($35,878,047) | ($26,334,202) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 1,470,303 | $21,865,357 | 1,525,412 | $26,545,521 | ||||
| Shares reinvested | 1,409,350 | 21,238,901 | 883,607 | 14,985,971 | ||||
| Shares redeemed | + | (2,663,649) | (39,879,178) | (2,147,036) | (37,713,740) | |||
| Net transactions in fund shares | 216,004 | $3,225,080 | 261,983 | $3,817,752 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 14,189,605 | $250,870,044 | 13,927,622 | $255,978,312 | ||||
| Total increase or decrease | + | 216,004 | (31,950,236) | 261,983 | (5,108,268) | |||
| End of period | 14,405,609 | $218,919,808 | 14,189,605 | $250,870,044 | ||||
| Net investment income not yet distributed | $1,950,703 | $1,586,062 | ||||||
50
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $21.19 | $25.11 | $24.87 | $17.72 | $15.61 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.07 1 | 0.05 1 | (0.02) | 0.09 | 0.02 | |
| Net realized and unrealized gains (losses) | 0.12 | 0.63 | 2.71 | 7.16 | 2.10 | |
| Total from investment operations | 0.19 | 0.68 | 2.69 | 7.25 | 2.12 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.04) | (0.02) | (0.07) | (0.10) | (0.01) | |
| Distributions from net realized gains | (2.53) | (4.58) | (2.38) | — | — | |
| Total distributions | (2.57) | (4.60) | (2.45) | (0.10) | (0.01) | |
| Net asset value at end of period | $18.81 | $21.19 | $25.11 | $24.87 | $17.72 | |
| Total return | 1.47% | 3.01% | 11.67% | 41.10% | 13.57% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 1.09% | 1.09% | 1.10% | 1.10% | 1.12% | |
| Gross operating expenses | 1.10% | 1.09% | 1.10% | 1.11% | 1.12% | |
| Net investment income (loss) | 0.37% | 0.22% | (0.10%) | 0.42% | 0.11% | |
| Portfolio turnover rate | 85% | 95% | 103% | 84% | 101% | |
| Net assets, end of period (x 1,000,000) | $571 | $630 | $666 | $590 | $388 | |
1
Calculated based on the average shares outstanding during
the period.
51
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
52
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
53
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
54
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $565,926,475 | $— | $— | $565,926,475 | |
| Other Investment Company | 7,179,826 | — | — | 7,179,826 | |
| Short-Term Investment1 | — | 5,526,429 | — | 5,526,429 | |
| Total | $573,106,301 | $5,526,429 | $— | $578,632,730 |
| 1 | As categorized in Portfolio Holdings. |
The fund's
policy is to recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
55
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $541,616,800) including securities on loan of $7,016,353 | $571,452,904 | |
| Collateral invested for securities on loan, at value (cost $7,179,826) | + | 7,179,826 |
| Total investments, at value (cost $548,796,626) | 578,632,730 | |
| Deposit with broker for futures contracts | 236,000 | |
| Receivables: | ||
| Investments sold | 2,558,042 | |
| Fund shares sold | 226,930 | |
| Dividends | 47,808 | |
| Income from securities on loan | 38,068 | |
| Foreign tax reclaims | 399 | |
| Interest | 22 | |
| Prepaid expenses | + | 15,377 |
| Total assets | 581,755,376 | |
| Liabilities | ||
| Collateral held for securities on loan | 7,179,826 | |
| Payables: | ||
| Investments bought | 1,990,110 | |
| Investment adviser and administrator fees | 410,615 | |
| Shareholder service fees | 122,431 | |
| Fund shares redeemed | 530,418 | |
| Accrued expenses | + | 63,726 |
| Total liabilities | 10,297,126 | |
| Net Assets | ||
| Total assets | 581,755,376 | |
| Total liabilities | – | 10,297,126 |
| Net assets | $571,458,250 | |
| Net Assets by Source | ||
| Capital received from investors | 546,500,862 | |
| Net investment income not yet distributed | 1,410,331 | |
| Net realized capital losses | (6,289,047) | |
| Net unrealized capital appreciation | 29,836,104 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $571,458,250 | 30,383,588 | $18.81 | ||
56
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $6,163) | $7,375,734 | |
| Interest | 4,001 | |
| Securities on loan | + | 1,231,449 |
| Total investment income | 8,611,184 | |
| Expenses | ||
| Investment adviser and administrator fees | 4,753,728 | |
| Shareholder service fees | 1,419,452 | |
| Portfolio accounting fees | 50,371 | |
| Shareholder reports | 50,023 | |
| Registration fees | 36,482 | |
| Professional fees | 35,232 | |
| Custodian fees | 33,920 | |
| Proxy fees | 21,309 | |
| Transfer agent fees | 21,253 | |
| Independent trustees' fees | 11,454 | |
| Interest expense | 721 | |
| Other expenses | + | 10,338 |
| Total expenses | 6,444,283 | |
| Expense reduction by CSIM and its affiliates | – | 21,253 |
| Net expenses | – | 6,423,030 |
| Net investment income | 2,188,154 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments | (6,311,162) | |
| Net realized gains on futures contracts | 37,496 | |
| Net realized losses on foreign currency transactions | + | (55) |
| Net realized losses | (6,273,721) | |
| Net change in unrealized appreciation (depreciation) on investments | 12,058,234 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (2,090) |
| Net change in unrealized appreciation (depreciation) | + | 12,056,144 |
| Net realized and unrealized gains | 5,782,423 | |
| Increase in net assets resulting from operations | $7,970,577 | |
57
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Small-Cap Equity Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $2,188,154 | $1,456,441 | ||
| Net realized gains (losses) | (6,273,721) | 75,131,840 | ||
| Net change in unrealized appreciation (depreciation) | + | 12,056,144 | (54,183,834) | |
| Increase in net assets from operations | 7,970,577 | 22,404,447 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (1,300,102) | (501,780) | ||
| Distributions from net realized gains | + | (75,008,179) | (122,791,233) | |
| Total distributions | ($76,308,281) | ($123,293,013) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 4,063,466 | $71,865,992 | 6,541,101 | $141,989,885 | ||||
| Shares reinvested | 3,095,037 | 55,617,808 | 4,347,908 | 90,523,445 | ||||
| Shares redeemed | + | (6,528,284) | (118,052,147) | (7,655,131) | (167,260,267) | |||
| Net transactions in fund shares | 630,219 | $9,431,653 | 3,233,878 | $65,253,063 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 29,753,369 | $630,364,301 | 26,519,491 | $665,999,804 | ||||
| Total increase or decrease | + | 630,219 | (58,906,051) | 3,233,878 | (35,635,503) | |||
| End of period | 30,383,588 | $571,458,250 | 29,753,369 | $630,364,301 | ||||
| Net investment income not yet distributed | $1,410,331 | $881,488 | ||||||
58
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $17.46 | $19.02 | $18.62 | $16.36 | $15.32 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.03 1 | (0.01) 1 | (0.08) | (0.10) | (0.08) | |
| Net realized and unrealized gains (losses) | 0.49 | 0.89 | 1.99 | 2.36 | 1.12 | |
| Total from investment operations | 0.52 | 0.88 | 1.91 | 2.26 | 1.04 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.12) | — | — | — | — | |
| Distributions from net realized gains | (1.61) | (2.44) | (1.51) | — | — | |
| Total distributions | (1.73) | (2.44) | (1.51) | — | — | |
| Net asset value at end of period | $16.25 | $17.46 | $19.02 | $18.62 | $16.36 | |
| Total return | 3.55% | 4.84% | 11.07% | 13.81% | 6.79% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses (including dividend expense on short sales) | 1.85% | 1.82% | 1.99% | 2.48% | 2.08% | |
| Net operating expenses (excluding dividend expense on short sales)2 | 1.57% | 1.54% | 1.52% | 1.48% | 1.53% | |
| Gross operating expenses | 1.87% | 1.84% | 2.02% | 2.52% | 2.13% | |
| Net investment income (loss) | 0.22% | (0.06%) | (0.46%) | (0.49%) | (0.47%) | |
| Portfolio turnover rate | 142% | 146% | 142% | 130% | 109% | |
| Net assets, end of period (x 1,000,000) | $204 | $212 | $200 | $193 | $194 | |
1
Calculated based on the average shares outstanding during
the period.
2
The ratios of net operating expenses would have been 1.33%
for the periods ended 10/31/12, 10/31/13, 10/31/14, 10/31/15 and 10/31/16, respectively, if stock loan fees on short sales had not been incurred.
59
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
60
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
61
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
| Security | Number
of Shares |
Value ($) |
| NRG Energy, Inc. | 32,705 | 347,654 |
| UGI Corp. | 13,587 | 628,942 |
| 4,826,049 | ||
| Total Common Stock | ||
| (Cost $188,173,472) | 199,800,830 | |
| Other Investment Company 3.4% of net assets | ||
| Money Market Fund 3.4% | ||
| State Street Institutional U.S. Government Money Market Fund, Premier Class 0.26% (b) | 7,026,780 | 7,026,780 |
| Total Other Investment Company | ||
| (Cost $7,026,780) | 7,026,780 | |
End of Investments.
At 10/31/16, the tax basis cost of the fund's investments was
$195,326,194 and the unrealized appreciation and depreciation were $22,176,082 and ($10,674,666), respectively, with a net unrealized appreciation of $11,501,416.
| * | Non-income producing security. |
| (a) | All or a portion of this security is held as collateral for short sales. |
| (b) | The rate shown is the 7-day yield. |
| REIT — | Real Estate Investment Trust |
In addition
to the above, the fund held the following at 10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| S&P 500 Index, e-mini, Long, expires 12/16/16 | 15 | 1,590,075 | (8,016) | |||
62
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
63
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $199,800,830 | $— | $— | $199,800,830 | |
| Other Investment Company1 | 7,026,780 | — | — | 7,026,780 | |
| Total | $206,827,610 | $— | $— | $206,827,610 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($8,016) | $— | $— | ($8,016) | |
| Short Sales1 | (78,377,966) | — | — | (78,377,966) |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between
Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
64
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $195,200,252) | $206,827,610 | |
| Cash | 2,427 | |
| Deposits with brokers for short sales and futures contracts | 78,486,601 | |
| Receivables: | ||
| Fund shares sold | 862,595 | |
| Dividends | 103,856 | |
| Prepaid expenses | + | 14,149 |
| Total assets | 286,297,238 | |
| Liabilities | ||
| Securities sold short, at value (proceeds $82,764,276) | 78,377,966 | |
| Payables: | ||
| Investments bought | 2,954,705 | |
| Investment adviser and administrator fees | 189,351 | |
| Shareholder service fees | 38,500 | |
| Fund shares redeemed | 181,650 | |
| Dividends on short sales | 11,018 | |
| Variation margin on futures contracts | 2,775 | |
| Accrued expenses | + | 49,200 |
| Total liabilities | 81,805,165 | |
| Net Assets | ||
| Total assets | 286,297,238 | |
| Total liabilities | – | 81,805,165 |
| Net assets | $204,492,073 | |
| Net Assets by Source | ||
| Capital received from investors | 182,846,579 | |
| Distributions in excess of net investment income | (336,330) | |
| Net realized capital gains | 5,976,172 | |
| Net unrealized capital appreciation | 16,005,652 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $204,492,073 | 12,583,757 | $16.25 | ||
65
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends | $4,134,375 | |
| Expenses | ||
| Investment adviser and administrator fees | 2,095,543 | |
| Shareholder service fees | 442,457 | |
| Dividends on short sales | 559,651 | |
| Stock loan fees on short sales | 468,846 | |
| Professional fees | 37,532 | |
| Registration fees | 30,612 | |
| Portfolio accounting fees | 26,771 | |
| Transfer agent fees | 24,974 | |
| Shareholder reports | 18,602 | |
| Custodian fees | 13,049 | |
| Independent trustees' fees | 9,143 | |
| Proxy fees | 5,555 | |
| Interest expense | 1,811 | |
| Other expenses | + | 2,751 |
| Total expenses | 3,737,297 | |
| Expense reduction by CSIM and its affiliates | – | 47,080 |
| Net expenses | – | 3,690,217 |
| Net investment income | 444,158 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments | (2,537,034) | |
| Net realized gains on futures contracts | 170,314 | |
| Net realized gains on short sales | + | 9,520,139 |
| Net realized gains | 7,153,419 | |
| Net change in unrealized appreciation (depreciation) on investments | 557,786 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | (166,178) | |
| Net change in unrealized appreciation (depreciation) on short sales | + | (1,876,312) |
| Net change in unrealized appreciation (depreciation) | + | (1,484,704) |
| Net realized and unrealized gains | 5,668,715 | |
| Increase in net assets resulting from operations | $6,112,873 | |
66
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Hedged Equity Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income (loss) | $444,158 | ($117,398) | ||
| Net realized gains | 7,153,419 | 20,369,324 | ||
| Net change in unrealized appreciation (depreciation) | + | (1,484,704) | (10,543,635) | |
| Increase in net assets from operations | 6,112,873 | 9,708,291 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (1,497,867) | — | ||
| Distributions from net realized gains | + | (19,419,333) | (25,864,727) | |
| Total distributions | ($20,917,200) | ($25,864,727) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 3,865,291 | $61,376,265 | 4,578,084 | $79,572,795 | ||||
| Shares reinvested | 1,134,070 | 17,510,038 | 1,327,636 | 22,755,673 | ||||
| Shares redeemed | + | (4,533,468) | (71,119,986) | (4,308,474) | (74,705,072) | |||
| Net transactions in fund shares | 465,893 | $7,766,317 | 1,597,246 | $27,623,396 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 12,117,864 | $211,530,083 | 10,520,618 | $200,063,123 | ||||
| Total increase or decrease | + | 465,893 | (7,038,010) | 1,597,246 | 11,466,960 | |||
| End of period | 12,583,757 | $204,492,073 | 12,117,864 | $211,530,083 | ||||
| Distributions in excess of net investment income | ($336,330) | $— | ||||||
67
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Health Care Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $26.68 | $28.19 | $24.57 | $20.59 | $17.29 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.19 1 | 0.14 1 | 0.23 | 0.22 | 0.27 | |
| Net realized and unrealized gains (losses) | (1.52) | 1.78 | 5.84 | 6.26 | 3.18 | |
| Total from investment operations | (1.33) | 1.92 | 6.07 | 6.48 | 3.45 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.16) | (0.21) | (0.19) | (0.33) | (0.15) | |
| Distributions from net realized gains | (3.63) | (3.22) | (2.26) | (2.17) | — | |
| Total distributions | (3.79) | (3.43) | (2.45) | (2.50) | (0.15) | |
| Net asset value at end of period | $21.56 | $26.68 | $28.19 | $24.57 | $20.59 | |
| Total return | (5.78%) | 7.26% | 27.06% | 35.46% | 20.10% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.80% | 0.79% | 0.80% | 0.82% | 0.82% | |
| Gross operating expenses | 0.80% | 0.80% | 0.81% | 0.83% | 0.85% | |
| Net investment income (loss) | 0.82% | 0.52% | 0.93% | 1.06% | 1.44% | |
| Portfolio turnover rate | 54% | 75% | 57% | 54% | 60% | |
| Net assets, end of period (x 1,000,000) | $853 | $1,118 | $1,064 | $816 | $511 | |
1
Calculated based on the average shares outstanding during
the period.
68
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Health Care Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
69
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Health Care Fund
Portfolio Holdings as of October 31, 2016 (continued)
70
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Health Care Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $661,118,584 | $— | $— | $661,118,584 | |
| Australia 1 | — | 16,241,876 | — | 16,241,876 | |
| Denmark 1 | — | 9,692,015 | — | 9,692,015 | |
| Finland 1 | — | 11,905,120 | — | 11,905,120 | |
| France 1 | — | 6,706,189 | — | 6,706,189 | |
| Germany 1 | — | 3,952,709 | — | 3,952,709 | |
| Hong Kong1 | — | 805,963 | — | 805,963 | |
| Italy 1 | — | 12,176,022 | — | 12,176,022 | |
| Japan 1 | — | 30,200,680 | — | 30,200,680 | |
| Malaysia 1 | — | 335,837 | — | 335,837 | |
| Republic of Korea1 | — | 388,263 | — | 388,263 | |
| Switzerland 1 | — | 61,471,191 | — | 61,471,191 | |
| Taiwan 1 | — | 6,935,319 | — | 6,935,319 | |
| United Kingdom1 | — | 29,237,344 | — | 29,237,344 | |
| Other Investment Company1 | 844,425 | — | — | 844,425 | |
| Total | $661,963,009 | $190,048,528 | $— | $852,011,537 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
71
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Health Care Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $725,894,608) including securities on loan of $822,231 | $851,167,112 | |
| Collateral invested for securities on loan, at value (cost $844,425) | + | 844,425 |
| Total investments, at value (cost $726,739,033) | 852,011,537 | |
| Deposit with broker for futures contracts | 630,000 | |
| Receivables: | ||
| Investments sold | 2,659,500 | |
| Foreign tax reclaims | 999,370 | |
| Dividends | 333,405 | |
| Fund shares sold | 324,192 | |
| Income from securities on loan | 1,082 | |
| Prepaid expenses | + | 16,055 |
| Total assets | 856,975,141 | |
| Liabilities | ||
| Collateral held for securities on loan | 844,425 | |
| Payables: | ||
| Investment adviser and administrator fees | 412,384 | |
| Shareholder service fees | 106,787 | |
| Fund shares redeemed | 1,594,606 | |
| Due to custodian | 1,015,208 | |
| Accrued expenses | + | 77,991 |
| Total liabilities | 4,051,401 | |
| Net Assets | ||
| Total assets | 856,975,141 | |
| Total liabilities | – | 4,051,401 |
| Net assets | $852,923,740 | |
| Net Assets by Source | ||
| Capital received from investors | 707,812,270 | |
| Net investment income not yet distributed | 6,748,836 | |
| Net realized capital gains | 13,160,180 | |
| Net unrealized capital appreciation | 125,202,454 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $852,923,740 | 39,560,395 | $21.56 | ||
72
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Health Care Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $517,306) | $15,814,756 | |
| Interest | 2,007 | |
| Securities on loan | + | 144,868 |
| Total investment income | 15,961,631 | |
| Expenses | ||
| Investment adviser and administrator fees | 5,229,517 | |
| Shareholder service fees | 2,272,888 | |
| Shareholder reports | 93,037 | |
| Custodian fees | 85,884 | |
| Portfolio accounting fees | 59,709 | |
| Transfer agent fees | 50,244 | |
| Professional fees | 33,102 | |
| Proxy fees | 31,637 | |
| Registration fees | 30,256 | |
| Independent trustees' fees | 13,957 | |
| Interest expense | 1,845 | |
| Other expenses | + | 28,890 |
| Total expenses | 7,930,966 | |
| Expense reduction by CSIM and its affiliates | – | 50,244 |
| Net expenses | – | 7,880,722 |
| Net investment income | 8,080,909 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 13,879,248 | |
| Net realized gains on futures contracts | 13,004 | |
| Net realized losses on foreign currency transactions | + | (40,323) |
| Net realized gains | 13,851,929 | |
| Net change in unrealized appreciation (depreciation) on investments | (78,189,153) | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | (9,317) |
| Net change in unrealized appreciation (depreciation) | + | (78,198,470) |
| Net realized and unrealized losses | (64,346,541) | |
| Decrease in net assets resulting from operations | ($56,265,632) | |
73
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Health Care Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $8,080,909 | $5,941,714 | ||
| Net realized gains | 13,851,929 | 149,735,571 | ||
| Net change in unrealized appreciation (depreciation) | + | (78,198,470) | (79,361,560) | |
| Increase (decrease) in net assets from operations | (56,265,632) | 76,315,725 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (6,691,995) | (8,134,921) | ||
| Distributions from net realized gains | + | (149,840,338) | (122,526,297) | |
| Total distributions | ($156,532,333) | ($130,661,218) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 2,833,641 | $64,956,918 | 7,812,599 | $212,724,582 | ||||
| Shares reinvested | 6,099,701 | 139,195,182 | 4,588,745 | 118,160,176 | ||||
| Shares redeemed | + | (11,272,005) | (256,438,361) | (8,253,014) | (222,654,576) | |||
| Net transactions in fund shares | (2,338,663) | ($52,286,261) | 4,148,330 | $108,230,182 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 41,899,058 | $1,118,007,966 | 37,750,728 | $1,064,123,277 | ||||
| Total increase or decrease | + | (2,338,663) | (265,084,226) | 4,148,330 | 53,884,689 | |||
| End of period | 39,560,395 | $852,923,740 | 41,899,058 | $1,118,007,966 | ||||
| Net investment income not yet distributed | $6,748,836 | $5,464,139 | ||||||
74
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $9.62 | $9.77 | $9.82 | $7.90 | $7.32 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.22 1 | 0.19 1 | 0.29 1 | 0.20 | 0.16 | |
| Net realized and unrealized gains (losses) | (0.45) | (0.01) | (0.08) | 1.93 | 0.62 | |
| Total from investment operations | (0.23) | 0.18 | 0.21 | 2.13 | 0.78 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.19) | (0.15) | (0.26) | (0.21) | (0.20) | |
| Distributions from net realized gains | — | (0.18) | — | — | — | |
| Total distributions | (0.19) | (0.33) | (0.26) | (0.21) | (0.20) | |
| Net asset value at end of period | $9.20 | $9.62 | $9.77 | $9.82 | $7.90 | |
| Total return | (2.41%) | 2.05% | 2.20% | 27.70% | 11.17% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.86% | 0.86% | 0.86% | 0.86% | 0.86% | |
| Gross operating expenses | 0.91% | 0.92% | 0.98% | 1.10% | 1.16% | |
| Net investment income (loss) | 2.40% | 2.02% | 2.95% | 2.40% | 2.45% | |
| Portfolio turnover rate | 90% | 87% | 90% | 75% | 112% | |
| Net assets, end of period (x 1,000,000) | $772 | $679 | $423 | $147 | $78 | |
1
Calculated based on the average shares outstanding during
the period.
75
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
76
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
77
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
78
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
79
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $— | $750,611,294 | $— | $750,611,294 | |
| Austria 1 | — | 3,737,875 | — | 3,737,875 | |
| Materials | 840,100 | — | — | 840,100 | |
| Brazil 1 | 2,992,034 | — | — | 2,992,034 | |
| Canada 1 | 858,967 | — | — | 858,967 | |
| Rights 1 | 283,134 | — | — | 283,134 | |
| Other Investment Company1 | 6,022,957 | — | — | 6,022,957 | |
| Total | $10,997,192 | $754,349,169 | $— | $765,346,361 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($63,369) | $— | $— | ($63,369) |
| 1 | As categorized in Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between
Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers in the amount of $10,474,707 from Level 1 to Level 2 for the period ended October 31, 2016. The transfers between Level 1 and Level 2 were primarily
due to the use of international fair valuation by the fund. There were no transfers from Level 2 to Level 1 and no transfers in or out of Level 3 during the period.
80
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $750,400,938) | $765,346,361 | |
| Deposit with broker for futures contracts | 546,000 | |
| Receivables: | ||
| Investments sold | 3,145,515 | |
| Dividends | 1,876,960 | |
| Fund shares sold | 1,230,230 | |
| Foreign tax reclaims | 833,614 | |
| Variation margin on futures contracts | 2,475 | |
| Prepaid expenses | + | 24,677 |
| Total assets | 773,005,832 | |
| Liabilities | ||
| Payables: | ||
| Investment adviser and administrator fees | 380,194 | |
| Shareholder service fees | 127,362 | |
| Fund shares redeemed | 482,599 | |
| Due to custodian | 87,269 | |
| Accrued expenses | + | 151,080 |
| Total liabilities | 1,228,504 | |
| Net Assets | ||
| Total assets | 773,005,832 | |
| Total liabilities | – | 1,228,504 |
| Net assets | $771,777,328 | |
| Net Assets by Source | ||
| Capital received from investors | 799,159,634 | |
| Net investment income not yet distributed | 17,033,702 | |
| Net realized capital losses | (59,217,732) | |
| Net unrealized capital appreciation | 14,801,724 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $771,777,328 | 83,859,976 | $9.20 | ||
81
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $2,229,194) | $23,423,739 | |
| Expenses | ||
| Investment adviser and administrator fees | 4,162,482 | |
| Shareholder service fees | 1,758,323 | |
| Custodian fees | 280,263 | |
| Portfolio accounting fees | 76,812 | |
| Registration fees | 71,111 | |
| Shareholder reports | 49,995 | |
| Professional fees | 44,776 | |
| Transfer agent fees | 27,612 | |
| Proxy fees | 17,253 | |
| Independent trustees' fees | 12,147 | |
| Interest expense | 58 | |
| Other expenses | + | 25,639 |
| Total expenses | 6,526,471 | |
| Expense reduction by CSIM and its affiliates | – | 334,534 |
| Net expenses | – | 6,191,937 |
| Net investment income | 17,231,802 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments | (42,939,095) | |
| Net realized losses on futures contracts | (70,325) | |
| Net realized gains on foreign currency transactions | + | 53,923 |
| Net realized losses | (42,955,497) | |
| Net change in unrealized appreciation (depreciation) on investments | 10,793,654 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | (103,376) | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | (63,151) |
| Net change in unrealized appreciation (depreciation) | + | 10,627,127 |
| Net realized and unrealized losses | (32,328,370) | |
| Decrease in net assets resulting from operations | ($15,096,568) | |
82
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab International Core Equity Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $17,231,802 | $11,307,276 | ||
| Net realized losses | (42,955,497) | (3,906,044) | ||
| Net change in unrealized appreciation (depreciation) | + | 10,627,127 | (590,377) | |
| Increase (decrease) in net assets from operations | (15,096,568) | 6,810,855 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (13,757,023) | (6,697,762) | ||
| Distributions from net realized gains | + | — | (8,247,177) | |
| Total distributions | ($13,757,023) | ($14,944,939) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 32,702,600 | $293,413,982 | 39,601,250 | $382,386,533 | ||||
| Shares reinvested | 1,360,473 | 12,393,908 | 1,470,490 | 13,499,099 | ||||
| Shares redeemed | + | (20,795,558) | (184,509,327) | (13,726,881) | (130,995,091) | |||
| Net transactions in fund shares | 13,267,515 | $121,298,563 | 27,344,859 | $264,890,541 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 70,592,461 | $679,332,356 | 43,247,602 | $422,575,899 | ||||
| Total increase | + | 13,267,515 | 92,444,972 | 27,344,859 | 256,756,457 | |||
| End of period | 83,859,976 | $771,777,328 | 70,592,461 | $679,332,356 | ||||
| Net investment income not yet distributed | $17,033,702 | $12,297,487 | ||||||
83
Schwab Active Equity Funds | Annual Report
See financial notes
Schwab Active Equity Funds
Financial Notes
1. Business Structure of the Funds:
Each of the
funds in this report is a series of Schwab Capital Trust (the trust), a no-load, open-end management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended
(the 1940 Act). The list below shows all the funds in the trust as of the end of the period, including the funds discussed in this report, which are highlighted:
| SCHWAB CAPITAL TRUST (ORGANIZED MAY 7, 1993) | |
| Schwab Core Equity Fund | Schwab Target 2045 Fund |
| Schwab Dividend Equity Fund | Schwab Target 2050 Fund |
| Schwab Large-Cap Growth Fund | Schwab Target 2055 Fund |
| Schwab Small-Cap Equity Fund | Schwab Target 2060 Fund |
| Schwab Hedged Equity Fund | Schwab Fundamental US Large Company Index Fund |
| Schwab Health Care Fund | Schwab Fundamental US Small Company Index Fund |
| Schwab International Core Equity Fund | Schwab Fundamental International Large Company Index Fund |
| Schwab ® S&P 500 Index Fund | Schwab Fundamental International Small Company Index Fund |
| Schwab Small-Cap Index Fund® | Schwab Fundamental Emerging Markets Large Company Index Fund |
| Schwab Total Stock Market Index Fund® | Schwab Fundamental Global Real Estate Index Fund |
| Schwab International Index Fund® | Schwab Target 2010 Index Fund |
| Schwab MarketTrack All Equity Portfolio™ | Schwab Target 2015 Index Fund |
| Schwab MarketTrack Growth Portfolio™ | Schwab Target 2020 Index Fund |
| Schwab MarketTrack Balanced Portfolio™ | Schwab Target 2025 Index Fund |
| Schwab MarketTrack Conservative Portfolio™ | Schwab Target 2030 Index Fund |
| Laudus Small-Cap MarketMasters Fund™ | Schwab Target 2035 Index Fund |
| Laudus International MarketMasters Fund™ | Schwab Target 2040 Index Fund |
| Schwab Balanced Fund™ | Schwab Target 2045 Index Fund |
| Schwab Target 2010 Fund | Schwab Target 2050 Index Fund |
| Schwab Target 2015 Fund | Schwab Target 2055 Index Fund |
| Schwab Target 2020 Fund | Schwab Target 2060 Index Fund |
| Schwab Target 2025 Fund | Schwab ® Monthly Income Fund - Moderate Payout |
| Schwab Target 2030 Fund | Schwab ® Monthly Income Fund - Enhanced Payout |
| Schwab Target 2035 Fund | Schwab ® Monthly Income Fund - Maximum Payout |
| Schwab Target 2040 Fund | |
Each fund in this report offers one share class. Shares are
bought and sold (subject to a redemption fee, see financial note 9) at closing net asset value per share (NAV), which is the price for all outstanding shares of a fund. Each share has a par value of 1/1,000 of a cent, and the funds' Board of
Trustees (the Board) may authorize the issuance of as many shares as necessary.
Each fund maintains its own account for purposes of holding
assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the funds use in their preparation of financial statements. The funds follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The funds invest in certain other investment companies
(underlying funds). For more information about the underlying funds’ operations and policies, please refer to those funds’ semiannual and annual reports, which are filed with the U.S. Securities and Exchange Commission (SEC).
(a) Security Valuation:
Under procedures approved by the Board, the investment adviser
has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect fair market value. Among other
things, these procedures allow the funds to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
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Financial Notes (continued)
2. Significant Accounting
Policies (continued):
The funds value the
securities in their portfolios every business day. The funds use the following policies to value various types of securities:
•
Securities traded on an exchange or over-the-counter: Traded securities are valued at the closing value for the day, or, on days when no closing value has been reported, at halfway between the most recent
bid and ask quotes. Securities that are primarily traded on foreign exchanges are valued at the official closing price or the last sales price on the exchange where the securities are principally traded with these values then translated into U.S.
dollars at the current exchange rate, unless these securities are fair valued as discussed below.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable.
For example, a fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is
closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of factors, including unobservable market inputs when
arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market multiples, book values, transactional back-testing,
disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a
fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the funds pursuant to the valuation procedures.
•
Foreign equity security fair valuation: The Board has adopted procedures to fair value foreign equity securities that are traded in markets that close prior to the funds valuing their holdings. By fair
valuing securities whose prices may have been affected by events occurring after the close of trading, each fund seeks to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is
designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of a fund’s portfolio holdings and the NAV of the fund’s shares, and seeks to help ensure that the prices at which the
fund’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders. When fair value pricing is used at the open or close of a reporting period, it may cause a temporary
divergence between the return of a fund and that of its comparative index or benchmark. The Board regularly reviews fair value determinations made by the funds pursuant to these procedures.
•
Futures contracts and forward foreign currency exchange contracts (forwards): Futures contracts are valued at their settlement prices as of the close of their exchanges. Forwards are valued based on that
day's forward exchange rates or by using an interpolated forward exchange rate for contracts with interim settlement dates.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
•
Underlying funds: Mutual funds are valued at their respective NAVs. Exchange-traded funds (ETFs) traded on a recognized securities exchange are valued at the last reported sale price that day or the
official closing price, if applicable.
In accordance
with the authoritative guidance on fair value measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair
value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that
are significant to the valuation (Level 3 measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation.
If the funds determine that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with
orderly transactions, increased analysis and management judgment will be required to estimate fair value.
The three levels of the fair value hierarchy are as
follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities, ETFs and futures contracts. Investments in mutual funds are valued daily at their NAVs,
and investments in ETFs are valued daily at the last reported sale price or the official closing price, which are classified as Level 1 prices, without consideration to the classification level of the specific investments held by an underlying
fund.
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Financial Notes (continued)
2. Significant
Accounting Policies (continued):
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations. In addition, international securities whose markets close hours before the funds value their holdings may require fair valuations due to significant movement in
the U.S. markets occurring after the daily close of the foreign markets. The Board has approved a vendor that calculates fair valuations of international equity securities based on a number of factors that appear to correlate to the movements in the
U.S. markets.
•
Level 3—significant unobservable inputs (including the funds' own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3
prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the funds' results of operations.
The inputs or methodology used for valuing securities are
not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the funds' investments
as of October 31, 2016 are disclosed in the Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Futures Contracts: Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed upon price on a stipulated future date. A
fund must give the broker a deposit of cash and/or securities (initial margin) whenever it enters into a futures contract. The amount of the deposit may vary from one contract to another. Subsequent payments (variation margin) are made or received
by a fund depending on the daily fluctuations in the value of the futures contract and are accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized. Futures contracts are
traded publicly on exchanges, and their market value may change daily.
Forward Foreign Currency Exchange Contracts: Forwards are contracts to buy and sell a currency at a set price on a future date. The value of the forwards is accounted for as unrealized appreciation or depreciation until the contracts settle, at which time the
gains or losses are realized.
Securities Lending: Under the trust’s Securities Lending Program, a fund (lender) may make short-term loans of its securities to another party (borrower) to generate additional revenue for the fund. The borrower pledges collateral
in the form of cash, securities issued or fully guaranteed by the U.S. government or foreign governments, or letters of credit issued by a bank. Collateral at the individual loan level is required to be maintained on a daily marked-to-market basis
in an amount at least equal to the current value of the securities loaned. The lending agent provides a fund with indemnification against borrower default (the borrower fails to return the security on loan) reducing the risk of loss as a result of
default. The cash collateral of securities loaned is currently invested in money market portfolios operating under Rule 2a-7 of the 1940 Act. Each fund bears the risk of loss with respect to the investment of cash collateral. The terms of the
securities lending agreements allow the funds or the lending agent to terminate any loan at any given time and the securities must be returned within the earlier of the standard trade settlement period or the specified time period under the relevant
securities lending agreement. Securities lending income, as disclosed in each fund’s Statement of Operations, if applicable, represents the income earned from the investment of the cash collateral plus any fees paid by borrowers, less the fees
paid to the lending agent and broker rebates which are subject to adjustments pursuant to the securities lending agreement. On loans not collateralized by cash, a fee is received from the borrower, and is allocated between a fund and the lending
agent.The aggregate market value of securities loaned will not at any time exceed one-third of the total assets of a fund, including collateral received from the loan (at market value computed at the time of the loan). Total costs and expenses,
including lending agent fees and broker rebates, associated with securities lending activities under the trust’s Securities Lending Program paid to the unaffiliated lending agents ranged from 10% to 15%, with subsequent breakpoints to a low of
7.5%, of gross lending revenue through November 30, 2015. After December 1, 2015, the total costs and expenses paid to the unaffiliated lending agents start at 10% of gross lending revenue, with subsequent breakpoints to a low of 7.5%.
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Financial Notes (continued)
2. Significant
Accounting Policies (continued):
As of October
31, 2016, the funds had securities on loan, all of which were classified as common stocks. The value of the securities on loan and the related collateral as of October 31, 2016, if any, are disclosed in each fund's Portfolio Holdings. The value of
the securities on loan and the investment of cash collateral are also disclosed in each fund's Statement of Assets and Liabilities.
Cash Management Transactions: The funds may subscribe to the Brown Brothers Harriman & Co. (BBH) Cash Management Service Sweep (CMS Sweep). The BBH CMS Sweep is an investment product that automatically sweeps the funds’ cash balances into
overnight offshore time deposits with either the BBH Grand Cayman branch or a branch of a pre-approved commercial bank. This fully automated program allows the funds to earn interest on cash balances. Excess cash invested with deposit institutions
domiciled outside of the U.S., as with any offshore deposit, may be subject to sovereign actions in the jurisdiction of the deposit institution including, but not limited to, freeze, seizure or diminution. The funds bear the risk associated with the
repayment of principal and payment of interest on such instruments by the institution with which the deposit is ultimately placed. Balances in the CMS Sweep are accounted for on a cost basis, which approximates market value.
Short Sales: When a fund
sells securities short (sells securities it does not own), the fund identifies assets worth at least 100% of the value of the short securities as collateral. If the market value of the short securities subsequently falls, the fund can realize a gain
by closing the short position. However, if the value rises, the fund typically would have to add to its collateral or close out its short position at a loss. The potential for losses associated with short positions is much greater than the original
value of the securities sold short and may exceed amounts recorded in the Statement of Assets and Liabilities.
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
Assets and liabilities denominated in foreign currencies
are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and
expense payments, are calculated using exchange rates in effect on the transaction date. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on
securities transactions and the differences between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange appreciation or
depreciation arises from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. These realized and unrealized foreign exchange gains or losses are
reported in foreign currency transactions or translations in the Statement of Operations. The funds do not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in
market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
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 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 a fund closes out a short position (buys the security), it records the outcome as a realized
gain or loss. Dividends accrued on securities sold short are recorded as an expense on a fund’s records and presented in the Statement of Operations. A fund may also incur stock loan fees which represent the cost of borrowing securities used
for short sale transactions.
Gains realized by the
funds on the sale of securities in certain foreign countries may be subject to non-U.S. taxes. In those instances, the funds record a liability based on unrealized appreciation to provide for potential non-U.S. taxes payable upon the sale of these
securities.
When a fund closes out a futures contract
or forward position, it calculates the difference between the value of the position at the beginning and at the end of the contract, and records a realized gain or loss accordingly.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date. Any
distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
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Financial Notes (continued)
2. Significant
Accounting Policies (continued):
Income received
from foreign sources may result in withholding tax. Withholding taxes are accrued at the same time as the related income if the tax rate is fixed and known, unless a tax withheld is reclaimable from the local tax authorities in which case it is
recorded as receivable. If the tax rate is not known or estimable, such expense or reclaim receivable is recorded when the net proceeds are received.
(e) Expenses:
Expenses that are specific to a fund are charged directly
to the fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.
(f) Distributions to Shareholders:
The funds make distributions from net investment income, if
any, once a year, with the exception of Schwab Dividend Equity Fund which typically pays quarterly dividends. The funds make distributions from net realized capital gains, if any, once a year.
(g) Custody Credit:
Certain funds have an arrangement with their custodian
bank, State Street Bank and Trust Company (State Street), under which the funds may receive a credit for their uninvested cash balance to offset their custody fees and accounting fees. The credit amounts, if any, are disclosed in the Statement of
Operations as a reduction to a fund's operating expenses.
(h) Accounting Estimates:
The accounting policies described in this report conform to
GAAP. 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 and these differences may be material.
(i) Federal Income Taxes:
The funds intend to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the funds distribute substantially all of their net investment income and net realized 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.
(j) Foreign Taxes:
The funds may be subject to foreign taxes (a portion of
which may be reclaimable) on income, corporate events, foreign currency exchanges and capital gains on investments. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in foreign markets in
which the funds invest. These foreign taxes, if any, are paid by the funds and are disclosed in the Statement of Operations. Foreign taxes payable as of October 31, 2016, if any, are reflected in each fund's Statement of Assets and
Liabilities.
(k) Indemnification:
Under the funds’ organizational documents, the
officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide
general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss attributable to
these arrangements to be remote.
3. Risk Factors:
Investing in the funds may involve
certain risks, as discussed in the funds' prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Market Risk. Equity markets
rise and fall daily. As with any investment whose performance is tied to these markets, the value of the investment in a fund will fluctuate, which means that investors could lose money.
Equity Risk. The prices of
equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to
fall over short or extended periods of time.
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Financial Notes (continued)
3. Risk
Factors (continued):
Management Risk. The funds' investment adviser makes investment decisions for the funds using a strategy based largely on historical information. There is no guarantee that a strategy based on historical information will produce the
desired results in the future. In addition, the portfolio optimization process used by each fund to assist in constructing the fund’s portfolio does not assure successful investment. Securities selected with the assistance of the process may
be negatively impacted by factors or events not foreseen in developing the process. As a result, a fund may have a lower return than if it were managed using another process or strategy.
Small-Cap Risk.
Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may be more vulnerable to adverse business or economic events
than larger, more established companies. During a period when small-cap stocks fall behind other types of investments—large-cap and mid-cap stocks, for instance—a fund's
performance also will lag those investments.
Large- and Mid-Cap Risk.
Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more vulnerable to adverse business or economic events than larger, more established companies.
During a period when large- and mid-cap U.S. stocks fall behind other types of investments—small-cap stocks, for instance—a fund's performance also
will lag those investments.
Growth Investing
Risk. Growth stocks can be volatile. Growth companies usually invest a high portion of earnings in their businesses and may lack the dividends of value stocks that can cushion stock prices in a falling market. The
prices of growth stocks are based largely on projections of the issuer’s future earnings and revenues. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks may also be more
expensive relative to their earnings or assets compared to value or other stocks.
Dividend Paying Risk. To
the extent that a fund invests in dividend paying stocks, the fund’s performance will correlate with the performance of the dividend paying stock segment of the stock market, and the fund may underperform funds that do not limit their
investments to dividend paying stocks. If stocks held by a fund reduce or stop paying dividends, the fund’s ability to generate income may be affected.
Derivatives Risk. A
fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk, market
risk and management risk, are discussed elsewhere in this section. A fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk
is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage
risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately large impact on a fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that
changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause a fund to realize higher amounts of short-term capital gain. A fund's use of
derivatives could reduce the fund's performance, increase its volatility, and could cause the fund to lose more than the initial amount invested.
Liquidity Risk. A fund may
be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or the fund may have to sell them at a loss.
Convertible Securities
Risk. Convertible securities generally are debt obligations that pay income, but which may convert into common or preferred stock under certain circumstances. The value of a convertible security is influenced by the
credit standing of the issuer, and changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The price of a convertible security will also normally vary in some proportion to
changes in the price of the underlying common stock because of the conversion or exercise feature.
ETF Risk. When a fund
invests in an ETF, it will bear a proportionate share of the ETF's expenses. In addition, lack of liquidity in the market for an ETF's shares can result in its value being more volatile than the underlying portfolio of securities.
REITs Risk. A fund's
investments in real estate investment trusts (REITs) will be subject to the risks associated with the direct ownership of real estate, including fluctuations in the value of underlying properties, defaults by borrowers or tenants, changes in
interest rates and risks related to general or local economic conditions. REITs are also subject to certain additional risks; for example, REITs are dependent upon specialized management skills and cash flows, and may have their investments in
relatively few properties, a small geographic area or a single property type. Failure of a company to qualify as a REIT under federal tax law may have adverse consequences on a fund. In addition, REITs have their own expenses, and a fund will bear a
proportionate share of those expenses.
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Financial Notes (continued)
3. Risk
Factors (continued):
Short Sales Risk. Certain funds engage in short sales transactions. Short sales are transactions in which a fund sells a security it does not own. To complete a short sale, a fund must borrow the security to deliver to the buyer. A fund
is then obligated to replace the borrowed security by purchasing the security at the market price at the time of replacement. This price may be more or less than the price at which the security was sold by a fund, and the fund will incur a loss if
the price of the security sold short increases between the time of the short sale and the time the fund replaces the borrowed security.
To the extent a fund establishes both long and short
positions in equity securities the fund’s long positions could decline in value at the same time that the value of the stocks sold short increase, thereby increasing the fund’s overall potential for loss. A fund’s short sales may
result in a loss if the prices of the borrowed securities rise and it costs more to replace the borrowed securities. In contrast to a fund’s long positions, the potential loss on the fund’s short positions is unlimited. In addition, the
lender of the borrowed securities may require a fund to return the securities on short notice, which may require the fund to purchase the borrowed securities at an unfavorable price, resulting in a loss.
Foreign Investment Risk. A
fund's investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory
and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting,
auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. To the extent a fund’s investments in a single country or a limited number of countries represent a higher
percentage of the fund’s assets, the fund assumes the risk that economic, political and social conditions in those countries will have a significant impact on its investment performance and it may be subject to increased price
volatility.
Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Such countries often have less uniformity in accounting and
reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result,
there will tend to be an increased risk of price volatility associated with a fund’s investments in emerging market countries and, at times, it may be difficult to value such investments.
Concentration Risk. The
investments of certain funds are concentrated in issuers doing business in the same sector, and therefore, the companies in which a fund invests will be affected by many of the same factors, such as legislative or regulatory changes, intense
competition for market share, and other competitive challenges. In addition, a fund is subject to the risks that stocks of these companies may underperform other segments of the equity market or stock market as a whole and are likely to have
above-average volatility.
Securities Lending
Risk. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.
Please refer to the funds’ prospectus for a more
complete description of the principal risks of investing in the funds.
4. Affiliates and Affiliated Transactions:
Charles
Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund's investment adviser and administrator pursuant to an Investment Advisory and Administration
Agreement between CSIM and the trust.
For its advisory
and administrative services to the funds, CSIM is entitled to receive an annual fee, payable monthly, based on a percentage of each fund’s average daily net assets as follows:
| % of Average Daily Net Assets | Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Large-Cap Growth Fund |
Schwab
Small-Cap Equity Fund |
Schwab
Hedged Equity Fund |
Schwab
International Core Equity Fund |
| Flat rate | 0.47% | 0.62% | 0.72% | 0.81% | 1.05% | 0.58% |
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
| % of Average Daily Net Assets | Schwab
Health Care Fund |
| First $500 million | 0.54% |
| $500 million to $1 billion | 0.515% |
| Over $1 billion | 0.49% |
For the period ended October 31,
2016, the aggregate advisory fee paid to CSIM by the Schwab Health Care Fund was 0.53%, as a percentage of the fund's average daily net assets.
The Board has adopted a Shareholder Servicing Plan (the Plan)
on behalf of the funds. The Plan enables each fund to bear expenses relating to the provision by financial intermediaries, including Charles Schwab & Co., Inc. (a broker-dealer affiliate of CSIM, Schwab) (together, service providers), of certain
account maintenance, customer liaison and shareholder services to the current shareholders of the funds.
Pursuant to the Plan, each fund’s shares are subject to
an annual shareholder servicing fee up to 0.25%. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab, as distributor of the funds (or, in the case of payments made to Schwab
acting as a service provider, pursuant to Schwab’s written agreement with the funds), and a fund will pay no more than 0.25% of the average annual daily net asset value of the fund shares owned by shareholders holding shares through such
service provider. Payments under the Plan are made as described above without regard to whether the fee is more or less than the service provider’s actual cost of providing the services, and if more, such excess may be retained as profit by
the service provider.
Although these agreements specify
certain fees for these services, CSIM and its affiliates have made an additional agreement with the funds, for so long as CSIM serves as the investment adviser to the funds, which may only be amended or terminated with the approval of the Board, to
limit the total annual fund operating expenses charged, excluding interest, taxes and certain non-routine expenses (expense limitation). The expense limitation as a percentage of average daily net assets is as follows:
| Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Large-Cap Growth Fund |
Schwab
Small-Cap Equity Fund |
Schwab
Hedged Equity Fund |
Schwab
Health Care Fund |
Schwab
International Core Equity Fund |
| 0.75% | 0.89% | 0.99% | 1.12% | 1.33%* | 0.82% | 0.86% |
| * | Excludes dividends and stock loan fees paid on securities sold short. |
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Certain Schwab
funds may own shares of other Schwab funds. The table below reflects the percentages of shares of each fund in this report that are owned by other Schwab funds as of October 31, 2016, as applicable:
| Underlying Funds | |||||||
| Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Small-Cap Equity Fund |
Schwab
International Core Equity Fund | ||||
| Schwab Target 2010 Fund | 0.2% | 0.1% | 0.1% | 0.3% | |||
| Schwab Target 2015 Fund | 0.4% | 0.2% | 0.3% | 0.5% | |||
| Schwab Target 2020 Fund | 2.3% | 1.4% | 1.9% | 3.5% | |||
| Schwab Target 2025 Fund | 2.3% | 1.4% | 2.1% | 3.5% | |||
| Schwab Target 2030 Fund | 4.7% | 2.8% | 4.9% | 7.3% | |||
| Schwab Target 2035 Fund | 2.2% | 1.4% | 2.5% | 3.6% | |||
| Schwab Target 2040 Fund | 5.6% | 3.3% | 7.1% | 9.0% | |||
| Schwab Target 2045 Fund | 0.6% | 0.3% | 0.8% | 0.9% | |||
| Schwab Target 2050 Fund | 0.5% | 0.3% | 0.7% | 0.8% | |||
| Schwab Target 2055 Fund | 0.3% | 0.2% | 0.4% | 0.5% | |||
| Schwab Target 2060 Fund | 0.0%* | 0.0%* | 0.0%* | 0.0%* | |||
| Schwab Monthly Income Fund — Moderate Payout | —% | 0.9% | —% | —% | |||
| Schwab Monthly Income Fund — Enhanced Payout | —% | 1.2% | —% | —% | |||
| Schwab Monthly Income Fund — Maximum Payout | —% | 0.4% | —% | —% | |||
| Schwab Balanced Fund | 4.8% | —% | —% | —% | |||
| * | Less than 0.05% |
Pursuant to an exemptive order issued
by the SEC, the funds may enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency purposes and the interest rate
to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating funds/portfolios. The
interfund lending facility is subject to the oversight and periodic review by the Board. The funds had no interfund borrowing or lending activity during the period.
5. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations
throughout the report period. The trust did not pay any of these interested persons for their services as trustees, but it did pay non-interested persons (independent trustees), as noted on each fund’s Statement of Operations. For information
regarding the trustees, please refer to the Trustees and Officers table at the end of this report.
6. Borrowing from Banks:
During the period, the funds
were participants with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit Facility, in
addition to the interest charged on any borrowings by a fund, each fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, the Credit Facility was amended to run for
a new 364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
The funds also have access to custodian overdraft facilities. A
fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
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Financial Notes (continued)
7.
Purchases and Sales/Maturities of Investment Securities:
For the period ended October 31, 2016, purchases and
sales/maturities of securities (excluding short-term obligations) were as follows:
| Purchases of Securities | Sales/Maturities of Securities | |
| Schwab Core Equity Fund | $1,729,289,131 | $1,950,096,614 |
| Schwab Dividend Equity Fund | 1,234,397,219 | 1,501,793,884 |
| Schwab Large-Cap Growth Fund | 190,786,253 | 219,317,034 |
| Schwab Small-Cap Equity Fund | 500,281,288 | 568,368,161 |
| Schwab Hedged Equity Fund* | 281,369,544 | 295,281,680 |
| Schwab Health Care Fund | 528,546,615 | 727,265,580 |
| Schwab International Core Equity Fund | 761,892,309 | 641,502,081 |
| * | Including securities sold short. |
8. Derivatives:
Certain funds entered into equity
index futures contracts during the report period. The funds invested in futures contracts to equitize available cash. The fair value and variation margin for futures contracts held at October 31, 2016 are presented on the Portfolio Holdings and
Statement of Assets and Liabilities, respectively. The net realized and change in unrealized gains (losses) on futures contracts are presented on the Statement of Operations. Refer to financial note 2(b) for the funds' accounting policies with
respect to futures contracts and financial note 3 for disclosures concerning the risks of investing in futures contracts. During the period ended October 31, 2016, the month-end average contract values of futures contracts held by the funds and the
month-end average number of contracts held were as follows:
| Contract Values | Number of Contracts | |
| Schwab Core Equity Fund | $11,101,620 | 109 |
| Schwab Dividend Equity Fund | 3,394,315 | 34 |
| Schwab Large-Cap Growth Fund | 821,019 | 8 |
| Schwab Small-Cap Equity Fund | 1,802,236 | 15 |
| Schwab Hedged Equity Fund | 1,545,980 | 15 |
| Schwab Health Care Fund | 405,075 | 4 |
| Schwab International Core Equity Fund | 6,614,352 | 80 |
The Schwab International Core Equity
Fund invested in forwards during the report period. The fund invested in forwards in connection with the purchase and sale of portfolio securities to minimize the uncertainty of changes in future foreign currency exchange rates and to manage cash.
Refer to financial note 2(b) for the fund’s accounting policies with respect to forwards and financial note 3 for disclosures concerning the risks of investing in forwards. During the period ended October 31, 2016, the month-end average
forward foreign currency notional amount and the month-end average unrealized appreciation (depreciation) were $134,364 and ($2,545), respectively.
The effects of the derivatives held by the Schwab International
Core Equity Fund in the Statement of Operations for the period ended October 31, 2016 were:
| Schwab
International Core Equity Fund | |
| Equity Index Futures Contracts | |
| Realized Gains (Losses)1 | ($70,325) |
| Change in Unrealized Appreciation (Depreciation)2 | (103,376) |
| Forward Foreign Currency Exchange Contracts | |
| Realized Gains (Losses)1 | ($40,624) |
| Change in Unrealized Appreciation (Depreciation)2 | — |
| 1 | Statement of Operations location: Net realized gains (losses) on futures contracts and net realized gains (losses) on foreign currency transactions. |
| 2 | Statement of Operations location: Net change in unrealized appreciation (depreciation) on futures contracts and net change in unrealized appreciation (depreciation) on foreign currency translations. |
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Schwab Active Equity Funds
Financial Notes (continued)
9.
Redemption Fee:
The funds charge a 2.00% redemption fee
on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods were as
follows:
| Current
Period (11/1/15-10/31/16) |
Prior
Period (11/1/14-10/31/15) | |
| Schwab Core Equity Fund | $21,676 | $22,991 |
| Schwab Dividend Equity Fund | 10,131 | 17,039 |
| Schwab Large-Cap Growth Fund | 590 | 5,458 |
| Schwab Small-Cap Equity Fund | 4,174 | 13,614 |
| Schwab Hedged Equity Fund | 4,852 | 8,264 |
| Schwab Health Care Fund | 28,881 | 54,580 |
| Schwab International Core Equity Fund | 20,115 | 15,500 |
10. Federal Income Taxes:
As of October 31, 2016, the
components of distributable earnings on a tax-basis were as follows:
| Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Large-Cap Growth Fund |
Schwab
Small-Cap Equity Fund |
Schwab
Hedged Equity Fund | |||||
| Undistributed ordinary income | $27,905,265 | $1,273,539 | $1,950,703 | $1,410,331 | $4,573,764 | ||||
| Undistributed long-term capital gains | — | — | 7,122,436 | — | 1,796,103 | ||||
| Unrealized appreciation on investments | 272,660,738 | 154,675,788 | 28,365,935 | 73,764,080 | 22,176,082 | ||||
| Unrealized depreciation on investments | (49,288,560) | (59,533,836) | (6,543,376) | (44,440,291) | (10,674,666) | ||||
| Other unrealized appreciation (depreciation) | — | — | — | — | 4,110,541 | ||||
| Net unrealized appreciation (depreciation) | $223,372,178 | $95,141,952 | $21,822,559 | $29,323,789 | $15,611,957 |
| Schwab
Health Care Fund |
Schwab
International Core Equity Fund | ||
| Undistributed ordinary income | $6,748,836 | $17,944,797 | |
| Undistributed long-term capital gains | 13,906,469 | — | |
| Unrealized appreciation on investments | 162,628,004 | 46,185,771 | |
| Unrealized depreciation on investments | (38,101,789) | (33,658,625) | |
| Other unrealized appreciation (depreciation) | (70,050) | (75,164) | |
| Net unrealized appreciation (depreciation) | $124,456,165 | $12,451,982 |
The primary differences between
book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments are the tax deferral of losses on wash sales, Passive Foreign Investment Companies (PFIC), partnership investments and non-taxable dividends.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of October 31, 2016, the funds had capital loss carryforwards available to offset future net capital gains before the expiration dates as follows:
| Expiration Date | Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Large-Cap Growth Fund |
Schwab
Small-Cap Equity Fund |
Schwab
Hedged Equity Fund | ||||
| October 31, 2017 | $1,636,581 | $— | $— | $— | $— | ||||
| No expiration* | — | 9,117,909 | — | 5,776,732 | — | ||||
| Total | $1,636,581 | $9,117,909 | $— | $5,776,732 | $— |
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Financial Notes (continued)
10. Federal Income
Taxes (continued):
| Expiration Date | Schwab
Health Care Fund |
Schwab
International Core Equity Fund | |
| October 31, 2017 | $— | $7,906,336 | |
| No expiration* | — | 49,872,747 | |
| Total | $— | $57,779,083 |
| * | As a result of the passage of the Regulated Investment Company Modernization Act of 2010, capital losses incurred after December 31, 2010 may now be carried forward indefinitely, but must retain the character of the original loss. |
Qualified late-year losses are certain capital and ordinary
losses which occur during the portion of a fund's taxable year subsequent to October 31. A fund may elect to treat any portion of qualified late-year losses as arising during the first day of the next taxable year. For the year ended October 31,
2016, the funds had late-year ordinary losses deferred, capital loss carryforwards utilized and capital losses expired as follows:
| Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Large-Cap Growth Fund |
Schwab
Small-Cap Equity Fund |
Schwab
Hedged Equity Fund | |
| Late-year ordinary losses deferred | $— | $— | $— | $— | $336,330 |
| Capital loss carryforwards utilized | 3,143,092 | — | — | — | — |
| Capital losses expired | 6,584,673 | — | — | — | — |
| Schwab
Health Care Fund |
Schwab
International Core Equity Fund | |
| Capital loss carryforwards utilized | $— | $— |
The tax-basis components of
distributions paid during the current and prior fiscal years were as follows:
| Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Large-Cap Growth Fund |
Schwab
Small-Cap Equity Fund |
Schwab
Hedged Equity Fund | |
| Current period distributions | |||||
| Ordinary income | $91,137,043 | $70,215,756 | $10,837,735 | $11,811,855 | $5,415,180 |
| Long-term capital gains | 245,370,769 | 161,290,992 | 25,040,312 | 64,496,426 | 15,502,020 |
| Prior period distributions | |||||
| Ordinary income | $73,466,144 | $78,202,168 | $1,230,983 | $25,751,786 | $— |
| Long-term capital gains | 264,913,205 | 225,404,481 | 25,103,219 | 97,541,227 | 25,864,727 |
| Schwab
Health Care Fund |
Schwab
International Core Equity Fund | |
| Current period distributions | ||
| Ordinary income | $61,724,249 | $13,757,023 |
| Long-term capital gains | 94,808,084 | — |
| Prior period distributions | ||
| Ordinary income | $57,907,541 | $6,699,187 |
| Long-term capital gains | 72,753,677 | 8,245,752 |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements.
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Schwab Active Equity Funds
Financial Notes (continued)
10. Federal Income
Taxes (continued):
Permanent book and tax basis
differences may result in reclassifications between components of net assets as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2016, the funds made the following reclassifications:
| Schwab
Core Equity Fund |
Schwab
Dividend Equity Fund |
Schwab
Large-Cap Growth Fund |
Schwab
Small-Cap Equity Fund |
Schwab
Hedged Equity Fund | |
| Capital shares | ($6,584,673) | $— | $— | $— | $— |
| Undistributed net investment income | 308,601 | 104,925 | 112,459 | (359,209) | 717,379 |
| Net realized capital gains (losses) | 6,276,072 | (104,925) | (112,459) | 359,209 | (717,379) |
| Schwab
Health Care Fund |
Schwab
International Core Equity Fund | |
| Capital shares | $— | $— |
| Undistributed net investment income | (104,217) | 1,261,436 |
| Net realized capital gains (losses) | 104,217 | (1,261,436) |
11. Recent Regulatory Development:
In October 2016,
the SEC adopted new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require
standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact
that the adoption of the amendments to Regulation S-X will have on the funds' financial statements and related disclosures.
12. Subsequent Events:
Management has determined there
are no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.
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Schwab Active Equity Funds
Report of
Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab Core Equity Fund
Schwab Dividend Equity Fund
Schwab Large-Cap Growth Fund
Schwab Small-Cap Equity Fund
Schwab Hedged Equity Fund
Schwab Health Care Fund
Schwab International Core Equity Fund
Schwab Core Equity Fund
Schwab Dividend Equity Fund
Schwab Large-Cap Growth Fund
Schwab Small-Cap Equity Fund
Schwab Hedged Equity Fund
Schwab Health Care Fund
Schwab International Core Equity 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 Core Equity
Fund, Schwab Dividend Equity Fund, Schwab Large-Cap Growth Fund, Schwab Small-Cap Equity Fund, Schwab Hedged Equity Fund, Schwab Health Care Fund and Schwab International Core Equity Fund (seven of the funds constituting Schwab Capital Trust,
hereafter referred to as the “Funds”) at October 31, 2016, and 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2016
San Francisco, California
December 16, 2016
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Schwab Active Equity Funds
Other Federal Tax
Information (unaudited)
Schwab International Core Equity Fund elects to pass through
under section 853 of the Internal Revenue Code foreign tax credit of $1,942,381 to its shareholders for the year ended October 31, 2016. The respective foreign source income on the fund is $25,634,207.
For corporate shareholders, the following percentage of the
funds' dividend distributions paid during the fiscal year ended October 31, 2016, qualify for the corporate dividends received deduction:
| Percentage | |
| Schwab Core Equity Fund | 58.82 |
| Schwab Dividend Equity Fund | 85.31 |
| Schwab Large-Cap Growth Fund | 43.87 |
| Schwab Small-Cap Equity Fund | 48.12 |
| Schwab Hedged Equity Fund | 77.94 |
| Schwab Health Care Fund | 19.06 |
| Schwab International Core Equity Fund | — |
For the fiscal year ended October
31, 2016, the funds designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(11) of the Internal Revenue Code. Shareholders will be notified in January 2017 via IRS
form 1099 of the amounts for use in preparing their 2016 income tax return.
| Schwab Core Equity Fund | $54,123,403 |
| Schwab Dividend Equity Fund | 60,295,601 |
| Schwab Large-Cap Growth Fund | 4,887,426 |
| Schwab Small-Cap Equity Fund | 6,044,413 |
| Schwab Hedged Equity Fund | 4,353,149 |
| Schwab Health Care Fund | 15,827,921 |
| Schwab International Core Equity Fund | 15,699,404 |
Under Section 852 (b)(3)(C) of the
Internal Revenue Code, the funds hereby designate the following amounts as long-term capital gain dividends for the fiscal year ended October 31, 2016:
| Schwab Core Equity Fund | $245,370,769 |
| Schwab Dividend Equity Fund | 161,290,992 |
| Schwab Large-Cap Growth Fund | 25,040,312 |
| Schwab Small-Cap Equity Fund | 64,496,426 |
| Schwab Hedged Equity Fund | 15,502,020 |
| Schwab Health Care Fund | 94,808,084 |
| Schwab International Core Equity Fund | — |
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Schwab Active Equity Funds
Investment Advisory
Agreement Approval
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Schwab Active Equity Funds
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Schwab Active Equity Funds
Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic
Trust and Laudus Trust. The Fund Complex includes 108 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the funds’ Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 108 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 108 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 108 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 108 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 108 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 108 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 108 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 108 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 108 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
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| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); and Director, Schwab Holdings, Inc. (May 2008 – present). | 108 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 108 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer, Schwab Holdings, Inc. (May 2007 – present). | 108 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
103
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
104
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
Glossary
105
Schwab Active Equity Funds | Annual Report
Schwab Active Equity Funds
106
Schwab Active Equity Funds | Annual Report
Notes
Schwab Active Equity Funds
Our straightforward
approach sets us apart.
As one of the nation’s largest asset managers, our
goal is to provide investors with a diverse selection of foundational products that aim to deliver consistent performance at a competitive cost. The list below shows all currently available Schwab Funds.
An investor should consider a fund’s investment
objectives, risks, charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-877-824-5615 for a prospectus and brochure for any Schwab Fund.
Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Schwab Funds’ website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s
website at www.sec.gov, or by contacting Schwab Funds at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s
website at www.sec.gov.
| 1 | You could lose money by investing in a money market fund. All Schwab Money Funds with the exception of Schwab Variable Share Price Money Fund seek to preserve the value of your investment at $1.00 per share, but cannot guarantee they will do so. Effective October 14, 2016, all Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab Retirement Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury Obligations Money Fund and Schwab Government Money Market Portfolio may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The money market fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. |
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MFR26298-13
00186670
00186670
Table of Contents
Annual
Report | October 31, 2016
Schwab Balanced Fund™
This page is intentionally left blank.
Schwab Balanced Fund
In
This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab).
1
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com.
| Total Return for the 12 Months Ended October 31, 2016 | |
| Schwab Balanced Fund (Ticker Symbol: SWOBX) | 1.41% |
| Balanced Blended Index | 4.32% |
| Fund Category: Morningstar Allocation—50% to 70% Equity | 2.75% |
| Performance Details | pages 8-10 |
| Minimum Initial Investment1 | $ 100 |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
The components that make up the composite index may vary over
time. For index definition, please see the Glossary.
Fund
expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, a fund’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions
or on the redemption of fund shares.
Source for category
information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date.
| 1 | Please see the fund’s prospectus for further detail and eligibility requirements. |
2
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Asset
Class Performance Comparison % returns during the 12 months ended 10/31/2016
Index figures
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Past performance is not an indication of future
results.
For index definitions, please see the
Glossary.
Data source: Index provider websites
and CSIM.
Nothing in this report represents a
recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
1 The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no
deductions for expenses or other taxes.
3
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
4
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
The Investment
Environment
Over the 12-month reporting period ended October 31, 2016,
global fixed-income investments and emerging market and U.S. equities performed well, while many developed international equities lagged behind. The Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and
then held steady for the remainder of the reporting period. Yields on many global government-backed securities remained historically low, with some in negative territory, while lackluster global economic growth contributed to continued investor
uncertainty. Toward the end of the reporting period, the U.S. presidential election fueled heightened market volatility in both the U.S. and abroad. For the reporting period, the S&P 500® Index, a bellwether for the overall U.S. stock market, returned 4.51%, while the MSCI EAFE Index (Net), a broad measure of developed international
equity performance, returned -3.23%. In fixed-income markets, the Bloomberg Barclays U.S. Aggregate Bond Index returned 4.37% for the reporting period, and the Citigroup Non-U.S. Dollar World Government Bond Index returned 7.34%.
U.S. economic data generally improved over the reporting
period, despite several weak measurements during the 12 months. Corporate earnings were better-than-expected for the second quarter of 2016 but contracted in the third quarter, while U.S. nonfarm payrolls came in near expectations outside of a sharp
drop in May. Consumer confidence measurements were generally below expectations for most of the reporting period, but rebounded in September to reach its highest level since the 2008 recession. However, consumer confidence fell slightly in October
as increasing uncertainty surrounding the U.S. presidential election and the stability of the labor market resulted in more cautious consumers. In addition, U.S. economic growth trended upwards after dipping slightly in the first quarter of 2016,
with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Short-term interest rate policy in the U.S. remained a source
of uncertainty and volatility during the reporting period. The Fed raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, with the possibility of four additional increases in 2016. Inconsistent U.S. economic data, weak
global growth, and persistently low inflation, however, caused the Fed to leave rates unchanged at each meeting during the reporting period. At its meeting in September, the Fed noted that although the case for a rate increase had strengthened, it
had “…decided, for the time being, to wait for further evidence of continued progress toward its objectives.” Continued low interest rates in the U.S. resulted in cheaper borrowing costs, supporting the overall performance of
emerging markets and U.S. markets during the reporting period. In addition, many emerging market economies were able to absorb the sharp drop in commodities prices and shore up their monetary reserves over the past year, lessening investor fears
about the potentially negative impact of a U.S. interest rate increase. As of the end of the reporting period, markets continued to expect one rate hike by the end of 2016.
5
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
The Investment
Environment (continued)
During the 12-month reporting period, many central banks
outside the U.S. increased accommodative policy measures to help combat stalling economic growth. Both the Bank of Japan and the European Central Bank increased bond purchases and introduced negative interest rates, while the People’s Bank of
China (PBOC) expanded its lending facilities. Following the United Kingdom’s vote in June to leave the European Union (also known as Brexit), the Bank of England (BoE) announced its plan to take additional measures if necessary while markets
adjusted. Less than two months later in early August, the BoE cut its benchmark rate and resumed quantitative easing, and also increased lending to consumers and companies. The Central Bank of Russia also took steps aimed at stabilizing the economy
and inflation, decreasing its key interest rate in mid-September. While some of these measures initially appeared to be less effective than the central banks had hoped, the positive performance of many international equities in the second half of
the reporting period suggested that economic conditions outside the U.S. were beginning to improve.
With interest rates near historically low levels in the U.S.
and overseas, the yields on many government-backed securities also remained low, with some dropping below 0.00%. Over the reporting period, the yields on both German and Japanese 10-year government bonds dipped into negative territory. Meanwhile,
the yield on the British 10-year government note declined to levels approaching 0.50% in August after the announcement of increased accommodative policy measures from the BoE. In the U.S., short-term yields generally increased after the Fed’s
rate hike in December, and then leveled off as the reporting period continued. Longer-term U.S. yields, which are highly influenced by inflation and growth expectations, generally fell in the first half of 2016 amid subdued inflation and weak global
economic growth. As inflation rose slightly and growth expectations improved, the yields on longer-term Treasuries generally trended upwards in the last months of the reporting period.
Index figures assume dividends and distributions were
reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Past performance is not an
indication of future results.
For index definitions,
please see the Glossary.
Nothing in this report represents
a recommendation of a security by the investment adviser.
Management views may have changed since the report date.
6
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Fund Management
 |
Zifan Tang, Ph.D., CFA, Managing Director, Senior Portfolio Manager, leads the portfolio management team and has overall responsibility for all aspects of the management of the fund. She was appointed portfolio manager of the fund in February 2012. Prior to joining CSIM in 2012, Ms. Tang was a product manager at Thomson Reuters and, from 1997 to 2009, worked as a portfolio manager at Barclays Global Investors, which was subsequently acquired by BlackRock. |
7
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Balanced Fund (the
fund) seeks capital growth and income. To pursue its goal, the fund generally invests in a diversified group of other Schwab and/or Laudus Funds, in accordance with its target portfolio allocation. Normally, the fund invests 55% to 65% of its assets
in equity securities (including stocks and equity funds) and 35% to 45% in fixed income securities (including bonds and fixed income funds), and cash or cash equivalents (including money market funds). The fund’s allocation is designed to
provide a mix of the growth opportunities of stock investing with the income opportunities of bonds and other fixed income securities. For more information concerning the fund’s investment objective, strategies, and risks, please see the
fund’s prospectus.
Market Highlights. Over the 12-month reporting period, global fixed-income investments and U.S. equities performed well. At its December 2015 meeting, the Federal Reserve (Fed) raised short-term interest rates for the first
time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in volatility. Toward the end of the reporting
period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the fund returned 1.41%. The fund’s internally calculated comparative index, the Balanced Blended Index (the index), returned 4.32%.
Positioning and
Strategies. Over the reporting period, the fund’s asset allocations were broadly in line with those of the index.
Of the fund’s two underlying fixed-income funds, the
greatest contributions to total return for the reporting period came from the Schwab Total Bond Market Fund, which returned 3.9%, and the Schwab Intermediate-Term Bond Fund, which returned 3.0%. Both funds, however, detracted from the fund’s
performance relative to the index.
The fund’s U.S
equity allocation generated a positive return that contributed to the fund’s absolute performance. The Laudus US Large Cap Growth Fund returned 0.8%, contributing to total return, but detracting from relative performance. However, the Schwab
Core Equity Fund, the fund’s largest position, and the Laudus Small-Cap MarketMasters Fund (Select Shares), each returned -0.5%, detracting from total return. Both funds also detracted from the fund’s performance relative to the
index.
8
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets1,2
Management views and portfolio holdings may have changed
since the report date.
Small-company stocks are subject to
greater volatility than many other asset classes.
The
Laudus U.S. Large Cap Growth Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | This list is not a recommendation of any security by the investment adviser. |
| 2 | The holdings listed exclude any temporary liquidity investments. |
9
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Balanced Fund (11/18/96) | 1.41% | 8.15% | 5.08% |
| Balanced Blended Index | 4.32% | 8.96% | 6.00% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.64% |
| Fund Category: Morningstar Allocation—50% to 70% Equity | 2.75% | 7.36% | 4.76% |
| Fund Expense Ratios3: Net 0.62%; Gross 0.69% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
From June 3, 2002 to February 28, 2008, the fund used a manager
of managers strategy, and therefore its performance during this time does not reflect the fund’s current multi-fund strategy and may have been different if it did.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.62%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
10
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Schwab Balanced Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,031.30 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12-month period. The expenses incurred by the underlying funds in which the fund invests are not included in this ratio. This ratio does not include certain non-routine expenses, such as proxy expenses. |
| 2 | Expenses for the fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year. |
11
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $15.40 | $15.56 | $14.28 | $12.51 | $11.61 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.19 | 0.18 | 0.16 | 0.14 | 0.19 | |
| Net realized and unrealized gains (losses) | 0.00 2 | 0.42 | 1.33 | 1.85 | 0.88 | |
| Total from investment operations | 0.19 | 0.60 | 1.49 | 1.99 | 1.07 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.32) | (0.34) | (0.21) | (0.22) | (0.17) | |
| Distributions from net realized gains | (0.76) | (0.42) | — | — | — | |
| Total distributions | (1.08) | (0.76) | (0.21) | (0.22) | (0.17) | |
| Net asset value at end of period | $14.51 | $15.40 | $15.56 | $14.28 | $12.51 | |
| Total return | 1.41% | 3.95% | 10.52% | 16.13% | 9.36% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses3,4 | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | |
| Gross operating expenses3 | 0.06% | 0.07% | 0.09% | 0.10% | 0.16% | |
| Net investment income (loss) | 1.34% | 1.18% | 1.09% | 1.06% | 1.54% | |
| Portfolio turnover rate | 19% | 5% | 27% | 33% | 38% | |
| Net assets, end of period (x 1,000,000) | $282 | $305 | $202 | $165 | $117 | |
1
Calculated based on the average shares outstanding during
the period.
2
Less than $0.005.
3
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
4
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses and/or interest expense had not been incurred.
12
Schwab Balanced Fund | Annual Report
See financial notes
Schwab Balanced Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $281,956,025 | $— | $— | $281,956,025 | |
| Total | $281,956,025 | $— | $— | $281,956,025 |
| 1 | As categorized in Portfolio Holdings. |
The fund's
policy is to recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
13
Schwab Balanced Fund | Annual Report
See financial notes
Schwab Balanced Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $264,264,579) | $273,749,804 | |
| Investments in unaffiliated issuers, at value (cost $8,206,221) | + | 8,206,221 |
| Total investments, at value (cost $272,470,800) | 281,956,025 | |
| Receivables: | ||
| Fund shares sold | 290,201 | |
| Dividends | 189,021 | |
| Prepaid expenses | + | 18,151 |
| Total assets | 282,453,398 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 168,778 | |
| Fund shares redeemed | 428,661 | |
| Accrued expenses | + | 37,493 |
| Total liabilities | 634,932 | |
| Net Assets | ||
| Total assets | 282,453,398 | |
| Total liabilities | – | 634,932 |
| Net assets | $281,818,466 | |
| Net Assets by Source | ||
| Capital received from investors | 256,374,517 | |
| Net investment income not yet distributed | 1,863,577 | |
| Net realized capital gains | 14,095,147 | |
| Net unrealized capital appreciation | 9,485,225 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $281,818,466 | 19,422,015 | $14.51 | ||
14
Schwab Balanced Fund | Annual Report
See financial notes
Schwab Balanced Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $3,826,541 | |
| Dividends received from unaffiliated underlying funds | + | 16,752 |
| Total investment income | 3,843,293 | |
| Expenses | ||
| Shareholder reports | 40,909 | |
| Registration fees | 40,712 | |
| Professional fees | 28,147 | |
| Portfolio accounting fees | 17,247 | |
| Transfer agent fees | 16,746 | |
| Independent trustees' fees | 9,655 | |
| Proxy fees | 7,379 | |
| Custodian fees | 1,832 | |
| Interest expense | 36 | |
| Other expenses | + | 4,339 |
| Total expenses | 167,002 | |
| Expense reduction by CSIM | – | 159,587 |
| Net expenses | – | 7,415 |
| Net investment income | 3,835,878 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 17,455,377 | |
| Net realized gains on sales of affiliated underlying funds | + | 1,982,418 |
| Net realized gains | 19,437,795 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | + | (19,051,501) |
| Net realized and unrealized gains | 386,294 | |
| Increase in net assets resulting from operations | $4,222,172 | |
15
Schwab Balanced Fund | Annual Report
See financial notes
Schwab Balanced Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $3,835,878 | $2,857,135 | ||
| Net realized gains | 19,437,795 | 16,386,818 | ||
| Net change in unrealized appreciation (depreciation) | + | (19,051,501) | (9,772,217) | |
| Increase in net assets from operations | 4,222,172 | 9,471,736 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (6,125,816) | (4,612,433) | ||
| Distributions from net realized gains | + | (14,319,966) | (5,780,880) | |
| Total distributions | ($20,445,782) | ($10,393,313) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 5,997,037 | $86,468,453 | 9,167,626 | $139,981,488 | ||||
| Shares reinvested | 1,316,822 | 18,725,208 | 628,361 | 9,532,242 | ||||
| Shares redeemed | + | (7,731,157) | (112,621,617) | (2,913,119) | (44,685,668) | |||
| Net transactions in fund shares | (417,298) | ($7,427,956) | 6,882,868 | $104,828,062 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 19,839,313 | $305,470,032 | 12,956,445 | $201,563,547 | ||||
| Total increase or decrease | + | (417,298) | (23,651,566) | 6,882,868 | 103,906,485 | |||
| End of period | 19,422,015 | $281,818,466 | 19,839,313 | $305,470,032 | ||||
| Net investment income not yet distributed | $1,863,577 | $1,469,990 | ||||||
16
Schwab Balanced Fund | Annual Report
See financial notes
Schwab Balanced Fund
Financial Notes
1. Business Structure of the Fund:
Schwab
Balanced Fund is a series of Schwab Capital Trust (the trust), a no-load, open-end management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended (the
1940 Act). The list below shows all the funds in the trust as of the end of the period, including the fund discussed in this report, which is highlighted:
| SCHWAB CAPITAL TRUST (ORGANIZED MAY 7, 1993) | |
| Schwab Balanced Fund | Schwab Target 2045 Fund |
| Schwab ® S&P 500 Index Fund | Schwab Target 2050 Fund |
| Schwab Small-Cap Index Fund® | Schwab Target 2055 Fund |
| Schwab Total Stock Market Index Fund® | Schwab Target 2060 Fund |
| Schwab International Index Fund® | Schwab Fundamental US Large Company Index Fund |
| Schwab MarketTrack All Equity Portfolio™ | Schwab Fundamental US Small Company Index Fund |
| Schwab MarketTrack Growth Portfolio™ | Schwab Fundamental International Large Company Index Fund |
| Schwab MarketTrack Balanced Portfolio™ | Schwab Fundamental International Small Company Index Fund |
| Schwab MarketTrack Conservative Portfolio™ | Schwab Fundamental Emerging Markets Large Company Index Fund |
| Laudus Small-Cap MarketMasters Fund™ | Schwab Fundamental Global Real Estate Index Fund |
| Laudus International MarketMasters Fund™ | Schwab Target 2010 Index Fund |
| Schwab Core Equity Fund™ | Schwab Target 2015 Index Fund |
| Schwab Dividend Equity Fund™ | Schwab Target 2020 Index Fund |
| Schwab Large-Cap Growth Fund™ | Schwab Target 2025 Index Fund |
| Schwab Small-Cap Equity Fund™ | Schwab Target 2030 Index Fund |
| Schwab Hedged Equity Fund™ | Schwab Target 2035 Index Fund |
| Schwab Health Care Fund™ | Schwab Target 2040 Index Fund |
| Schwab ® International Core Equity Fund | Schwab Target 2045 Index Fund |
| Schwab Target 2010 Fund | Schwab Target 2050 Index Fund |
| Schwab Target 2015 Fund | Schwab Target 2055 Index Fund |
| Schwab Target 2020 Fund | Schwab Target 2060 Index Fund |
| Schwab Target 2025 Fund | Schwab ® Monthly Income Fund - Moderate Payout |
| Schwab Target 2030 Fund | Schwab ® Monthly Income Fund - Enhanced Payout |
| Schwab Target 2035 Fund | Schwab ® Monthly Income Fund - Maximum Payout |
| Schwab Target 2040 Fund | |
The Schwab Balanced Fund is a single class “fund of
funds” which seeks to achieve its investment objective by investing in a diversified group of other Schwab and/or Laudus Funds, but also may invest in other unaffiliated, third party mutual funds, including exchange-traded funds (ETFs). In
addition, the fund may invest a portion of its assets directly in equity and fixed-income securities to maintain its allocations.
The fund offers one share class. Shares are bought and sold
(subject to a redemption fee, see financial note 8) at closing net asset value per share (NAV), which is the price for all outstanding shares of the fund. Each share has a par value of 1/1,000 of a cent, and the fund's Board of Trustees (the Board)
may authorize the issuance of as many shares as necessary.
The fund maintains its own account for purposes of holding
assets and accounting, and is considered a separate entity for tax purposes. Within its account, the fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the fund uses in its preparation of financial statements. The fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The financial statements of the fund should be read in
conjunction with the underlying funds' financial statements. For more information about the underlying funds' operations and policies, please refer to those funds' semiannual and annual reports, which are filed and available on the U.S. Securities
and Exchange Commission's (SEC) website at www.sec.gov or at the SEC's Public Reference Room in Washington D.C.
17
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Notes (continued)
2. Significant Accounting
Policies (continued):
(a) Security
Valuation:
Under procedures approved by the Board,
the investment adviser has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect fair market
value. Among other things, these procedures allow the fund to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
The fund values the securities in its portfolio every
business day. The fund uses the following policies to value various types of securities:
• Underlying funds: Mutual funds are valued at their respective NAVs.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value the fund’s securities when market prices are not “readily available” or are unreliable.
For example, the fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market
is closed during regular market hours. The fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of factors, including unobservable market inputs when
arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market multiples, book values, transactional back-testing,
disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of fair value pricing, there can be no assurance that
the fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the fund pursuant to the valuation procedures.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
In accordance with the authoritative guidance on fair value
measurements and disclosures under GAAP, the fund discloses the fair value of its investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to
valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3
measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation. If the fund determines that either the
volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and
management judgment will be required to estimate fair value.
The three levels of the fair value hierarchy are as
follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities. Investments in mutual funds are valued daily at their NAVs, which are classified as Level
1 prices, without consideration to the classification level of the specific investments held by an underlying fund.
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations.
•
Level 3—significant unobservable inputs (including the fund's own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the fund uses one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the fund in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3
prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the fund in the absence of market information. Assumptions used by the fund due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the fund's results of operations.
18
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
The inputs or
methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the fund's investments
as of October 31, 2016 are disclosed in the Portfolio Holdings.
(b) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
(c) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the fund records certain foreign security dividends on the day it learns of the ex-dividend date. Any
distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
(d) Expenses:
Expenses that are specific to the fund are charged directly
to the fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets. The fund bears its share of the allocable expenses of the underlying funds in which it
invests. Such expenses are reflected in the net asset values of the underlying funds.
(e) Distributions to Shareholders:
The fund makes distributions from net investment income and
net realized capital gains, if any, once a year.
(f)
Custody Credit:
The fund has an arrangement with its
custodian bank, State Street Bank and Trust Company (State Street), under which the fund may receive a credit for its uninvested cash balance to offset its custody fees and accounting fees. The credit amounts, if any, are disclosed in the Statement
of Operations as a reduction to the fund’s operating expenses.
(g) Accounting Estimates:
The accounting policies described in this report conform to
GAAP. 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 and these differences may be material.
(h) Federal Income Taxes:
The fund intends to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the fund distributes substantially all of its net investment income and net realized capital gains, if any, to its respective
shareholders each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax.
(i) Indemnification:
Under the fund’s organizational documents, the
officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the fund. In addition, in the normal course of business the fund enters into contracts with its vendors and others that provide
general indemnifications. The fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the fund. However, based on experience, the fund expects the risk of loss attributable to
these arrangements to be remote.
3. Risk Factors:
Investing in the fund may involve
certain risks, as discussed in the fund's prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
19
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Notes (continued)
3. Risk
Factors (continued):
Asset Allocation Risk. The fund is subject to asset allocation risk, which is the risk that the selection of the underlying funds and the allocation of the fund's assets among the various asset classes and market segments will cause the fund
to underperform other funds with a similar investment objective.
Conflicts of Interest Risk.
The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds may create a conflict of interest because the fees paid to it by some underlying funds are higher than the
fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under management or to support new investment strategies. In addition,
other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be aligned with those of the fund or vice versa. However, the investment adviser is a fiduciary to the fund and is legally obligated to act in
the fund’s best interests when selecting underlying funds.
Market Risk. Equity and
fixed income markets rise and fall daily. As with any investment whose performance is tied to these markets, the value of an investment in the fund will fluctuate, which means that an investor could lose money.
Direct Investment Risk. The
fund may invest a portion of its assets directly in equity and fixed income securities, ETFs and cash equivalents, including money market securities. The fund's direct investment in these securities is subject to the same or similar risks as an
underlying fund's investment in the same security.
Underlying Fund Investment Risk. The value of an investment in the fund is based primarily on the prices of the underlying funds that the fund purchases. In turn, the price of each underlying fund is based on the value of its securities. The fund is
subject to the performance and expenses of the underlying funds in which it invests. Before investing in the fund, investors should assess the risks associated with the underlying funds in which the fund may invest and the types of investments made
by those underlying funds. These risks include any combination of the risks described below, although the fund's exposure to a particular risk will be proportionate to the fund's overall asset allocation and underlying fund allocation.
•
Investment Risk. The fund may experience losses with respect to its investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.
•
Management Risk. Generally, the underlying funds are actively managed mutual funds. Any actively managed mutual fund is subject to the risk that its investment adviser (or subadviser(s)) will select or
allocate assets that could cause the fund to underperform or otherwise not meet its objective. An underlying fund's adviser applies its own investment techniques and risk analyses in making investment decisions for the fund, but there can be no
guarantee that they will produce the desired results.
•
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition,
the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.
•
Large- and Mid-Cap Risk. Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more vulnerable to adverse
business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of
investments—small-cap stocks, for instance—an underlying fund's performance also will
lag those investments.
•
Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may
be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments — large-cap and mid-cap stocks, for instance — an underlying
fund's performance also will lag those investments.
•
Growth Investing Risk. An underlying fund’s investments in growth stocks can be volatile. Growth companies usually invest a high portion of earnings in their businesses and may lack the dividends of
value stocks that can cushion stock prices in a falling market. The prices of growth stocks are based largely on projections of the issuer’s future earnings and revenues. If a company’s earnings or revenues fall short of expectations,
its stock price may fall dramatically. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks.
•
Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund's yield and share price. Because interest rates in the United States and other countries are at, or near,
historically low levels, a change in a central bank's monetary policy or improving economic conditions may result in an increase in interest rates. A rise in interest rates could cause an underlying fund's share price to fall. The credit quality of
a portfolio investment could also cause an underlying fund's share price to fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal
or interest payments or otherwise honor its obligations. Fixed income
20
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Notes (continued)
3. Risk
Factors (continued):
securities may be paid off earlier or
later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund's yield or share price. Below investment-grade bonds (junk bonds) involve greater credit
risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities.
•
ETF Risk. When an underlying fund invests in an ETF, it will bear a proportionate share of the ETF's expenses. In addition, lack of liquidity in the market for an ETF's shares can result in its value being
more volatile than the underlying portfolio of securities.
•
Money Market Fund Risk. The fund may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or that have a
share price that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money
market fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type
of money market fund is designed to offer capital appreciation. Effective October 14, 2016, certain underlying money market funds may impose a fee upon the sale of shares or may temporarily suspend the ability to sell shares if such fund's liquidity
falls below required minimums.
•
Foreign Investment Risk. An underlying fund's investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers.
These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of
economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in
connection with investments in emerging markets.
•
Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market
countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be
more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with an underlying fund's investments in emerging market countries and, at times, it may be difficult to value such
investments.
•
Derivatives Risk. An underlying fund's use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other
traditional investments. An underlying fund's use of derivatives could reduce the underlying fund's performance, increase volatility and could cause the fund to lose more than the principal amount invested. In addition, investments in derivatives
may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging
rather than to enhance the underlying fund’s returns or as a substitute for a position or security.
•
Leverage Risk. Certain underlying fund transactions, such as derivatives, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an
underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund's portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on
the underlying fund.
•
Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss.
•
Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the
underlying fund's performance and may increase the likelihood of capital gain distributions.
•
Securities Lending Risk. Certain underlying funds engage in securities lending, which involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to
return the security loaned or becomes insolvent.
•
Mortgage-Backed and Mortgage Pass-Through Securities Risk. Certain of the mortgage-backed securities in which an underlying fund may invest are not backed by the full faith and credit of the U.S.
government and there can be no assurance that the U.S. government would provide financial support where it was not obligated to do so. Mortgage-backed securities
21
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Notes (continued)
3. Risk
Factors (continued):
tend to
increase in value less than other debt securities when interest rates decline, but are subject to similar risk of decline in market value during periods of rising interest rates. Transactions in mortgage pass-through securities primarily occur
through to be announced (TBA) transactions. Default by or bankruptcy of a counterparty to a TBA transaction would expose an underlying fund to possible losses.
•
Mortgage Dollar Rolls Risk. Mortgage dollar rolls are transactions in which an underlying fund sells mortgage-backed securities to a dealer and simultaneously agrees to repurchase similar securities in the
future at a predetermined price. An underlying fund’s mortgage dollar rolls could lose money if the price of the mortgage-backed securities sold falls below the agreed upon repurchase price, or if the counterparty is unable to honor the
agreement.
Please refer to the fund’s
prospectus for a more complete description of the principal risks of investing in the fund.
4. Affiliates and Affiliated Transactions:
Charles
Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as the fund's investment adviser and administrator pursuant to an Investment Advisory and Administration
Agreement between CSIM and the trust.
The Board has
adopted a Shareholder Servicing Plan (the Plan) on behalf of the fund. The Plan enables the fund to bear expenses relating to the provision by financial intermediaries, including Charles Schwab & Co., Inc. (a broker-dealer affiliate of CSIM,
Schwab) (together, service providers), of certain account maintenance, customer liaison and shareholder services to the current shareholders of the fund. The fund is not subject to any fee under the Plan.
CSIM and its affiliates have agreed with the fund, for so long
as CSIM serves as the investment adviser to the fund, which may only be amended or terminated with the approval of the Board, to limit the total annual fund operating expenses charged, excluding interest, taxes and certain non-routine expenses to
0.00%.
The agreement to limit the fund's total expenses
charged is limited to the fund's direct operating expenses and, therefore, does not apply to underlying fund fees and expenses, which are indirect expenses incurred by a fund through its investments in the underlying funds.
The fund may engage in certain transactions involving related
parties. Pursuant to an exemptive order issued by the SEC, the fund may invest in other related funds. As of October 31, 2016, the Schwab Balanced Fund's ownership percentages of other related funds' shares are:
| Laudus Small-Cap MarketMasters Fund, Select Shares | 17.9% |
| Laudus U.S. Large Cap Growth Fund | 2.2% |
| Schwab Core Equity Fund | 4.8% |
| Schwab Intermediate-Term Bond Fund | 9.7% |
| Schwab Total Bond Market Fund | 5.1% |
Below is a summary of the fund's
transactions with its affiliated underlying funds during the period ended October 31, 2016.
Schwab Balanced Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 1,791,811 | 304,143 | (427,500) | 1,668,454 | $27,612,913 | $285,540 | $1,780,576 | ||
| Laudus U.S. Large Cap Growth Fund | 2,611,438 | 422,802 | (518,599) | 2,515,641 | 42,212,464 | 429,287 | 2,662,096 | ||
| Schwab Core Equity Fund | 4,640,638 | 1,385,880 | (1,003,269) | 5,023,249 | 98,706,846 | 978,732 | 14,537,459 | ||
| Schwab Intermediate-Term Bond Fund | 3,504,525 | 513,500 | (721,162) | 3,296,863 | 33,957,690 | 26,293 | 710,613 | ||
| Schwab Total Bond Market Fund | 7,899,025 | 1,013,288 | (1,527,868) | 7,384,445 | 71,259,891 | 262,566 | 1,591,174 | ||
| Total | $273,749,804 | $1,982,418 | $21,281,918 |
| * | Distributions received include distributions from net investment income and capital gains, if any, from the underlying funds. |
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Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Pursuant to an
exemptive order issued by the SEC, the fund may enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency purposes
and the interest rate to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating
funds/portfolios. The interfund lending facility is subject to the oversight and periodic review by the Board. The fund had no interfund borrowing or lending activity during the period.
5. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations
throughout the report period. The trust did not pay any of these interested persons for their services as trustees, but it did pay non-interested persons (independent trustees), as noted on the fund’s Statement of Operations. For information
regarding the trustees, please refer to the Trustees and Officers table at the end of this report.
6. Borrowing from Banks:
During the period, the fund
was a participant with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit Facility, in
addition to the interest charged on any borrowings by a fund, the fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, the Credit Facility was amended to run for
a new 364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
The fund also has access to custodian overdraft facilities. The
fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
7. Purchases and Sales/Maturities of Investment Securities:
For the period ended October 31, 2016, purchases and
sales/maturities of securities (excluding short-term obligations) were as follows:
| Purchases of Securities | Sales/Maturities of Securities |
| $53,627,666 | $58,820,000 |
8. Redemption Fee:
The fund charges a 2.00%
redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods
were as follows:
| Current
Period (11/1/15-10/31/16) |
Prior
Period (11/1/14-10/31/15) |
| $6,464 | $46,338 |
9. Federal Income Taxes:
As of October 31, 2016, the
components of distributable earnings on a tax-basis were as follows:
| Undistributed ordinary income | $3,804,930 |
| Undistributed long-term capital gains | 14,943,943 |
| Unrealized appreciation on investments | 6,695,076 |
| Net unrealized appreciation (depreciation) | $6,695,076 |
23
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Financial Notes (continued)
9. Federal Income
Taxes (continued):
The primary difference between book-basis
and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of October 31, 2016, the fund had no capital loss carryforwards.
The tax-basis components of distributions paid during the
current and prior fiscal years were as follows:
| Current period distributions | |
| Ordinary income | $6,797,035 |
| Long-term capital gains | 13,648,747 |
| Prior period distributions | |
| Ordinary income | $4,612,433 |
| Long-term capital gains | 5,780,880 |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements.
Permanent book and tax basis differences may result in
reclassifications between components of net assets as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2016, the fund made the following reclassifications:
| Capital shares | $— |
| Undistributed net investment income | 2,683,525 |
| Net realized capital gains (losses) | (2,683,525) |
As of October 31, 2016, management
has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) as applicable to the fund, and has determined that no provision for income tax is
required in the fund’s financial statements. The fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended October 31, 2016, the fund did
not incur any interest or penalties.
10. Recent Regulatory Development:
In October 2016,
the SEC adopted new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require
standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact
that the adoption of the amendments to Regulation S-X will have on the fund's financial statements and related disclosures.
11. Subsequent Events:
Management has determined there
are no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.
24
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Report of
Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab Balanced Fund
Schwab Balanced Fund
In our opinion, the accompanying statement 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 Balanced Fund (one of the
funds constituting Schwab Capital Trust, hereafter referred to as the “Fund”) at October 31, 2016, the results of its operations for the year then ended, the changes in its 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 Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits, which included confirmation of securities and investments in the underlying funds at October 31, 2016 by correspondence with the custodian and transfer agent of the underlying
funds, respectively, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2016
San Francisco, California
December 16, 2016
25
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Other Federal Tax
Information (unaudited)
For corporate shareholders, 27.96% of the fund's dividend
distributions paid during the fiscal year ended October 31, 2016, qualify for the corporate dividends received deduction.
For the fiscal year ended October 31, 2016, the fund designates
$1,951,059 of the dividend distributions as qualified dividends for the purposes of the maximum rate under section 1(h)(11) of the Internal Revenue Code. Shareholders will be notified in January 2017 via IRS form 1099 of the amounts for use in
preparing their 2016 income tax return.
Under Section 852
(b)(3)(C) of the Internal Revenue Code, the fund hereby designates $13,648,747 as long-term capital gain dividends for the fiscal year ended October 31, 2016.
26
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Investment Advisory
Agreement Approval
27
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
28
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Capital Trust, which includes the fund covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust
and Laudus Trust. The Fund Complex includes 108 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the fund’s Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 108 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 108 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 108 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 108 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 108 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 108 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 108 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 108 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 108 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
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Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); and Director, Schwab Holdings, Inc. (May 2008 – present). | 108 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 108 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer, Schwab Holdings, Inc. (May 2007 – present). | 108 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
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Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
32
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
Glossary
33
Schwab Balanced Fund | Annual Report
Schwab Balanced Fund
34
Schwab Balanced Fund | Annual Report
Notes
Schwab Balanced Fund
Our straightforward
approach sets us apart.
As one of the nation’s largest asset managers, our
goal is to provide investors with a diverse selection of foundational products that aim to deliver consistent performance at a competitive cost. The list below shows all currently available Schwab Funds.
An investor should consider a fund’s investment
objectives, risks, charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-877-824-5615 for a prospectus and brochure for any Schwab Fund.
Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Schwab Funds’ website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s
website at www.sec.gov, or by contacting Schwab Funds at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s
website at www.sec.gov.
| 1 | You could lose money by investing in a money market fund. All Schwab Money Funds with the exception of Schwab Variable Share Price Money Fund seek to preserve the value of your investment at $1.00 per share, but cannot guarantee they will do so. Effective October 14, 2016, all Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab Retirement Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury Obligations Money Fund and Schwab Government Money Market Portfolio may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The money market fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. |
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MFR36112-10
00186672
00186672
Table of Contents
Annual
Report | October 31, 2016
Schwab Equity Index Funds
Schwab® S&P 500 Index Fund
Schwab 1000 Index® Fund
Schwab Small-Cap Index Fund®
Schwab Total Stock Market
Index Fund®
Index Fund®
Schwab International
Index Fund®
Index Fund®
This page is intentionally left blank.
Five cost-efficient ways to tap into the power of the stock
market for long-term growth potential.
In This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab)
The Sector/Industry classifications in this report use the
Global Industry Classification Standard (GICS), which was developed by, and is the exclusive property of, MSCI and Standard & Poor’s (S&P). GICS is a service mark of MSCI and S& P and has been licensed for use by Schwab. The
Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.
1
Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com.
| Total Return for the 12 Months Ended October 31, 2016 | |
| Schwab S&P 500 Index Fund (Ticker Symbol: SWPPX) | 4.40% |
| S&P 500® Index | 4.51% |
| Fund Category: Morningstar Large Blend | 2.12% |
| Performance Details | pages 8-10 |
| Schwab 1000 Index Fund (Ticker Symbol: SNXFX) | 3.87% |
| Schwab 1000 Index® | 4.14% |
| Fund Category: Morningstar Large Blend | 2.12% |
| Performance Details | pages 11-13 |
| Schwab Small-Cap Index Fund (Ticker Symbol: SWSSX) | 4.17% |
| Russell 2000® Index | 4.11% |
| Fund Category: Morningstar Small Blend | 2.91% |
| Performance Details | pages 14-16 |
| Schwab Total Stock Market Index Fund (Ticker Symbol: SWTSX) | 4.19% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% |
| Fund Category: Morningstar Large Blend | 2.12% |
| Performance Details | pages 17-19 |
| Schwab International Index Fund1 (Ticker Symbol: SWISX) | -2.64% |
| MSCI EAFE® Index (Net)2 | -3.23% |
| Fund Category: Morningstar Foreign Large Blend | -2.08% |
| Performance Details | pages 20-22 |
| Minimum Initial Investment3 | $ 100 |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Fund expenses may have been partially absorbed by CSIM and its
affiliates. Without these reductions, a fund’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
Source for category information: Morningstar, Inc. The
Morningstar Category return represents all active and index mutual funds within the category as of the report date.
| 1 | The fund’s performance relative to the index may be affected by fair-value pricing and timing differences in foreign exchange calculations. See financial note 2 for more information. |
| 2 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 3 | Please see the funds’ prospectus for further detail and eligibility requirements. |
2
Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Asset
Class Performance Comparison % returns during the 12 months ended 10/31/2016
Index figures
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Past performance is not an indication of future
results.
For index definitions, please see the
Glossary.
Data source: Index provider websites
and CSIM.
Nothing in this report represents a
recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
1 The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no
deductions for expenses or other taxes.
3
Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
4
Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
The Investment
Environment
Over the 12-month reporting period ended October 31, 2016,
equity markets generated mixed returns, with U.S. stocks performing well and many international stocks in negative territory. The Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade in December 2015, but held
them steady at each subsequent meeting during the reporting period. Concerns surrounding global growth and heightened market volatility weighed on stocks in the first part of the reporting period, especially after the United Kingdom’s
unexpected decision in June to leave the European Union (also known as Brexit). As the reporting period continued, however, some signs of stability emerged, including improving economic data, and many equity markets rebounded. Toward the end of the
reporting period, the U.S. presidential election fueled heightened market volatility and uncertainty. For the reporting period, the S&P 500®
Index, a bellwether for the overall U.S. stock market, returned 4.51%, while the Russell 2000® Index, a U.S. small-cap company measure, returned
4.11%. Internationally, the MSCI EAFE Index (Net), a broad measure of international developed equity performance, returned -3.23% for same time period.
U.S. economic data generally improved over the reporting
period, despite several weak measurements during the 12 months. Corporate earnings were better-than-expected for the second quarter of 2016 but contracted in the third quarter, while U.S. nonfarm payrolls came in near expectations outside of a sharp
drop in May. Consumer confidence measurements were generally below expectations for most of the reporting period, but rebounded in September to reach the highest level since the 2008 recession. However, consumer confidence fell slightly in October
as increasing uncertainty surrounding the U.S. presidential election and the stability of the labor market resulted in more cautious consumers. In addition, U.S. economic growth trended upwards after dipping slightly in the first quarter of 2016,
with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Short-term interest rate policy in the U.S. remained a source
of uncertainty and volatility during the reporting period. The Fed raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, with the possibility of four additional increases in 2016. Inconsistent U.S. economic data, weak
global growth, and persistently low inflation, however, caused the Fed to leave rates unchanged at each meeting during the reporting period. At its meeting in September, the Fed noted that although the case for a rate increase had strengthened, it
had “…decided, for the time being, to wait for further evidence of continued progress toward its objectives.” As of the end of the reporting period, markets continued to expect one rate hike by the end of 2016.
Many central banks outside the U.S. increased accommodative
policy measures over the reporting period to help combat stalling economic growth. Both the Bank of Japan and the European Central Bank increased bond purchases and introduced negative interest rates, while the People’s Bank of China (PBOC)
expanded its lending facilities. Following the June Brexit vote, the Bank of England (BoE) announced its plan to take additional measures if necessary while markets adjusted. Less than two months later in early August, the BoE cut its benchmark rate
and resumed quantitative easing, and also increased lending to consumers and companies. While some of these measures initially appeared to be less effective than the central banks had hoped, the positive performance of many international equities in
the second half of the reporting period suggested that economic conditions outside the U.S. were beginning to improve.
5
Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
The Investment
Environment (continued)
Concerns around unsteady global growth were present throughout
the first part of the 12-month reporting period, and then lessened as the reporting period continued. In China, fears about the slowing economy declined as stimulative moves by the PBOC helped to reverse downward trends in several economic gauges.
Meanwhile, the results of the June Brexit vote shook markets globally, sending the British pound downward and markedly increasing uncertainty and volatility. However, because Brexit was not driven by liquidity or changes in underlying fundamentals,
most stock markets rebounded and stabilized in the days and weeks that followed.
In January 2016, the price of oil dropped significantly and
remained volatile in the following months, weighing on many global stock markets. Oil prices stabilized at the end of the reporting period, however, and a relatively narrow trading range supported an overall rebound in the performance of many energy
companies and oil-producing countries. A proposed agreement by the Organization of the Petroleum Exporting Countries to limit output also initially helped boost oil prices after the agreement was announced, though the longer-term effects of an
agreement were uncertain and skepticism surrounding the deal tempered optimism among many investors and banks.
Index figures assume dividends and distributions were
reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Past performance is not an
indication of future results.
For index definitions,
please see the Glossary.
Nothing in this report represents
a recommendation of a security by the investment adviser.
Management views may have changed since the report date.
6
Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Fund Management
 |
Agnes Hong, CFA, Vice President and Senior Portfolio Manager, is responsible for the day-to-day co-management of the funds. Prior to joining CSIM in 2009, Ms. Hong spent five years as a portfolio manager at Barclays Global Investors (subsequently acquired by BlackRock), where she managed institutional index funds and quantitative active funds. Prior to that, Ms. Hong worked in management consulting and product management, servicing global financial services clients. |
 |
Ferian Juwono, CFA, Managing Director and Senior Portfolio Manager, is responsible for the day-to-day co-management of the funds. Prior to joining CSIM in 2010, Mr. Juwono worked at BlackRock (formerly Barclays Global Investors), where he spent more than three years as a portfolio manager, managing equity index funds for institutional clients, and nearly two years as a senior business analyst. Prior to that, Mr. Juwono worked for more than four years as a senior financial analyst with Union Bank of California. |
 |
David Rios, Portfolio Manager, is responsible for the day-to-day co-management of the Schwab S&P 500 Index Fund, Schwab 1000 Index Fund, and Schwab Small-Cap Index Fund. He joined CSIM in 2008 and became a Portfolio Manager in September 2014. Prior to this role, Mr. Rios served as an Associate Portfolio Manager on the Schwab Equity Index Strategies team for four years. His first role with CSIM was as a trade operation specialist. He also previously worked as a senior fund accountant at Investors Bank & Trust (subsequently acquired by State Street Corporation). |
7
Schwab Equity Index Funds | Annual Report
Schwab S&P 500 Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab S&P 500 Index Fund’s (the fund) goal is to track the total return of the S&P 500 Index (the index), which includes the stocks of 500 leading U.S. publicly traded companies from a broad range of industries. To pursue its goal, the fund
uses a replication investment approach and generally gives the same weight to a given stock as does the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s
prospectus.
Market Highlights. U.S. large-cap stocks performed well over the 12-month reporting period. The Federal Reserve raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50% and then left rates unchanged for the
remainder of the reporting period, while concerns continued to lessen around China’s decelerating economy. In June, the results of the United Kingdom’s unexpected decision to leave the European Union (also known as Brexit) increased
volatility and uncertainty across the globe and asset classes. Over the reporting period, U.S. economic data generally improved, despite some uneven measurements, and a better-than-expected corporate earnings report in the 2nd quarter of 2016 helped support the performance of many U.S. equities. From a sector standpoint within the index, the Utilities and the Telecommunication
Services sectors outperformed over the 12-month reporting period, while the Consumer Discretionary and Health Care sectors underperformed by comparison.
Performance. The fund returned
4.40% for the 12-month reporting period ended October 31, 2016, compared with the index, which returned 4.51%. Differences between the return of the fund and the return of the index may be attributable to, among other things, the operational and
transactional costs incurred by the fund and not the index.
Contributors and Detractors.
Health Care stocks were the largest detractors from the returns of both the index and the fund. The Health Care sector represented an average weight of approximately 15% of the fund’s investments and returned approximately -4% for the
reporting period. One example from this sector is Gilead Sciences, Inc., a research-based biopharmaceutical company. Due in part to declining sales of its hepatitis C drug over the reporting period, the fund’s holdings of Gilead Sciences, Inc.
returned approximately -30%.
The Consumer
Discretionary sector was another detractor from overall fund performance, representing an average weight of approximately 13% of the fund’s investments and returning approximately -2% for the reporting period.
The fund’s holdings in the Information Technology sector
were the largest contributors to the return of the fund. Information Technology stocks represented an average weight of approximately 21% of the fund’s investments and returned approximately 11%, representing the overall positive performance
of companies involved in software and internet services. The fund’s holdings of Microsoft Corporation are one example from this sector, returning approximately 17%.
Stocks in the Consumer Staples sector were another contributor
to overall fund performance. Consumer Staples stocks represented an average weight of approximately 10% of the fund’s investments and returned approximately 9% for the reporting period.
8
Schwab Equity Index Funds | Annual Report
Schwab S&P 500 Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
9
Schwab Equity Index Funds | Annual Report
Schwab S&P 500 Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab S&P 500 Index Fund (5/19/97) | 4.40% | 13.46% | 6.66% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Large Blend | 2.12% | 11.90% | 5.80% |
| Fund Expense Ratio4: 0.09% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Index ownership – “Standard & Poor’s®,” “S&P®,” and
“S&P 500®” are registered trademarks of Standard & Poor’s Financial Services LLC (S&P), and "Dow Jones®" is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones) and have been licensed for use by S&P Dow Jones Indices LLC and its
affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “S&P 500® Index” is a
product of S&P Dow Jones Indices LLC or its affiliates, and has been licensed for use by CSIM. The Schwab S&P 500 Index Fund is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their
respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in the fund.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On September 9, 2009, the Investor Share class, Select Share class and e.Shares class were combined into a single class of shares of the fund. The performance history of the fund prior to September 9, 2009 is that of the fund’s former Select Shares. On September 9, 2009, the Schwab Institutional Select S&P 500 Fund merged into the fund. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
10
Schwab Equity Index Funds | Annual Report
Schwab 1000 Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab 1000 Index Fund’s (the fund) goal is to match the total return of the Schwab 1000 Index (the index), which includes the stocks of the largest 1,000 publicly traded companies in the U.S., with size being determined by market
capitalization (total market value of all shares outstanding). To pursue its goal, the fund uses a replication investment approach and generally gives the same weight to a given stock as does the index. For more information concerning the
fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. U.S.
large-cap stocks performed well over the 12-month reporting period. The Federal Reserve raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50% and then left rates unchanged for the remainder of the reporting period, while
concerns continued to lessen around China’s decelerating economy. In June, the results of the United Kingdom’s unexpected decision to leave the European Union (also known as Brexit) increased volatility and uncertainty across the globe
and asset classes. Over the reporting period, U.S. economic data generally improved, despite some uneven measurements, and a better-than-expected corporate earnings report in the 2nd quarter of 2016 helped support the performance of many U.S. equities. From a sector standpoint within the index, the Utilities and the Telecommunication
Services sectors outperformed over the 12-month reporting period, while the Consumer Discretionary and Health Care sectors underperformed by comparison.
Performance. The fund returned
3.87% for the 12-month reporting period ended October 31, 2016, compared with the index, which returned 4.14%. Differences between the return of the fund and the return of the index may be attributable to, among other things, the operational and
transactional costs incurred by the fund and not the index.
Contributors and
Detractors. The fund’s holdings in the Health Care sector were the largest detractors from the returns of the fund. Health Care stocks represented an average weight of approximately 15% of the
fund’s investments and returned approximately -4% for the reporting period. One example from this sector is Gilead Sciences, Inc., a research-based biopharmaceutical company. Due in part to declining sales of its hepatitis C drug over the
reporting period, the fund’s holdings of Gilead Sciences, Inc. returned approximately -30%.
The Consumer Discretionary sector was another detractor from
overall fund performance, representing an average weight of approximately 13% of the fund’s investments and falling approximately 2% for the reporting period.
The Information Technology sector was the largest contributor
to the return of the index and the fund. Information Technology stocks represented an average weight of approximately 20% of the fund’s investments and returned approximately 10%, representing the overall positive performance of companies
involved in software and internet services. The fund’s Class A holdings of social media company Facebook, Inc. are one example from this sector, returning approximately 28%.
Stocks in the Consumer Staples sector were another strong
contributor to overall fund performance. Consumer Staples stocks represented an average weight of approximately 9% of the fund’s investments and returned approximately 8% for the reporting period.
11
Schwab Equity Index Funds | Annual Report
Schwab 1000 Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets2
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | As a result of the Schwab 1000 Index’s once per year reconstitution and the effects of certain corporate actions, the fund may hold less than 1,000 securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
12
Schwab Equity Index Funds | Annual Report
Schwab 1000 Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab 1000 Index Fund (4/2/91) | 3.87% | 13.09% | 6.57% |
| Schwab 1000 Index® | 4.14% | 13.39% | 6.87% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Large Blend | 2.12% | 11.90% | 5.80% |
| Fund Expense Ratios4: Net 0.29%; Gross 0.33% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On September 18, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to September 18, 2009 is that of the fund’s former Investor Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
13
Schwab Equity Index Funds | Annual Report
Schwab Small-Cap Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Small-Cap Index Fund’s (the fund) goal is to track the performance of the Russell 2000 Index (the index), which is designed to measure the performance of the small-cap sector of the U.S. equity market. To pursue its goal, the fund uses a
replication investment approach and generally gives the same weight to a given stock as does the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s
prospectus.
Market Highlights. U.S. small-cap stocks performed well over the 12-month reporting period. The Federal Reserve raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, and then left rates unchanged for the
remainder of the reporting period, while concerns continued to lessen around China’s decelerating economy. In June, the results of the United Kingdom’s unexpected decision to leave the European Union (also known as Brexit) increased
volatility and uncertainty across the globe and asset classes. Over the reporting period, U.S. economic data generally improved, despite some uneven measurements, and a better-than-expected corporate earnings report in the 2nd quarter of 2016 helped support the performance of many U.S. equities. From a sector standpoint within index, the Utilities and Materials sectors were two
of the top performers over the 12-month reporting period, while the Energy and Health Care sectors underperformed by comparison.
Performance. The
fund returned 4.17% for the 12-month reporting period ended October 31, 2016, compared with the index, which returned 4.11%.
Contributors and
Detractors. The fund’s holdings in the Information Technology sector were the largest contributors to the returns of the fund. Information Technology stocks represented an average weight of
approximately 18% of the fund’s investments and returned approximately 11%, representing the overall positive performance of companies involved in software and internet services. The fund’s holdings of global semiconductor company
Advanced Micro Devices, Inc. are one example from this sector, producing a triple-digit return of approximately 241% for the reporting period.
Stocks in the Industrials sector also contributed to overall
fund performance. Industrials stocks represented an average weight of approximately 13% of the fund’s investments and returned approximately 8%.
The Health Care sector was the largest detractor from the
returns of both the index and the fund. Health Care stocks represented an average weight of approximately 14% of the fund’s investments and returned approximately -7% for the reporting period. One example from this sector is biopharmaceutical
company Clovis Oncology, Inc. The fund’s holdings of Clovis Oncology, Inc. returned approximately -71%, driven in part by the termination of the clinical development of its new lung cancer drug in May of this year.
The Consumer Discretionary sector was another detractor from
overall fund performance, representing an average weight of approximately 13% of the fund’s investments and returning approximately -6% for the reporting period.
14
Schwab Equity Index Funds | Annual Report
Schwab Small-Cap Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
Small-company stocks are subject to
greater volatility than many other asset classes.
| 1 | This list is not a recommendation of any security by the investment adviser. |
15
Schwab Equity Index Funds | Annual Report
Schwab Small-Cap Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Small-Cap Index Fund (5/19/97) | 4.17% | 11.48% | 6.91% |
| Russell 2000® Index | 4.11% | 11.51% | 5.96% |
| Small-Cap Spliced Index | 4.11% | 11.42% | 6.96% |
| Fund Category: Morningstar Small Blend | 2.91% | 10.53% | 5.71% |
| Fund Expense Ratios4: Net 0.17%; Gross 0.20% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Index ownership – “Russell 2000®” is a registered mark of the Frank Russell Company (Russell) and has been licensed for use by the Schwab Small-Cap Index Fund. The Schwab
Small-Cap Index Fund is not sponsored, endorsed, sold or promoted by Russell and Russell makes no representation regarding the advisability of investing in the fund.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On August 21, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to August 21, 2009 is that of the fund’s former Select Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
16
Schwab Equity Index Funds | Annual Report
Schwab Total Stock Market Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Total Stock Market Index Fund’s (the fund) goal is to track the total return of the entire U.S. stock market, as measured by the Dow Jones U.S. Total Stock Market Index (the index), which includes the stocks of all publicly traded companies
headquartered in the U.S. for which pricing information is readily available. To pursue its investment objective, the fund uses a sampling investment approach that involves investing in a representative sample of stocks with similar risk and return
characteristics as the index, and maintains a tight allocation across all sectors, market capitalizations, and valuation measures compared with the index. For more information concerning the fund’s investment objective, strategies, and risks,
please see the fund’s prospectus.
Market
Highlights. U.S. stocks performed well over the 12-month reporting period. The Federal Reserve raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50% and then left rates
unchanged for the remainder of the reporting period, while concerns continued to lessen around China’s decelerating economy. In June, the results of the United Kingdom’s unexpected decision to leave the European Union (also known as
Brexit) increased volatility and uncertainty across the globe and asset classes. Over the reporting period, U.S. economic data generally improved, despite some uneven measurements, and a better-than-expected corporate earnings report in the 2nd quarter of 2016 helped support the performance of many U.S. equities. From a sector standpoint within the index, the Utilities and the Telecommunication
Services sectors outperformed over the 12-month reporting period, while the Consumer Discretionary and Health Care sectors underperformed by comparison.
Performance. The fund returned
4.19% for the 12-month reporting period ended October 31, 2016, compared with the index, which returned 4.21%. Differences between the return of the fund and the return of the index may be attributable to, among other things, the operational and
transactional costs incurred by the fund and not the index.
Contributors and Detractors.
The fund’s holdings in the Health Care sector were the largest detractors from the returns of the fund. Health Care stocks represented an average weight of approximately 14% of the fund’s investments and returned approximately -4% for
the reporting period. One example from this sector is Gilead Sciences, Inc., a research-based biopharmaceutical company. Due in part to declining sales of its hepatitis C drug over the reporting period, the fund’s holdings of Gilead Sciences,
Inc. fell approximately 30% over the reporting period.
The Consumer Discretionary sector was another detractor from
overall fund performance, representing an average weight of approximately 13% of the fund’s investments and returning approximately -2% over the 12-month reporting period.
Information Technology stocks were the largest contributors to
the returns of both the index and the fund. The Information Technology sector represented an average weight of approximately 20% of the fund’s investments and returned approximately 10%, representing the overall positive performance of
companies involved in software and internet services. The fund’s Class A holdings of social media company Facebook, Inc. are one example from this sector, returning approximately 28%.
The Consumer Staples sector was another strong contributor to
overall fund performance. Consumer Staples stocks represented an average weight of approximately 9% of the fund’s investments and returned approximately 8% for the reporting period.
17
Schwab Equity Index Funds | Annual Report
Schwab Total Stock Market Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
18
Schwab Equity Index Funds | Annual Report
Schwab Total Stock Market Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Total Stock Market Index Fund (6/1/99) | 4.19% | 13.24% | 6.90% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 6.87% |
| Fund Category: Morningstar Large Blend | 2.12% | 11.90% | 5.80% |
| Fund Expense Ratios4: Net 0.09%; Gross 0.11% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Index ownership – “Dow Jones®” is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones) and has been licensed for use by S& P Dow Jones Indices LLC and
its affiliates and sublicensed for certain purposes by Charles Schwab Investment Management, Inc. (CSIM). The “Dow Jones U.S. Total Stock Market Index” is a product of S&P Dow Jones Indices LLC or its affiliates, and has been
licensed for use by CSIM. The Schwab Total Stock Market Index Fund is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S& P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow
Jones, S&P, nor their respective affiliates make any representation regarding the advisability of investing in the fund.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On September 18, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to September 18, 2009 is that of the fund’s former Select Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
19
Schwab Equity Index Funds | Annual Report
Schwab International Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab International Index Fund’s (the fund) goal is to track the performance of the MSCI EAFE Index (Net) (the index), which measures the total return of large, publicly traded non-U.S. companies from countries with developed equity markets outside of
the U.S. To pursue its goal, the fund uses a replication investment approach and generally gives the same weight to a given stock as does the index. For more information concerning the fund’s investment objective, strategies, and risks, please
see the fund’s prospectus.
Market Highlights. International large-cap stocks generated negative returns over the 12-month reporting period. Market volatility spiked in June after the United Kingdom’s vote to leave the European Union (also known as Brexit), as
global stocks sold off and the British pound fell sharply, though many markets calmed and even rebounded in the following months. Accommodative monetary policies in Europe and Japan contributed to signs of improvement in those regions, though
uncertainty remained surrounding the stability of global economic growth and the effects of the Brexit referendum.
Performance. The
fund returned -2.64% for the 12-month reporting period ended October 31, 2016, compared with the index, which returned -3.23%. Timing differences in foreign exchange calculations and fair valuation of the fund’s holdings contributed to the
fund’s relative performance.1
Contributors and
Detractors. From a country perspective, stocks from Australia contributed the most to the fund’s return. Representing an average weight of approximately 7% of the fund, Australian stocks returned
approximately 13% in U.S. dollar terms. Among the fund’s Australian holdings, the strongest contributor to fund performance was Australia and New Zealand Banking Group Ltd., which returned almost 17% for the reporting period. Stocks from Japan
also positively contributed to fund performance. Representing an average weight of approximately 23% of the fund’s investments, Japanese stocks returned about 3% in U.S. dollar terms for the reporting period. Within this country segment, the
largest contributor was telecommunications company KDDI Corporation. The fund’s holdings of KDDI Corporation returned almost 27% for the reporting period.
By comparison, stocks from the United Kingdom detracted the
most from the total return of both the index and the fund. Representing an average weight of approximately 19% of the fund’s investments, British stocks returned -10% for the period, due in large part to uncertainty and volatility resulting
from the June Brexit decision. One example from the United Kingdom is Lloyds Banking Group plc. The fund’s holdings of Lloyds Banking Group plc detracted from performance and returned approximately -36% for the reporting period. Stocks from
Switzerland also dampened fund returns. Representing an average weight of approximately 9%, Swiss stocks returned approximately -9% in U.S. dollar terms. Within this country segment, one of the largest drags on performance was Novartis AG, a company
that specializes in the research, development, manufacturing and marketing of a range of healthcare products led by pharmaceuticals. The fund’s holdings of Novartis AG returned approximately -20% in U.S. dollar terms for the reporting
period.
| 1 | Typically, the securities in the index are valued using foreign exchange rates obtained at the close of the London foreign currency exchange (11:00 AM EST). Securities in the fund, however, are valued using foreign exchange rates obtained at the close of the New York foreign currency exchange (4:00 PM EST). This difference in closing times can result in different foreign currency exchange rates between the two exchanges, and thus different foreign currency exchange rates used in the valuation of the index’s and fund’s securities. |
20
Schwab Equity Index Funds | Annual Report
Schwab International Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Management views and portfolio holdings may have
changed since the report date.
Source of Sector
Classification: S&P and MSCI.
International
investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
21
Schwab Equity Index Funds | Annual Report
Schwab International Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1,2
Average Annual Total Returns1,2,3
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab International Index Fund (5/19/97) | -2.64% | 5.17% | 1.33% |
| MSCI EAFE® Index (Net)4 | -3.23% | 4.99% | 1.22% |
| International Spliced Index | -3.23% | 5.09% | 1.47% |
| Fund Category: Morningstar Foreign Large Blend | -2.08% | 4.69% | 1.14% |
| Fund Expense Ratios5: Net 0.19%; Gross 0.23% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The fund’s performance relative to the index may be
affected by fair-value pricing, see financial note 2 for more information.
Index ownership – “MSCI EAFE” is a registered
mark of MSCI and has been licensed for use by the Schwab International Index Fund. The Schwab International Index Fund is not sponsored, endorsed, sold or promoted by MSCI and MSCI bears no liability with respect to the fund. The Statement of
Additional Information contains a more detailed description of the limited relationship MSCI has with the fund.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On August 21, 2009, the Investor Share class and Select Share class were combined into a single class of shares of the fund. The performance history of the fund prior to August 21, 2009 is that of the fund’s former Select Shares. |
| 3 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 4 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 5 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
22
Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Schwab S&P 500 Index Fund | ||||
| Actual Return | 0.09% | $1,000.00 | $1,040.20 | $0.46 |
| Hypothetical 5% Return | 0.09% | $1,000.00 | $1,024.65 | $0.46 |
| Schwab 1000 Index Fund | ||||
| Actual Return | 0.29% | $1,000.00 | $1,040.30 | $1.49 |
| Hypothetical 5% Return | 0.29% | $1,000.00 | $1,023.64 | $1.48 |
| Schwab Small-Cap Index Fund | ||||
| Actual Return | 0.17% | $1,000.00 | $1,061.40 | $0.88 |
| Hypothetical 5% Return | 0.17% | $1,000.00 | $1,024.25 | $0.87 |
| Schwab Total Stock Market Index Fund | ||||
| Actual Return | 0.09% | $1,000.00 | $1,041.70 | $0.46 |
| Hypothetical 5% Return | 0.09% | $1,000.00 | $1,024.65 | $0.46 |
| Schwab International Index Fund | ||||
| Actual Return | 0.19% | $1,000.00 | $1,007.50 | $0.96 |
| Hypothetical 5% Return | 0.19% | $1,000.00 | $1,024.14 | $0.97 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12- month period. This ratio does not include certain non-routine expenses, such as proxy expenses. |
| 2 | Expenses for each fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year. |
23
Schwab Equity Index Funds | Annual Report
Schwab S&P 500 Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $33.00 | $31.99 | $27.78 | $22.35 | $19.82 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.69 1 | 0.67 1 | 0.56 | 0.52 | 0.44 | |
| Net realized and unrealized gains (losses) | 0.69 | 0.92 | 4.13 | 5.40 | 2.49 | |
| Total from investment operations | 1.38 | 1.59 | 4.69 | 5.92 | 2.93 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.68) | (0.58) | (0.48) | (0.49) | (0.40) | |
| Distributions from net realized gains | (0.32) | — | — | — | — | |
| Total distributions | (1.00) | (0.58) | (0.48) | (0.49) | (0.40) | |
| Net asset value at end of period | $33.38 | $33.00 | $31.99 | $27.78 | $22.35 | |
| Total return | 4.40% | 5.10% | 17.16% | 27.06% | 15.09% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | |
| Gross operating expenses | 0.09% | 0.09% | 0.09% | 0.09% | 0.10% | |
| Net investment income (loss) | 2.12% | 2.07% | 1.89% | 2.10% | 2.09% | |
| Portfolio turnover rate | 2% | 2% | 2% | 1% | 2% | |
| Net assets, end of period (x 1,000,000) | $22,675 | $21,587 | $20,473 | $17,121 | $12,687 | |
1
Calculated based on the average shares outstanding during
the period.
24
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
25
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
26
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
In addition to the above, the fund held the following at
10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| S&P 500 Index, e-mini, Long, expires 12/16/16 | 1,300 | 137,806,500 | (951,893) | |||
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $22,513,476,544 | $— | $— | $22,513,476,544 | |
| Other Investment Company1 | 13,893,103 | — | — | 13,893,103 | |
| Short-Term Investments1 | — | 112,832,837 | — | 112,832,837 | |
| Total | $22,527,369,647 | $112,832,837 | $— | $22,640,202,484 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($951,893) | $— | $— | ($951,893) |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
27
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investment in affiliated issuer, at value (cost $22,549,133) | $46,928,078 | |
| Investments in unaffiliated issuers, at value (cost $13,089,124,248) including securities on loan of $13,706,721 | 22,579,381,303 | |
| Collateral invested for securities on loan, at value (cost $13,893,103) | + | 13,893,103 |
| Total investments, at value (cost $13,125,566,484) | 22,640,202,484 | |
| Deposit with broker for futures contracts | 15,912,500 | |
| Receivables: | ||
| Fund shares sold | 28,863,925 | |
| Dividends | 27,826,123 | |
| Income from securities on loan | 20,004 | |
| Interest | 470 | |
| Prepaid expenses | + | 212,983 |
| Total assets | 22,713,038,489 | |
| Liabilities | ||
| Collateral held for securities on loan | 13,893,103 | |
| Payables: | ||
| Investments bought | 5,381,030 | |
| Investment adviser and administrator fees | 1,162,498 | |
| Shareholder service fees | 365,456 | |
| Independent trustees' fees | 12 | |
| Fund shares redeemed | 16,961,365 | |
| Variation margin on futures contracts | 240,500 | |
| Accrued expenses | + | 497,339 |
| Total liabilities | 38,501,303 | |
| Net Assets | ||
| Total assets | 22,713,038,489 | |
| Total liabilities | – | 38,501,303 |
| Net assets | $22,674,537,186 | |
| Net Assets by Source | ||
| Capital received from investors | 12,687,713,013 | |
| Net investment income not yet distributed | 370,308,971 | |
| Net realized capital gains | 102,831,095 | |
| Net unrealized capital appreciation | 9,513,684,107 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $22,674,537,186 | 679,318,269 | $33.38 | ||
28
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated issuer | $372,825 | |
| Dividends received from unaffiliated issuers | 482,110,779 | |
| Interest | 194,136 | |
| Securities on loan | + | 1,225,524 |
| Total investment income | 483,903,264 | |
| Expenses | ||
| Investment adviser and administrator fees | 13,125,526 | |
| Shareholder service fees | 4,117,131 | |
| Shareholder reports | 521,361 | |
| Transfer agent fees | 517,590 | |
| Custodian fees | 374,813 | |
| Portfolio accounting fees | 326,309 | |
| Registration fees | 205,718 | |
| Proxy fees | 180,364 | |
| Independent trustees' fees | 137,479 | |
| Professional fees | 131,800 | |
| Index fees | 110,844 | |
| Other expenses | + | 313,093 |
| Total expenses | 20,062,028 | |
| Expense reduction by CSIM and its affiliates | – | 517,590 |
| Net expenses | – | 19,544,438 |
| Net investment income | 464,358,826 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on unaffiliated issuers | 124,681,168 | |
| Net realized gains on futures contracts | + | 11,183,834 |
| Net realized gains | 135,865,002 | |
| Net change in unrealized appreciation (depreciation) on affiliated issuer | 1,972,789 | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 372,314,502 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (6,416,993) |
| Net change in unrealized appreciation (depreciation) | + | 367,870,298 |
| Net realized and unrealized gains | 503,735,300 | |
| Increase in net assets resulting from operations | $968,094,126 | |
29
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $464,358,826 | $440,842,159 | ||
| Net realized gains | 135,865,002 | 408,470,702 | ||
| Net change in unrealized appreciation (depreciation) | + | 367,870,298 | 203,793,813 | |
| Increase in net assets from operations | 968,094,126 | 1,053,106,674 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (445,863,757) | (369,772,138) | ||
| Distributions from net realized gains | + | (213,585,458) | — | |
| Total distributions | ($659,449,215) | ($369,772,138) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 138,449,264 | $4,442,657,641 | 141,493,107 | $4,563,459,195 | ||||
| Shares reinvested | 18,184,196 | 567,165,064 | 10,513,082 | 323,697,799 | ||||
| Shares redeemed | + | (131,502,877) | (4,230,435,569) | (137,893,672) | (4,457,275,751) | |||
| Net transactions in fund shares | 25,130,583 | $779,387,136 | 14,112,517 | $429,881,243 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 654,187,686 | $21,586,505,139 | 640,075,169 | $20,473,289,360 | ||||
| Total increase | + | 25,130,583 | 1,088,032,047 | 14,112,517 | 1,113,215,779 | |||
| End of period | 679,318,269 | $22,674,537,186 | 654,187,686 | $21,586,505,139 | ||||
| Net investment income not yet distributed | $370,308,971 | $357,061,921 | ||||||
30
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $53.67 | $53.63 | $48.31 | $40.23 | $37.44 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.95 | 0.94 | 0.83 | 0.81 | 0.71 | |
| Net realized and unrealized gains (losses) | 0.92 | 1.40 | 6.74 | 9.74 | 4.32 | |
| Total from investment operations | 1.87 | 2.34 | 7.57 | 10.55 | 5.03 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.96) | (0.86) | (0.75) | (0.81) | (0.72) | |
| Distributions from net realized gains | (2.18) | (1.44) | (1.50) | (1.66) | (1.52) | |
| Total distributions | (3.14) | (2.30) | (2.25) | (2.47) | (2.24) | |
| Net asset value at end of period | $52.40 | $53.67 | $53.63 | $48.31 | $40.23 | |
| Total return | 3.87% | 4.66% | 16.36% | 27.85% | 14.38% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.29% | 0.29% | 0.29% | 0.29% | 0.29% | |
| Gross operating expenses | 0.33% | 0.33% | 0.33% | 0.34% | 0.34% | |
| Net investment income (loss) | 1.86% | 1.77% | 1.64% | 1.87% | 1.85% | |
| Portfolio turnover rate | 3% | 4% | 4% | 4% | 4% | |
| Net assets, end of period (x 1,000,000) | $6,432 | $6,550 | $6,586 | $5,887 | $4,848 | |
1
Calculated based on the average shares outstanding during
the period.
31
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
32
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
33
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $6,404,137,765 | $— | $— | $6,404,137,765 | |
| Other Investment Companies1 | 37,801,743 | — | — | 37,801,743 | |
| Total | $6,441,939,508 | $— | $— | $6,441,939,508 | |
| Other Financial Instruments | |||||
| Futures Contracts2 | $1,633 | $— | $— | $1,633 |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
34
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investment in affiliated issuer, at value (cost $2,209,352) | $11,895,900 | |
| Investments in unaffiliated issuers, at value (cost $1,948,725,777) including securities on loan of $14,532,147 | 6,415,219,458 | |
| Collateral invested for securities on loan, at value (cost $14,824,150) | + | 14,824,150 |
| Total investments, at value (cost $1,965,759,279) | 6,441,939,508 | |
| Deposit with broker for futures contracts | 1,552,500 | |
| Receivables: | ||
| Dividends | 7,482,499 | |
| Fund shares sold | 1,474,768 | |
| Income from securities on loan | 52,036 | |
| Prepaid expenses | + | 56,028 |
| Total assets | 6,452,557,339 | |
| Liabilities | ||
| Collateral held for securities on loan | 14,824,150 | |
| Payables: | ||
| Investments bought | 1,401,446 | |
| Investment adviser and administrator fees | 1,222,518 | |
| Shareholder service fees | 343,494 | |
| Fund shares redeemed | 2,068,487 | |
| Variation margin on futures contracts | 51,800 | |
| Accrued expenses | + | 187,932 |
| Total liabilities | 20,099,827 | |
| Net Assets | ||
| Total assets | 6,452,557,339 | |
| Total liabilities | – | 20,099,827 |
| Net assets | $6,432,457,512 | |
| Net Assets by Source | ||
| Capital received from investors | 1,738,578,933 | |
| Net investment income not yet distributed | 93,428,871 | |
| Net realized capital gains | 124,267,846 | |
| Net unrealized capital appreciation | 4,476,181,862 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $6,432,457,512 | 122,766,378 | $52.40 | ||
35
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated issuer | $97,569 | |
| Dividends received from unaffiliated issuers (net of foreign withholding taxes of $6,430) | 136,619,548 | |
| Securities on loan | + | 959,771 |
| Total investment income | 137,676,888 | |
| Expenses | ||
| Investment adviser and administrator fees | 14,191,681 | |
| Shareholder service fees | 6,158,513 | |
| Shareholder reports | 196,767 | |
| Portfolio accounting fees | 129,705 | |
| Custodian fees | 90,341 | |
| Transfer agent fees | 86,837 | |
| Professional fees | 73,513 | |
| Proxy fees | 70,781 | |
| Independent trustees' fees | 66,516 | |
| Registration fees | 44,964 | |
| Interest expense | 1,005 | |
| Other expenses | + | 86,943 |
| Total expenses | 21,197,566 | |
| Expense reduction by CSIM and its affiliates | – | 2,577,844 |
| Net expenses | – | 18,619,722 |
| Net investment income | 119,057,166 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on unaffiliated issuers | 92,181,266 | |
| Net realized gains on futures contracts | + | 7,301,404 |
| Net realized gains | 99,482,670 | |
| Net change in unrealized appreciation (depreciation) on affiliated issuer | 442,812 | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 27,049,676 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (1,434,569) |
| Net change in unrealized appreciation (depreciation) | + | 26,057,919 |
| Net realized and unrealized gains | 125,540,589 | |
| Increase in net assets resulting from operations | $244,597,755 | |
36
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $119,057,166 | $117,273,762 | ||
| Net realized gains | 99,482,670 | 263,878,115 | ||
| Net change in unrealized appreciation (depreciation) | + | 26,057,919 | (78,689,547) | |
| Increase in net assets from operations | 244,597,755 | 302,462,330 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (116,634,011) | (105,608,703) | ||
| Distributions from net realized gains | + | (264,435,992) | (176,669,683) | |
| Total distributions | ($381,070,003) | ($282,278,386) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 7,018,989 | $351,323,719 | 8,572,420 | $453,508,106 | ||||
| Shares reinvested | 6,609,034 | 324,569,655 | 4,867,270 | 244,385,619 | ||||
| Shares redeemed | + | (12,905,052) | (656,886,870) | (14,211,205) | (754,521,955) | |||
| Net transactions in fund shares | 722,971 | $19,006,504 | (771,515) | ($56,628,230) | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 122,043,407 | $6,549,923,256 | 122,814,922 | $6,586,367,542 | ||||
| Total increase or decrease | + | 722,971 | (117,465,744) | (771,515) | (36,444,286) | |||
| End of period | 122,766,378 | $6,432,457,512 | 122,043,407 | $6,549,923,256 | ||||
| Net investment income not yet distributed | $93,428,871 | $92,741,182 | ||||||
37
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $26.29 | $28.13 | $27.62 | $21.26 | $20.55 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.39 | 0.38 | 0.35 | 0.42 | 0.33 | |
| Net realized and unrealized gains (losses) | 0.59 | (0.34) | 1.76 | 6.94 | 1.89 | |
| Total from investment operations | 0.98 | 0.04 | 2.11 | 7.36 | 2.22 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.36) | (0.34) | (0.31) | (0.50) | (0.35) | |
| Distributions from net realized gains | (1.31) | (1.54) | (1.29) | (0.50) | (1.16) | |
| Total distributions | (1.67) | (1.88) | (1.60) | (1.00) | (1.51) | |
| Net asset value at end of period | $25.60 | $26.29 | $28.13 | $27.62 | $21.26 | |
| Total return | 4.17% | 0.36% | 8.08% | 36.23% | 11.87% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.17% | 0.17% | 0.17% | 0.17% | 0.17% | |
| Gross operating expenses | 0.20% | 0.20% | 0.21% | 0.20% | 0.21% | |
| Net investment income (loss) | 1.60% | 1.37% | 1.27% | 1.76% | 1.63% | |
| Portfolio turnover rate | 17% | 17% | 12% | 11% | 41% 2 | |
| Net assets, end of period (x 1,000,000) | $2,619 | $2,607 | $2,567 | $2,351 | $1,675 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate increase was mainly the result of
trading activities in connection with the change in primary benchmark index effective December 14, 2011.
38
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
39
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
40
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $2,203,521,753 | $— | $— | $2,203,521,753 | |
| Banks | 326,366,285 | — | 328,122 | 326,694,407 | |
| Consumer Durables & Apparel | 62,226,995 | — | 119,658 | 62,346,653 | |
| Rights 1 | — | — | 503,531 * | 503,531 | |
| Other Investment Company1 | 71,694,474 | — | — | 71,694,474 | |
| Short-Term Investments1 | — | 29,131,264 | — | 29,131,264 | |
| Total | $2,663,809,507 | $29,131,264 | $951,311 | $2,693,892,082 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($607,492) | $— | $— | ($607,492) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between
Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers out of Level 1 to Level 3 due to the result of fair valued securities for which no quoted value was available. There were no transfers between Level 1
and Level 2 for the period ended October 31, 2016.
41
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $2,045,021,503) including securities on loan of $69,176,152 | $2,622,197,608 | |
| Collateral invested for securities on loan, at value (cost $71,694,474) | + | 71,694,474 |
| Total investments, at value (cost $2,116,715,977) | 2,693,892,082 | |
| Deposit with broker for futures contracts | 1,475,000 | |
| Receivables: | ||
| Investments sold | 1,711,484 | |
| Fund shares sold | 1,904,697 | |
| Dividends | 964,844 | |
| Income from securities on loan | 401,930 | |
| Variation margin on futures contracts | 84,086 | |
| Foreign tax reclaims | 138 | |
| Interest | 121 | |
| Prepaid expenses | + | 31,766 |
| Total assets | 2,700,466,148 | |
| Liabilities | ||
| Collateral held for securities on loan | 71,694,474 | |
| Payables: | ||
| Investments bought | 8,203,569 | |
| Investment adviser and administrator fees | 320,827 | |
| Shareholder service fees | 5,440 | |
| Fund shares redeemed | 1,275,703 | |
| Accrued expenses | + | 254,766 |
| Total liabilities | 81,754,779 | |
| Net Assets | ||
| Total assets | 2,700,466,148 | |
| Total liabilities | – | 81,754,779 |
| Net assets | $2,618,711,369 | |
| Net Assets by Source | ||
| Capital received from investors | 1,947,661,792 | |
| Net investment income not yet distributed | 29,632,152 | |
| Net realized capital gains | 64,848,812 | |
| Net unrealized capital appreciation | 576,568,613 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $2,618,711,369 | 102,299,380 | $25.60 | ||
42
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $13,028) | $39,704,920 | |
| Interest | 22,234 | |
| Securities on loan | + | 5,662,957 |
| Total investment income | 45,390,111 | |
| Expenses | ||
| Investment adviser and administrator fees | 3,845,081 | |
| Shareholder service fees | 481,202 | |
| Index fees | 331,260 | |
| Shareholder reports | 134,752 | |
| Portfolio accounting fees | 96,014 | |
| Registration fees | 66,938 | |
| Custodian fees | 60,375 | |
| Transfer agent fees | 56,176 | |
| Professional fees | 49,204 | |
| Proxy fees | 48,079 | |
| Independent trustees' fees | 23,128 | |
| Interest expense | 346 | |
| Other expenses | + | 37,587 |
| Total expenses | 5,230,142 | |
| Expense reduction by CSIM and its affiliates | – | 823,959 |
| Net expenses | – | 4,406,183 |
| Net investment income | 40,983,928 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 74,455,591 | |
| Net realized losses on futures contracts | (943,993) | |
| Net realized losses on foreign currency transactions | + | (166) |
| Net realized gains | 73,511,432 | |
| Net change in unrealized appreciation (depreciation) on investments | (16,991,820) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (652,700) |
| Net change in unrealized appreciation (depreciation) | + | (17,644,520) |
| Net realized and unrealized gains | 55,866,912 | |
| Increase in net assets resulting from operations | $96,850,840 | |
43
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $40,983,928 | $36,385,637 | ||
| Net realized gains | 73,511,432 | 129,409,804 | ||
| Net change in unrealized appreciation (depreciation) | + | (17,644,520) | (161,888,183) | |
| Increase in net assets from operations | 96,850,840 | 3,907,258 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (36,921,658) | (31,478,925) | ||
| Distributions from net realized gains | + | (133,048,449) | (140,885,597) | |
| Total distributions | ($169,970,107) | ($172,364,522) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 19,812,273 | $485,854,730 | 22,816,080 | $620,636,969 | ||||
| Shares reinvested | 6,229,806 | 148,954,660 | 6,143,892 | 156,607,812 | ||||
| Shares redeemed | + | (22,912,471) | (550,233,981) | (21,022,054) | (568,337,329) | |||
| Net transactions in fund shares | 3,129,608 | $84,575,409 | 7,937,918 | $208,907,452 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 99,169,772 | $2,607,255,227 | 91,231,854 | $2,566,805,039 | ||||
| Total increase | + | 3,129,608 | 11,456,142 | 7,937,918 | 40,450,188 | |||
| End of period | 102,299,380 | $2,618,711,369 | 99,169,772 | $2,607,255,227 | ||||
| Net investment income not yet distributed | $29,632,152 | $26,542,110 | ||||||
44
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $37.69 | $36.96 | $32.53 | $25.80 | $22.92 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.75 1 | 0.72 1 | 0.60 | 0.57 | 0.47 | |
| Net realized and unrealized gains (losses) | 0.75 | 0.83 | 4.49 | 6.70 | 2.83 | |
| Total from investment operations | 1.50 | 1.55 | 5.09 | 7.27 | 3.30 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.70) | (0.61) | (0.51) | (0.54) | (0.42) | |
| Distributions from net realized gains | (0.30) | (0.21) | (0.15) | — | — | |
| Total distributions | (1.00) | (0.82) | (0.66) | (0.54) | (0.42) | |
| Net asset value at end of period | $38.19 | $37.69 | $36.96 | $32.53 | $25.80 | |
| Total return | 4.19% | 4.36% | 15.93% | 28.76% | 14.71% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.09% | 0.09% | 0.09% | 0.09% | 0.09% | |
| Gross operating expenses | 0.10% | 0.11% | 0.10% | 0.10% | 0.10% | |
| Net investment income (loss) | 2.03% | 1.92% | 1.79% | 2.02% | 2.02% | |
| Portfolio turnover rate | 1% | 2% | 1% | 2% | 3% | |
| Net assets, end of period (x 1,000,000) | $4,850 | $4,477 | $4,049 | $3,183 | $2,240 | |
1
Calculated based on the average shares outstanding during
the period.
45
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
46
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
47
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $4,822,321,992 | $— | $— * | $4,822,321,992 | |
| Rights 1 | — | — | 73,410 * | 73,410 | |
| Other Investment Company1 | 19,726,894 | — | — | 19,726,894 | |
| Short-Term Investment1 | — | 21,277,491 | — | 21,277,491 | |
| Total | $4,842,048,886 | $21,277,491 | $73,410 | $4,863,399,787 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($391,950) | $— | $— | ($391,950) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between
Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
48
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investment in affiliated issuer, at value (cost $5,313,111) | $7,928,994 | |
| Investments in unaffiliated issuers, at value (cost $3,107,987,134) including securities on loan of $19,150,544 | 4,835,743,899 | |
| Collateral invested for securities on loan, at value (cost $19,726,894) | + | 19,726,894 |
| Total investments, at value (cost $3,133,027,139) | 4,863,399,787 | |
| Deposit with broker for futures contracts | 2,273,500 | |
| Receivables: | ||
| Dividends | 5,232,639 | |
| Fund shares sold | 2,824,461 | |
| Income from securities on loan | 89,146 | |
| Interest | 89 | |
| Prepaid expenses | + | 63,452 |
| Total assets | 4,873,883,074 | |
| Liabilities | ||
| Collateral held for securities on loan | 19,726,894 | |
| Payables: | ||
| Investments bought | 933,514 | |
| Investment adviser and administrator fees | 248,680 | |
| Shareholder service fees | 30,822 | |
| Fund shares redeemed | 2,202,642 | |
| Variation margin on futures contracts | 26,025 | |
| Accrued expenses | + | 291,223 |
| Total liabilities | 23,459,800 | |
| Net Assets | ||
| Total assets | 4,873,883,074 | |
| Total liabilities | – | 23,459,800 |
| Net assets | $4,850,423,274 | |
| Net Assets by Source | ||
| Capital received from investors | 3,052,206,562 | |
| Net investment income not yet distributed | 74,346,707 | |
| Net realized capital losses | (6,110,693) | |
| Net unrealized capital appreciation | 1,729,980,698 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $4,850,423,274 | 127,023,967 | $38.19 | ||
49
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated issuer | $63,833 | |
| Dividends received from unaffiliated issuers (net of foreign withholding taxes of $7,224) | 96,197,015 | |
| Interest | 47,011 | |
| Securities on loan | + | 1,463,081 |
| Total investment income | 97,770,940 | |
| Expenses | ||
| Investment adviser and administrator fees | 2,767,668 | |
| Shareholder service fees | 884,424 | |
| Index fees | 409,169 | |
| Shareholder reports | 158,813 | |
| Portfolio accounting fees | 128,896 | |
| Registration fees | 99,867 | |
| Custodian fees | 87,889 | |
| Transfer agent fees | 85,192 | |
| Professional fees | 56,925 | |
| Proxy fees | 56,547 | |
| Independent trustees' fees | 35,174 | |
| Interest expense | 21 | |
| Other expenses | + | 67,356 |
| Total expenses | 4,837,941 | |
| Expense reduction by CSIM and its affiliates | – | 629,871 |
| Net expenses | – | 4,208,070 |
| Net investment income | 93,562,870 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on unaffiliated issuers | 11,187,497 | |
| Net realized losses on futures contracts | + | (187,022) |
| Net realized gains | 11,000,475 | |
| Net change in unrealized appreciation (depreciation) on affiliated issuer | 354,848 | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | 94,598,040 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (1,492,906) |
| Net change in unrealized appreciation (depreciation) | + | 93,459,982 |
| Net realized and unrealized gains | 104,460,457 | |
| Increase in net assets resulting from operations | $198,023,327 | |
50
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $93,562,870 | $83,961,729 | ||
| Net realized gains | 11,000,475 | 37,802,516 | ||
| Net change in unrealized appreciation (depreciation) | + | 93,459,982 | 56,507,932 | |
| Increase in net assets from operations | 198,023,327 | 178,272,177 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (84,938,610) | (68,099,121) | ||
| Distributions from net realized gains | + | (36,762,493) | (23,418,312) | |
| Total distributions | ($121,701,103) | ($91,517,433) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 23,096,907 | $842,649,529 | 24,753,855 | $920,238,549 | ||||
| Shares reinvested | 2,656,745 | 94,819,269 | 2,076,130 | 73,370,427 | ||||
| Shares redeemed | + | (17,507,062) | (640,225,552) | (17,609,468) | (652,741,483) | |||
| Net transactions in fund shares | 8,246,590 | $297,243,246 | 9,220,517 | $340,867,493 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 118,777,377 | $4,476,857,804 | 109,556,860 | $4,049,235,567 | ||||
| Total increase | + | 8,246,590 | 373,565,470 | 9,220,517 | 427,622,237 | |||
| End of period | 127,023,967 | $4,850,423,274 | 118,777,377 | $4,476,857,804 | ||||
| Net investment income not yet distributed | $74,346,707 | $69,554,519 | ||||||
51
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $18.49 | $19.42 | $19.92 | $16.32 | $16.02 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.53 1 | 0.54 1 | 0.64 | 0.49 | 0.57 | |
| Net realized and unrealized gains (losses) | (1.03) | (0.86) | (0.63) | 3.69 | 0.33 | |
| Total from investment operations | (0.50) | (0.32) | 0.01 | 4.18 | 0.90 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.47) | (0.61) | (0.51) | (0.58) | (0.60) | |
| Net asset value at end of period | $17.52 | $18.49 | $19.42 | $19.92 | $16.32 | |
| Total return | (2.64%) | (1.53%) | 0.09% | 26.40% | 6.07% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.19% | 0.19% | 0.19% | 0.19% | 0.19% | |
| Gross operating expenses | 0.23% | 0.23% | 0.23% | 0.23% | 0.23% | |
| Net investment income (loss) | 3.06% | 2.82% | 3.42% | 2.88% | 3.66% | |
| Portfolio turnover rate | 4% | 7% | 2% | 5% | 31% 2 | |
| Net assets, end of period (x 1,000,000) | $2,900 | $2,844 | $2,699 | $2,205 | $1,415 | |
1
Calculated based on the average shares outstanding during
the period.
2
Portfolio turnover rate increase was mainly the result of
trading activities in connection with the change in primary benchmark index effective December 20, 2011.
52
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
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Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
54
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $— | $1,568,919,611 | $— * | $1,568,919,611 | |
| Belgium | 21,789,045 | 14,997,669 | — | 36,786,714 | |
| Germany | 1,310,467 | 244,667,920 | — | 245,978,387 | |
| Hong Kong | 5,242,526 | 95,566,266 | — | 100,808,792 | |
| Ireland | 2,675,284 | 10,255,690 | — | 12,930,974 | |
| Israel | 4,550,090 | 14,788,361 | — | 19,338,451 | |
| Netherlands | 8,663,832 | 87,198,431 | — | 95,862,263 | |
| Switzerland | 1,427,113 | 247,056,450 | — | 248,483,563 | |
| United Kingdom | — | 511,318,252 | 24,172 | 511,342,424 | |
| Preferred Stock1 | — | 17,308,068 | — | 17,308,068 | |
| Rights | |||||
| Italy | — | — | — * | — | |
| Spain | 50,226 | — | — | 50,226 | |
| Sweden | — | — | 22,380 | 22,380 | |
| Other Investment Company1 | 3,953,494 | — | — | 3,953,494 | |
| Short-Term Investments1 | — | 26,753,989 | — | 26,753,989 | |
| Total | $49,662,077 | $2,838,830,707 | $46,552 | $2,888,539,336 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($428,653) | $— | $— | ($428,653) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
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Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The fund’s policy is to recognize transfers between Level
1, Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016. The transfers in the amount of $20,783,854 and $4,538,553 from Level 1 to Level
2 and from Level 2 to Level 1, respectively, were primarily due to the use of international fair valuation by the fund. The transfers from Level 3 to Level 1 or Level 2 are a result of the availability of current and reliable market-based data
provided by third-party pricing services or other valuation techniques which utilize significant observable inputs.
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Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $2,600,190,526) including securities on loan of $3,735,911 | $2,884,585,842 | |
| Collateral invested for securities on loan, at value (cost $3,953,494) | + | 3,953,494 |
| Total investments, at value (cost $2,604,144,020) | 2,888,539,336 | |
| Foreign currency, at value (cost $251,821) | 247,395 | |
| Deposit with broker for futures contracts | 1,890,000 | |
| Receivables: | ||
| Dividends | 6,899,548 | |
| Foreign tax reclaims | 4,824,950 | |
| Fund shares sold | 4,006,906 | |
| Income from securities on loan | 43,733 | |
| Variation margin on futures contracts | 18,000 | |
| Interest | 101 | |
| Prepaid expenses | + | 50,857 |
| Total assets | 2,906,520,826 | |
| Liabilities | ||
| Collateral held for securities on loan | 3,953,494 | |
| Payables: | ||
| Investments bought | 52,544 | |
| Investment adviser and administrator fees | 320,118 | |
| Shareholder service fees | 8,085 | |
| Fund shares redeemed | 1,367,389 | |
| Accrued expenses | + | 370,068 |
| Total liabilities | 6,071,698 | |
| Net Assets | ||
| Total assets | 2,906,520,826 | |
| Total liabilities | – | 6,071,698 |
| Net assets | $2,900,449,128 | |
| Net Assets by Source | ||
| Capital received from investors | 2,679,838,099 | |
| Net investment income not yet distributed | 63,872,618 | |
| Net realized capital losses | (126,778,707) | |
| Net unrealized capital appreciation | 283,517,118 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $2,900,449,128 | 165,507,912 | $17.52 | ||
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Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $8,865,815) | $91,787,563 | |
| Interest | 20,855 | |
| Securities on loan | + | 1,537,344 |
| Total investment income | 93,345,762 | |
| Expenses | ||
| Investment adviser and administrator fees | 4,306,862 | |
| Shareholder service fees | 537,050 | |
| Index fees | 523,325 | |
| Custodian fees | 497,200 | |
| Professional fees | 190,619* | |
| Shareholder reports | 152,860 | |
| Registration fees | 129,428 | |
| Portfolio accounting fees | 113,341 | |
| Transfer agent fees | 59,825 | |
| Proxy fees | 45,807 | |
| Independent trustees' fees | 24,966 | |
| Interest expense | 2,448 | |
| Other expenses | + | 76,181 |
| Total expenses | 6,659,912 | |
| Expense reduction by CSIM and its affiliates | – | 1,156,298 |
| Net expenses | – | 5,503,614 |
| Net investment income | 87,842,148 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments | (37,049,366) | |
| Net realized losses on futures contracts | (4,801,478) | |
| Net realized losses on foreign currency transactions | + | (102,012) |
| Net realized losses | (41,952,856) | |
| Net change in unrealized appreciation (depreciation) on investments | (118,190,338) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | (694,783) | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | (247,515) |
| Net change in unrealized appreciation (depreciation) | + | (119,132,636) |
| Net realized and unrealized losses | (161,085,492) | |
| Decrease in net assets resulting from operations | ($73,243,344) | |
| * | Includes professional fees of $131,932 associated with the filing of tax claims in the European Union deemed to be non-routine expenses of the fund. See financial notes 2 and 4 for additional information. |
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Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $87,842,148 | $77,423,909 | ||
| Net realized losses | (41,952,856) | (60,245,085) | ||
| Net change in unrealized appreciation (depreciation) | + | (119,132,636) | (78,449,200) | |
| Decrease in net assets from operations | (73,243,344) | (61,270,376) | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($77,100,360) | ($87,032,492) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 64,054,024 | $1,096,906,593 | 59,133,426 | $1,111,348,958 | ||||
| Shares reinvested | 3,569,073 | 61,423,757 | 4,061,536 | 72,539,032 | ||||
| Shares redeemed | + | (55,915,117) | (951,870,981) | (48,379,691) | (890,397,689) | |||
| Net transactions in fund shares | 11,707,980 | $206,459,369 | 14,815,271 | $293,490,301 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 153,799,932 | $2,844,333,463 | 138,984,661 | $2,699,146,030 | ||||
| Total increase | + | 11,707,980 | 56,115,665 | 14,815,271 | 145,187,433 | |||
| End of period | 165,507,912 | $2,900,449,128 | 153,799,932 | $2,844,333,463 | ||||
| Net investment income not yet distributed | $63,872,618 | $53,167,370 | ||||||
59
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Equity Index Funds
Financial Notes
1. Business Structure of the Funds:
Each of
the funds in this report is a series of Schwab Capital Trust, except Schwab 1000 Index Fund, which is a series of Schwab Investments. Both Schwab Capital Trust and Schwab Investments (the trusts) are no-load, open-end management investment
companies. Each trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended (the 1940 Act). The list below shows all the funds in the trusts as of the end of the period, including the
funds discussed in this report, which are highlighted:
| SCHWAB CAPITAL TRUST (ORGANIZED MAY 7, 1993) | |
| Schwab S&P 500 Index Fund | Schwab Target 2045 Fund |
| Schwab Small-Cap Index Fund | Schwab Target 2050 Fund |
| Schwab Total Stock Market Index Fund | Schwab Target 2055 Fund |
| Schwab International Index Fund | Schwab Target 2060 Fund |
| Schwab MarketTrack All Equity Portfolio™ | Schwab Fundamental US Large Company Index Fund |
| Schwab MarketTrack Growth Portfolio™ | Schwab Fundamental US Small Company Index Fund |
| Schwab MarketTrack Balanced Portfolio™ | Schwab Fundamental International Large Company Index Fund |
| Schwab MarketTrack Conservative Portfolio™ | Schwab Fundamental International Small Company Index Fund |
| Laudus Small-Cap MarketMasters Fund™ | Schwab Fundamental Emerging Markets Large Company Index Fund |
| Laudus International MarketMasters Fund™ | Schwab Fundamental Global Real Estate Index Fund |
| Schwab Balanced Fund™ | Schwab Target 2010 Index Fund |
| Schwab Core Equity Fund™ | Schwab Target 2015 Index Fund |
| Schwab Dividend Equity Fund™ | Schwab Target 2020 Index Fund |
| Schwab Large-Cap Growth Fund™ | Schwab Target 2025 Index Fund |
| Schwab Small-Cap Equity Fund™ | Schwab Target 2030 Index Fund |
| Schwab Hedged Equity Fund™ | Schwab Target 2035 Index Fund |
| Schwab Health Care Fund™ | Schwab Target 2040 Index Fund |
| Schwab ® International Core Equity Fund | Schwab Target 2045 Index Fund |
| Schwab Target 2010 Fund | Schwab Target 2050 Index Fund |
| Schwab Target 2015 Fund | Schwab Target 2055 Index Fund |
| Schwab Target 2020 Fund | Schwab Target 2060 Index Fund |
| Schwab Target 2025 Fund | Schwab ® Monthly Income Fund – Moderate Payout |
| Schwab Target 2030 Fund | Schwab ® Monthly Income Fund – Enhanced Payout |
| Schwab Target 2035 Fund | Schwab ® Monthly Income Fund – Maximum Payout |
| Schwab Target 2040 Fund | |
| SCHWAB INVESTMENTS (ORGANIZED OCTOBER 26, 1990) | |
| Schwab 1000 Index Fund | Schwab ® Treasury Inflation Protected Securities Index Fund |
| Schwab Short-Term Bond Market Fund™ | Schwab Tax-Free Bond Fund™ |
| Schwab Intermediate-Term Bond Fund™ | Schwab California Tax-Free Bond Fund™ |
| Schwab Total Bond Market Fund™ | Schwab Global Real Estate Fund™ |
| Schwab GNMA Fund™ | |
Each fund in this report offers one share class. Shares are
bought and sold (subject to a redemption fee, see financial note 9) at closing net asset value per share (NAV), which is the price for all outstanding shares of a fund. Each share has a par value of 1/1,000 of a cent, and the funds' Board of
Trustees (the Board) may authorize the issuance of as many shares as necessary.
Each fund maintains its own account for purposes of holding
assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the funds use in their preparation of financial statements. The funds follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The funds may invest in certain other investment companies
(underlying funds). For specific investments in underlying funds, please refer to the complete schedule of portfolio holdings on Form N-CSR(S) for this reporting period, which is filed with the U.S. Securities and Exchange Commission (SEC). For more
information about the underlying funds’ operations and policies, please refer to those funds’ semiannual and annual reports, which are filed with the SEC.
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Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Financial Notes (continued)
2. Significant Accounting
Policies (continued):
(a) Security
Valuation:
Under procedures approved by the Board,
the investment adviser has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect fair market
value. Among other things, these procedures allow the funds to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
The funds value the securities in their portfolios every
business day. The funds use the following policies to value various types of securities:
•
Securities traded on an exchange or over-the-counter: Traded securities are valued at the closing value for the day, or, on days when no closing value has been reported, at halfway between the most recent
bid and ask quotes. Securities that are primarily traded on foreign exchanges are valued at the official closing price or the last sales price on the exchange where the securities are principally traded with these values then translated into U.S.
dollars at the current exchange rate, unless these securities are fair valued as discussed below.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable.
For example, a fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is
closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of factors, including unobservable market inputs when
arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market multiples, book values, transactional back-testing,
disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a
fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the funds pursuant to the valuation procedures.
•
Foreign equity security fair valuation: The Board has adopted procedures to fair value foreign equity securities that are traded in markets that close prior to the funds valuing their holdings. By fair
valuing securities whose prices may have been affected by events occurring after the close of trading, each fund seeks to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is
designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of a fund’s portfolio holdings and the NAV of the fund’s shares, and seeks to help ensure that the prices at which the
fund’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders. When fair value pricing is used at the open or close of a reporting period, it may cause a temporary
divergence between the return of a fund and that of its comparative index or benchmark. The Board regularly reviews fair value determinations made by the funds pursuant to these procedures.
• Futures contracts: Futures contracts are valued at their settlement prices as of the close of their exchanges.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
•
Underlying funds: Mutual funds are valued at their respective NAVs. Exchange-traded funds (ETFs) traded on a recognized securities exchange are valued at the last reported sale price that day or the
official closing price, if applicable.
In accordance
with the authoritative guidance on fair value measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair
value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that
are significant to the valuation (Level 3 measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation.
If the funds determine that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with
orderly transactions, increased analysis and management judgment will be required to estimate fair value.
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Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
The three
levels of the fair value hierarchy are as follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities, ETFs and futures contracts. Investments in mutual funds are valued daily at their NAVs,
and investments in ETFs are valued daily at the last reported sale price or the official closing price, which are classified as Level 1 prices, without consideration to the classification level of the specific investments held by an underlying
fund.
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations. In addition, international securities whose markets close hours before the funds value their holdings may require fair valuations due to significant movement in
the U.S. markets occurring after the daily close of the foreign markets. The Board has approved a vendor that calculates fair valuations of international equity securities based on a number of factors that appear to correlate to the movements in the
U.S. markets.
•
Level 3—significant unobservable inputs (including the funds' own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3
prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the funds' results of operations.
The inputs or methodology used for valuing securities are
not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the funds' investments
as of October 31, 2016 are disclosed in the Condensed Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Futures Contracts: Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed upon price on a stipulated future date. A
fund must give the broker a deposit of cash and/or securities (initial margin) whenever it enters into a futures contract. The amount of the deposit may vary from one contract to another. Subsequent payments (variation margin) are made or received
by a fund depending on the daily fluctuations in the value of the futures contract and are accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized. Futures contracts are
traded publicly on exchanges, and their market value may change daily.
Securities Lending: Under
the trusts’ Securities Lending Program, a fund (lender) may make short-term loans of its securities to another party (borrower) to generate additional revenue for the fund. The borrower pledges collateral in the form of cash, securities issued
or fully guaranteed by the U.S. government or foreign governments, or letters of credit issued by a bank. Collateral at the individual loan level is required to be maintained on a daily marked-to-market basis in an amount at least equal to the
current value of the securities loaned. The lending agent provides a fund with indemnification against borrower default (the borrower fails to return the security on loan) reducing the risk of loss as a result of default. The cash collateral of
securities loaned is currently invested in money market portfolios operating under Rule 2a-7 of the 1940 Act. Each fund bears the risk of loss with respect to the investment of cash collateral. The terms of the securities lending agreements allow
the funds or the lending agent to terminate any loan at any given time and the securities must be returned within the earlier of the standard trade settlement period or the specified time period under the relevant securities lending agreement.
Securities lending income, as disclosed in each fund’s Statement of Operations, if applicable, represents the income earned from the investment of the cash collateral plus any fees paid by borrowers, less the fees paid to the lending agent and
broker rebates which are subject to adjustments pursuant to the securities lending agreement. On loans not collateralized by cash, a fee is received from the borrower, and is allocated between a fund and the lending agent.The aggregate market value
of securities loaned will not at any time exceed one-third of the total assets of a fund, including collateral received from the loan (at market value computed at the time of the loan). Total costs and expenses, including lending agent fees and
broker rebates, associated with securities lending activities under the trusts’ Securities Lending Program paid to the
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Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
unaffiliated
lending agents ranged from 10% to 15%, with subsequent breakpoints to a low of 7.5%, of gross lending revenue through November 30, 2015. After December 1, 2015, the total costs and expenses paid to the unaffiliated lending agents start at 10% of
gross lending revenue, with subsequent breakpoints to a low of 7.5%.
As of October 31, 2016, the funds had securities on loan,
all of which were classified as common stocks. The value of the securities on loan and the related collateral as of October 31, 2016, if any, are disclosed in each fund's Condensed Portfolio Holdings. The value of the securities on loan and the
investment of cash collateral are also disclosed in each fund's Statement of Assets and Liabilities.
Cash Management Transactions: The funds may subscribe to the Brown Brothers Harriman & Co. (BBH) Cash Management Service Sweep (CMS Sweep). The BBH CMS Sweep is an investment product that automatically sweeps the funds’ cash balances into
overnight offshore time deposits with either the BBH Grand Cayman branch or a branch of a pre-approved commercial bank. This fully automated program allows the funds to earn interest on cash balances. Excess cash invested with deposit institutions
domiciled outside of the U.S., as with any offshore deposit, may be subject to sovereign actions in the jurisdiction of the deposit institution including, but not limited to, freeze, seizure or diminution. The funds bear the risk associated with the
repayment of principal and payment of interest on such instruments by the institution with which the deposit is ultimately placed. Balances in the CMS Sweep are accounted for on a cost basis, which approximates market value.
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
Assets and liabilities denominated in foreign currencies
are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and
expense payments, are calculated using exchange rates in effect on the transaction date. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on
securities transactions and the differences between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange appreciation or
depreciation arises from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. These realized and unrealized foreign exchange gains or losses are
reported in foreign currency transactions or translations in the Statement of Operations. The funds do not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in
market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Gains realized by the funds on the sale of securities in
certain foreign countries may be subject to non-U.S. taxes. In those instances, the funds record a liability based on unrealized appreciation to provide for potential non-U.S. taxes payable upon the sale of these securities.
When a fund closes out a futures contract position, it
calculates the difference between the value of the position at the beginning and at the end of the contract, and records a realized gain or loss accordingly.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date. Any
distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
Income received from foreign sources may result in
withholding tax. Withholding taxes are accrued at the same time as the related income if the tax rate is fixed and known, unless a tax withheld is reclaimable from the local tax authorities in which case it is recorded as receivable. If the tax rate
is not known or estimable, such expense or reclaim receivable is recorded when the net proceeds are received.
In 2015, the Schwab International Index Fund filed claims
to recover taxes previously withheld in certain European Union countries on the basis that those countries had purportedly violated certain provisions in the Treaty on the Functioning of the European Union. These filings are subject to various
administrative and judicial proceedings within these countries, and all professional fees associated with these filings have been paid by CSIM. No other amounts for additional tax reclaims are reflected in the financial statements due to the
uncertainty surrounding the ultimate resolution of proceedings, the likelihood of receipt of these claims, and the potential timing of payment.
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Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
(e)
Expenses:
Expenses that are specific to a fund are
charged directly to the fund. Expenses that are common to all funds within a trust generally are allocated among the funds in proportion to their average daily net assets.
(f) Distributions to Shareholders:
The funds make distributions from net investment income and
net realized capital gains, if any, once a year.
(g)
Custody Credit:
Certain funds have an arrangement
with their custodian bank, State Street Bank and Trust Company (State Street), under which the funds may receive a credit for their uninvested cash balance to offset their custody fees and accounting fees. The credit amounts, if any, are disclosed
in the Statement of Operations as a reduction to a fund's operating expenses.
(h) Accounting Estimates:
The accounting policies described in this report conform to
GAAP. 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 and these differences may be material.
(i) Federal Income Taxes:
The funds intend to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the funds distribute substantially all of their net investment income and net realized 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.
(j) Foreign Taxes:
The funds may be subject to foreign taxes (a portion of
which may be reclaimable) on income, corporate events, foreign currency exchanges and capital gains on investments. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in foreign markets in
which the funds invest. These foreign taxes, if any, are paid by the funds and are disclosed in the Statement of Operations. Foreign taxes payable as of October 31, 2016, if any, are reflected in each fund's Statement of Assets and
Liabilities.
(k) Indemnification:
Under the funds’ organizational documents, the
officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide
general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss attributable to
these arrangements to be remote.
3. Risk Factors:
Investing in the funds may involve
certain risks, as discussed in the funds' prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Market Risk. Equity markets
rise and fall daily. As with any investment whose performance is tied to these markets, the value of the investment in a fund will fluctuate, which means that investors could lose money.
Equity Risk. The prices of
equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to
fall over short or extended periods of time.
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Financial Notes (continued)
3. Risk
Factors (continued):
Tracking Error Risk. As an index fund, each fund seeks to track the performance of its comparative index, although it may not be successful in doing so. The divergence between the performance of a fund and its index, positive or negative,
is called “tracking error.” Tracking error can be caused by many factors and it may be significant. For example, a fund may not invest in certain securities in the index, or match the securities’ weightings to the index, due to
regulatory, operational, custodial or liquidity constraints; corporate transactions; asset valuations; transaction costs and timing; tax considerations; and index rebalancing, which may result in tracking error.
Investment Style Risk. Each
fund invests in companies measured by its respective index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, a fund does not take steps to reduce market exposure or to lessen the effects of a declining
market. In addition, because of a fund’s expenses, a fund’s performance may be below that of the index.
A significant percentage of an index may be composed of
securities in a single industry or sector of the economy. If a fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.
Sampling Index Tracking Risk. If a fund uses a sampling method, the fund will not fully replicate its comparative index and may hold securities not included in the index. As a result, the fund will be subject to the risk that the investment
adviser’s investment strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. If a fund utilizes a sampling approach, it may not track the return of the index as well as it would if the
fund purchased all of the securities in the index.
Concentration Risk. To the
extent that a fund’s or an index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the performance of
those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset
class.
Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move
sharply, especially during market upturns and downturns. Small-cap companies themselves may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other
types of investments—bonds or large- or mid-cap stocks, for instance—a fund’s performance also will lag those investments.
Large- and Mid-Cap Risk.
Both large- and mid-cap stocks tend to go in and out of favor based on market and economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of large-cap companies because mid-cap companies tend to be more
susceptible to adverse business or economic events than larger more established companies. During a period when large- and mid-cap U.S. stocks fall behind other types of investments—bonds or small-cap stocks, for instance—a fund’s performance also will lag those investments.
Foreign Investment Risk. A
fund's investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory
and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting,
auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of a fund's investments, and could impair the fund's
ability to meet its investment objective or invest in accordance with its investment strategies. To the extent a fund’s investments in a single country or a limited number of countries represent a higher percentage of the fund’s assets,
the fund assumes the risk that economic, political and social conditions in those countries will have a significant impact on its investment performance and it may be subject to increased price volatility.
Derivatives Risk. A
fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Certain of these risks, such as liquidity risk and
market risk, are discussed elsewhere in this section. A fund’s use of derivatives is also subject to lack of availability risk, credit risk, leverage risk, valuation risk, correlation risk and tax risk. Lack of availability risk is the risk
that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its obligations. Leverage risk is the
risk that a small percentage of assets invested in derivatives can have a disproportionately large impact on a fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause a fund to realize higher amounts of short-term capital gain. A fund's use of derivatives could
reduce the fund's performance, increase its volatility, and could cause the fund to lose more than the initial amount invested.
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Financial Notes (continued)
3. Risk
Factors (continued):
Liquidity Risk. A fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or the fund may have to sell them at a loss.
Securities Lending Risk.
Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.
Please refer to the funds’ prospectus for a more
complete description of the principal risks of investing in the funds.
4. Affiliates and Affiliated Transactions:
Charles
Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund's investment adviser and administrator pursuant to an Investment Advisory and Administration
Agreement between CSIM and each trust.
For its advisory
and administrative services to the Schwab 1000 Index Fund, CSIM is entitled to receive an annual fee, payable monthly, based on a percentage of the fund’s average daily net assets as follows:
| % of Average Daily Net Assets | Schwab
1000 Index Fund |
| First $500 million | 0.30% |
| $500 million to $5 billion | 0.22% |
| $5 billion to $10 billion | 0.20% |
| Over $10 billion | 0.18% |
For the period ended October 31,
2016, the aggregate advisory fee paid to CSIM by the Schwab 1000 Index Fund was 0.22%, as a percentage of the fund's average daily net assets.
For its advisory and administrative services to the other funds
discussed in this report, CSIM is entitled to receive an annual fee, payable monthly, based on a percentage of each fund’s average daily net assets as follows:
| Schwab
S&P 500 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund |
| 0.06% | 0.15% | 0.06% | 0.15% |
The Board has adopted a Shareholder
Servicing Plan (the Plan) on behalf of the funds. The Plan enables each fund to bear expenses relating to the provision by financial intermediaries, including Charles Schwab & Co., Inc. (a broker-dealer affiliate of CSIM, Schwab) (together,
service providers), of certain account maintenance, customer liaison and shareholder services to the current shareholders of the funds.
Pursuant to the Plan, each fund’s shares are subject to
an annual shareholder servicing fee up to the amount set forth in the table below. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab, as distributor of the funds (or, in the
case of payments made to Schwab acting as a service provider, pursuant to Schwab’s written agreement with the funds), and a fund will pay no more than the amount set forth in the table below of the average annual daily net asset value of the
fund shares owned by shareholders holding shares through such service provider. Payments under the Plan are made as described above without regard to whether the fee is more or less than the service provider’s actual cost of providing the
services, and if more, such excess may be retained as profit by the service provider.
| Schwab
S&P 500 Index Fund |
Schwab
1000 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund |
| 0.02% | 0.10% | 0.02% | 0.02% | 0.02% |
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Although these agreements
specify certain fees for these services, CSIM and its affiliates have made an additional agreement with the funds, for so long as CSIM serves as the investment adviser to the funds, which may only be amended or terminated with the approval of the
Board, to limit the total annual fund operating expenses charged, excluding interest, taxes and certain non-routine expenses (expense limitation). The expense limitation as a percentage of average daily net assets is as follows:
| Schwab
S&P 500 Index Fund |
Schwab
1000 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund |
| 0.09% | 0.29% | 0.17% | 0.09% | 0.19% |
The funds may engage in certain
transactions involving affiliates. For instance, a fund may own shares of The Charles Schwab Corporation if that company is included in its index. The table below shows funds with investment activities involving The Charles Schwab Corporation shares
during the report period:
| Fund | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Dividends
Received 11/01/15 to 10/31/16 |
| Schwab S&P 500 Index Fund | 1,402,481 | 77,900 | — | 1,480,381 | $46,928,078 | $— | $372,825 |
| Schwab 1000 Index Fund | 375,265 | — | — | 375,265 | $11,895,900 | $— | $97,569 |
| Schwab Total Stock Market Index Fund | 240,126 | 10,000 | — | 250,126 | $7,928,994 | $— | $63,833 |
Certain Schwab Funds may own shares
of other Schwab funds. The table below reflects the percentages of shares of each fund in this report that are owned by other Schwab Funds as of October 31, 2016, as applicable:
| Underlying Funds | |||||
| Schwab
S&P 500 Index Fund |
Schwab
1000 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund | |
| Schwab MarketTrack All Equity Portfolio | 0.8% | —% | 3.6% | —% | 2.6% |
| Schwab MarketTrack Growth Portfolio | 0.9% | —% | 3.7% | —% | 2.3% |
| Schwab MarketTrack Balanced Portfolio | 0.5% | —% | 2.0% | —% | 1.2% |
| Schwab MarketTrack Conservative Portfolio | 0.1% | —% | 0.6% | —% | 0.4% |
| Schwab MarketTrack Growth Portfolio II | 0.0%* | 0.0%* | 0.2% | —% | 0.2% |
| Schwab Target 2010 Fund | 0.0%* | —% | —% | —% | —% |
| Schwab Target 2015 Fund | 0.0%* | —% | —% | —% | —% |
| Schwab Target 2020 Fund | 0.2% | —% | —% | —% | —% |
| Schwab Target 2025 Fund | 0.2% | —% | —% | —% | —% |
| Schwab Target 2030 Fund | 0.4% | —% | —% | —% | —% |
| Schwab Target 2035 Fund | 0.2% | —% | —% | —% | —% |
| Schwab Target 2040 Fund | 0.4% | —% | —% | —% | —% |
| Schwab Target 2045 Fund | 0.0%* | —% | —% | —% | —% |
| Schwab Target 2050 Fund | 0.0%* | —% | —% | —% | —% |
| Schwab Target 2055 Fund | 0.0%* | —% | —% | —% | —% |
| Schwab Target 2060 Fund | 0.0%* | —% | —% | —% | —% |
| * | Less than 0.05% |
Certain other related parties may own
shares of the funds in this report. As of October 31, 2016, the shares owned by Schwab Charitable Giving Trust (an affiliate of Schwab) as a percentage of the total shares of the Schwab Small-Cap Index Fund, Schwab Total Stock Market Index Fund and
Schwab International Index Fund were 3.3%, 7.8% and 3.8%, respectively.
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Pursuant to
an exemptive order issued by the SEC, the funds may enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency
purposes and the interest rate to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all
participating funds/portfolios. The interfund lending facility is subject to the oversight and periodic review by the Board. The funds had no interfund borrowing or lending activity during the period.
The funds may engage in direct transactions with certain
other Schwab funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs. This practice is limited to funds that share the
same investment adviser, trustees and/or officers. For the period ended October 31, 2016, each fund’s total aggregate security transactions with other Schwab funds as well as any realized gains (losses) were as follows:
| Total Aggregate Transactions | Realized Gains (Losses) | |
| Schwab S&P 500 Index Fund | $158,474,212 | $1,443,088 |
| Schwab 1000 Index Fund | 41,933,578 | 1,736,974 |
| Schwab Small-Cap Index Fund | 31,392,532 | (2,042,975) |
| Schwab Total Stock Market Index Fund | 30,034,077 | (6,888,006) |
| Schwab International Index Fund | — | — |
The professional fees related to
foreign withholding tax claims discussed in financial note 2 were non-routine expenses. However, the investment adviser agreed to pay these professional fees for this reporting period, subject to reimbursement by the Schwab International Index Fund
to the extent the fund is able to successfully recover taxes withheld in the future.
5. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trusts were in compliance with these limitations
throughout the report period. The trusts did not pay any of these interested persons for their services as trustees, but they did pay non-interested persons (independent trustees), as noted on each fund’s Statement of Operations. For
information regarding the trustees, please refer to the Trustees and Officers table at the end of this report.
6. Borrowing from Banks:
During the period, the funds
were participants with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit Facility, in
addition to the interest charged on any borrowings by a fund, each fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, the Credit Facility was amended to run for
a new 364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
The funds also have access to custodian overdraft facilities. A
fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
7. Derivatives:
Certain funds entered into equity
index futures contracts during the report period. The funds invested in futures contracts to equitize available cash. The fair value and variation margin for futures contracts held at October 31, 2016 are presented on the Condensed Portfolio
Holdings and Statement of Assets and Liabilities, respectively. The net realized and change in unrealized gains (losses) on futures contracts are presented on the Statement of Operations. Refer to financial note 2(b) for the funds' accounting
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Financial Notes (continued)
7.
Derivatives (continued):
policies with respect
to futures contracts and financial note 3 for disclosures concerning the risks of investing in futures contracts. During the period ended October 31, 2016, the month-end average contract values of futures contracts held by the funds and the
month-end average number of contracts held were as follows:
| Contract Values | Number of Contracts | |
| Schwab S&P 500 Index Fund | $170,403,094 | 1,656 |
| Schwab 1000 Index Fund | 46,898,617 | 454 |
| Schwab Small-Cap Index Fund | 18,160,921 | 157 |
| Schwab Total Stock Market Index Fund | 38,980,373 | 374 |
| Schwab International Index Fund | 22,156,352 | 266 |
8. Purchases and Sales/Maturities of Investment Securities:
For the period ended October 31, 2016, purchases and
sales/maturities of securities (excluding short-term obligations) were as follows:
| Purchases of Securities | Sales/Maturities of Securities | |
| Schwab S&P 500 Index Fund | $1,324,088,097 | $473,170,100 |
| Schwab 1000 Index Fund | 221,463,322 | 351,710,499 |
| Schwab Small-Cap Index Fund | 472,460,341 | 427,087,834 |
| Schwab Total Stock Market Index Fund | 413,677,694 | 55,590,041 |
| Schwab International Index Fund | 345,079,557 | 123,665,667 |
9. Redemption Fee:
The funds charge a 2.00%
redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods
were as follows:
| Current
Period (11/1/15-10/31/16) |
Prior
Period (11/1/14-10/31/15) | |
| Schwab S&P 500 Index Fund | $369,401 | $266,905 |
| Schwab 1000 Index Fund | 27,980 | 44,069 |
| Schwab Small-Cap Index Fund | 12,505 | 34,586 |
| Schwab Total Stock Market Index Fund | 54,925 | 50,564 |
| Schwab International Index Fund | 46,804 | 27,617 |
10. Federal Income Taxes:
As of October 31, 2016, the
components of distributable earnings on a tax-basis were as follows:
| Schwab
S&P 500 Index Fund |
Schwab
1000 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund | |||||
| Undistributed ordinary income | $377,944,709 | $93,428,871 | $30,361,938 | $75,035,075 | $84,698,256 | ||||
| Undistributed long-term capital gains | 122,940,295 | 104,585,704 | 77,928,741 | 23,619,453 | — | ||||
| Unrealized appreciation on investments | 10,049,075,204 | 4,517,631,042 | 808,218,794 | 1,826,837,441 | 530,418,159 | ||||
| Unrealized depreciation on investments | (563,136,035) | (21,767,038) | (245,459,896) | (127,275,257) | (285,295,837) | ||||
| Other unrealized appreciation (depreciation) | — | — | — | — | (449,545) | ||||
| Net unrealized appreciation (depreciation) | $9,485,939,169 | $4,495,864,004 | $562,758,898 | $1,699,562,184 | $244,672,777 |
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Financial Notes (continued)
10. Federal Income
Taxes (continued):
The primary differences between book-basis
and tax-basis unrealized appreciation or unrealized depreciation of investments are the tax deferral of losses on wash sales, Passive Foreign Investment Companies (PFIC), partnership investments and non-taxable dividends.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of October 31, 2016, the funds had capital loss carryforwards available to offset future net capital gains before the expiration dates as follows:
| Expiration Date | Schwab
S&P 500 Index Fund |
Schwab
1000 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund | ||||
| October 31, 2017 | $— | $— | $— | $— | $13,252,761 | ||||
| No expiration* | — | — | — | — | 95,507,243 | ||||
| Total | $— | $— | $— | $— | $108,760,004 |
| * | As a result of the passage of the Regulated Investment Company Modernization Act of 2010, capital losses incurred after December 31, 2010 may now be carried forward indefinitely, but must retain the character of the original loss. |
For the year ended October 31, 2016, the funds had no capital
loss carryforwards utilized and had no capital losses expired.
The tax-basis components of distributions paid during the
current and prior fiscal years were as follows:
| Schwab
S&P 500 Index Fund |
Schwab
1000 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund | |
| Current period distributions | |||||
| Ordinary income | $445,863,757 | $116,634,011 | $46,401,819 | $85,807,300 | $77,100,360 |
| Long-term capital gains | 213,585,458 | 264,435,992 | 123,568,288 | 35,893,803 | — |
| Prior period distributions | |||||
| Ordinary income | $369,772,138 | $110,332,491 | $41,501,610 | $75,210,034 | $87,032,492 |
| Long-term capital gains | — | 171,945,895 | 130,862,912 | 16,307,399 | — |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements.
Permanent book and tax basis differences may result in
reclassifications between components of net assets as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2016, the funds made the following reclassifications:
| Schwab
S&P 500 Index Fund |
Schwab
1000 Index Fund |
Schwab
Small-Cap Index Fund |
Schwab
Total Stock Market Index Fund |
Schwab
International Index Fund | |
| Capital shares | $— | $— | $— | $— | $— |
| Undistributed net investment income | (5,248,019) | (1,735,466) | (972,228) | (3,832,072) | (36,540) |
| Net realized capital gains (losses) | 5,248,019 | 1,735,466 | 972,228 | 3,832,072 | 36,540 |
As of October 31, 2016, management
has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) as applicable to the funds, and has determined that no provision for income tax is
required in the funds’ financial statements. The funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended October 31, 2016, the funds did
not incur any interest or penalties.
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Financial Notes (continued)
11. Recent
Regulatory Development:
In October 2016, the SEC adopted
new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced
disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the
amendments to Regulation S-X will have on the funds' financial statements and related disclosures.
12. Subsequent Events:
Management has determined there
are no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.
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Schwab Equity Index Funds
Report of
Independent Registered Public Accounting Firm
To the Boards of Trustees and Shareholders of:
Schwab S&P 500 Index Fund
Schwab 1000 Index Fund
Schwab Small-Cap Index Fund
Schwab Total Stock Market Index Fund
Schwab International Index Fund
Schwab S&P 500 Index Fund
Schwab 1000 Index Fund
Schwab Small-Cap Index Fund
Schwab Total Stock Market Index Fund
Schwab International Index Fund
In our opinion, the accompanying statements of assets and
liabilities, including the condensed 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 1000 Index Fund
(one of the funds constituting Schwab Investments), Schwab S&P 500 Index Fund, Schwab Small-Cap Index Fund, Schwab Total Stock Market Index Fund and Schwab International Index Fund (four of the funds constituting Schwab Capital Trust) (hereafter
collectively referred to as the “Funds”) at October 31, 2016, and 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2016
San Francisco, California
December 16, 2016
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Schwab Equity Index Funds
Other Federal Tax
Information (unaudited)
Schwab International Index Fund may elect to pass on the
benefits of the foreign tax credit of $7,396,248 to its shareholders for the year ended October 31, 2016. The respective foreign source income on the fund is $100,653,376.
For corporate shareholders, the following percentage of the
funds' dividend distributions paid during the fiscal year ended October 31, 2016, qualify for the corporate dividends received deduction:
| Percentage | |
| Schwab S&P 500 Index Fund | 93.54 |
| Schwab 1000 Index Fund | 100.00 |
| Schwab Small-Cap Index Fund | 52.63 |
| Schwab Total Stock Market Index Fund | 89.04 |
| Schwab International Index Fund | — |
For the fiscal year ended October
31, 2016, the funds designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(11) of the Internal Revenue Code. Shareholders will be notified in January 2017 via IRS
form 1099 of the amounts for use in preparing their 2016 income tax return.
| Schwab S&P 500 Index Fund | $444,667,596 |
| Schwab 1000 Index Fund | 116,634,011 |
| Schwab Small-Cap Index Fund | 25,340,018 |
| Schwab Total Stock Market Index Fund | 82,181,627 |
| Schwab International Index Fund | 75,370,359 |
Under Section 852 (b)(3)(C) of the
Internal Revenue Code, certain funds hereby designate the following amounts as long-term capital gain dividends for the fiscal year ended October 31, 2016:
| Schwab S&P 500 Index Fund | $213,585,458 |
| Schwab 1000 Index Fund | 264,435,992 |
| Schwab Small-Cap Index Fund | 123,568,288 |
| Schwab Total Stock Market Index Fund | 35,893,803 |
| Schwab International Index Fund | — |
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Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Investment Advisory
Agreement Approval
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Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
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Schwab Equity Index Funds | Annual Report
Schwab Equity Index Funds
Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Capital Trust and Schwab Investments, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity
Portfolios, Schwab Strategic Trust and Laudus Trust. The Fund Complex includes 108 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the funds’ Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 108 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 108 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 108 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 108 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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Schwab Equity Index Funds
| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 108 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 108 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 108 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 108 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 108 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
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Schwab Equity Index Funds
| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); and Director, Schwab Holdings, Inc. (May 2008 – present). | 108 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 108 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer, Schwab Holdings, Inc. (May 2007 – present). | 108 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
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Schwab Equity Index Funds
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
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Schwab Equity Index Funds
Glossary
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Schwab Equity Index Funds
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Notes
Schwab Equity Index Funds
Our straightforward
approach sets us apart.
As one of the nation’s largest asset managers, our
goal is to provide investors with a diverse selection of foundational products that aim to deliver consistent performance at a competitive cost. The list below shows all currently available Schwab Funds.
An investor should consider a fund’s investment
objectives, risks, charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-877-824-5615 for a prospectus and brochure for any Schwab Fund.
Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Schwab Funds’ website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s
website at www.sec.gov, or by contacting Schwab Funds at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s
website at www.sec.gov.
| 1 | You could lose money by investing in a money market fund. All Schwab Money Funds with the exception of Schwab Variable Share Price Money Fund seek to preserve the value of your investment at $1.00 per share, but cannot guarantee they will do so. Effective October 14, 2016, all Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab Retirement Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury Obligations Money Fund and Schwab Government Money Market Portfolio may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The money market fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. |
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MFR13810-19
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Table of Contents
Annual
Report | October 31, 2016
Schwab Fundamental Index* Funds
Schwab Fundamental
US Large Company Index Fund
US Large Company Index Fund
Schwab Fundamental
US Small Company Index Fund
US Small Company Index Fund
Schwab
Fundamental
International Large Company
Index Fund
International Large Company
Index Fund
Schwab Fundamental
International Small Company
Index Fund
International Small Company
Index Fund
Schwab
Fundamental
Emerging Markets Large
Company Index Fund
Emerging Markets Large
Company Index Fund
| * | SCHWAB is a registered
trademark of Charles Schwab & Co., Inc. FUNDAMENTAL INDEX is a registered trademark of Research Affiliates LLC. |
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Schwab Fundamental Index Funds
In
This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab)
The Sector/Industry classifications in this report use the
Global Industry Classification Standard (GICS), which was developed by, and is the exclusive property of MSCI and Standard & Poor’s (S&P). GICS is a service mark of MSCI and S& P and has been licensed for use by Schwab. The
Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com.
All total returns on this page assume dividends
and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized.
Performance data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Fund expenses may have been partially absorbed by
CSIM and its affiliates. Without these reductions, a fund’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
Index ownership — each of the names identifying
the Russell RAFI Index Series is a joint trademark of Frank Russell Company (Russell) and Research Affiliates LLC (RA) and is used by the funds under license. “Research Affiliates,” “Fundamental Index” and “RAFI”
are trademarks of RA. Subject to RA’s intellectual property rights in certain content, Russell is the owner of all copyrights related to the Russell Fundamental Index Series. Russell is the owner of the trademarks and copyrights related to the
Russell Indexes. The Schwab Fundamental Index Funds are not sponsored, endorsed, sold or promoted by Russell or RA, and Russell and RA do not make any representation regarding the advisability of investing in shares of the funds. Effective December
1, 2016, the name of the Russell Fundamental Index Series and all associated indexes were changed from “Russell Fundamental” to “Russell RAFI” by the index provider. No other changes have occurred.
Source for category information: Morningstar, Inc.
The Morningstar Category return represents all active and index mutual funds within the category as of the report date.
| 1 | The fund’s performance relative to the index may be affected by fair-value pricing and timing differences in foreign exchange calculations. See financial note 2 for more information. |
| 2 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
| 3 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 4 | Please see the funds’ prospectus for further detail and eligibility requirements. |
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Asset
Class Performance Comparison % returns during the 12 months ended 10/31/2016
Index figures
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Past performance is not an indication of future
results.
For index definitions, please see the
Glossary.
Data source: Index provider websites
and CSIM.
Nothing in this report represents a
recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
1 The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no
deductions for expenses or other taxes.
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Schwab Fundamental Index Funds | Annual
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Schwab Fundamental Index Funds
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
The Investment
Environment
Over the 12-month reporting period ended October 31, 2016,
equity markets generated mixed returns, with U.S. and emerging market stocks performing well and international stocks in negative territory. The Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade in December
2015, but held rates steady at each subsequent meeting. Concerns surrounding global growth and heightened market volatility weighed on stocks in the first part of the reporting period, especially after the United Kingdom’s unexpected decision
in June to leave the European Union (also known as Brexit). As the reporting period continued, however, some signs of stability emerged, including improving economic data, and many equity markets rebounded. Toward the end of the reporting period,
the U.S. presidential election fueled heightened market volatility and uncertainty. For the reporting period, the S&P 500® Index, a bellwether
for the overall U.S. stock market, returned 4.51%, while the Russell 2000® Index, a U.S. small-cap company measure, returned 4.11% for the reporting
period. Internationally, the MSCI EAFE Index (Net), a broad measure of international developed equity performance, returned -3.23% for the same time period. Emerging markets recovered significantly from a disappointing 2015, with the MSCI Emerging
Markets Index (Net) returning 9.27% for the 12-month reporting period.
U.S. economic data generally improved over the reporting
period, despite several weak measurements during the 12 months. Corporate earnings were better-than-expected for the second quarter of 2016 but contracted in the third quarter, while U.S. nonfarm payrolls came in near expectations outside of a sharp
drop in May. Consumer confidence measurements were generally below expectations for most of the reporting period, but rebounded in September to reach the highest level since the 2008 recession. However, consumer confidence fell slightly in October
as increasing uncertainty surrounding the U.S. presidential election and the stability of the labor market resulted in more cautious consumers. In addition, U.S. economic growth trended upwards after dipping slightly in the first quarter of 2016,
with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Short-term interest rate policy in the U.S. remained a source
of uncertainty and volatility during the reporting period. The Fed raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, with the possibility of four additional increases in 2016. Inconsistent U.S. economic data, weak
global growth, and persistently low inflation, however, caused the Fed to leave rates unchanged at each meeting during the reporting period. At its meeting in September, the Fed noted that although the case for a rate increase had strengthened, it
had “…decided, for the time being, to wait for further evidence of continued progress toward its objectives.” Continued low interest rates in the U.S. resulted in cheaper borrowing costs, supporting a rebound in the performance of
emerging markets and U.S. markets from the prior year. In addition, many emerging market economies were able to absorb the sharp drop in commodities prices and shore up their monetary reserves over the past year, lessening investor fears about the
potentially negative impact of a U.S. interest rate increase. As of the end of the reporting period, markets continued to expect one rate hike by the end of 2016.
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Schwab Fundamental Index Funds | Annual
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Schwab Fundamental Index Funds
The Investment
Environment (continued)
During the 12-month reporting period, many central banks
outside the U.S. increased accommodative policy measures to help combat stalling economic growth. Both the Bank of Japan and the European Central Bank increased bond purchases and introduced negative interest rates, while the People’s Bank of
China (PBOC) expanded its lending facilities. Following the June Brexit vote, the Bank of England (BoE) announced its plan to take additional measures if necessary while markets adjusted. Less than two months later in early August, the BoE cut its
benchmark rate and resumed quantitative easing, and also increased lending to consumers and companies. The Central Bank of Russia also took steps aimed at stabilizing the economy and inflation, decreasing its key interest rate in mid-September.
While some of these measures initially appeared to be less effective than the central banks had hoped, the positive performance of many international equities in the second half of the reporting period suggested that economic conditions outside the
U.S. were beginning to improve.
Concerns around unsteady
global growth were present throughout the first part of the 12-month reporting period, and then lessened as the reporting period continued. In China, fears about the slowing economy declined as stimulative moves by the PBOC helped to reverse
downward trends in several economic gauges. The results of the June Brexit vote initially shook markets globally, sending oil and the British pound downward and markedly increasing uncertainty and volatility. However, because Brexit was not driven
by liquidity or changes in underlying fundamentals, most stock markets rebounded and stabilized in the days and weeks that followed.
In January 2016, the price of oil dropped significantly and
remained volatile in the following months, weighing on many global stock markets. Oil prices stabilized at the end of the reporting period, however, and a relatively narrow trading range supported an overall rebound in the performance of many energy
companies and oil-producing countries, including many emerging markets. A proposed agreement by the Organization of the Petroleum Exporting Countries to limit output also initially helped boost oil prices after the agreement was announced, though
the longer-term effects of an agreement were uncertain and skepticism surrounding the deal tempered optimism among many investors and banks.
Index figures assume dividends and distributions were
reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Past performance is not an
indication of future results.
For index definitions,
please see the Glossary.
Nothing in this report represents
a recommendation of a security by the investment adviser.
Management views may have changed since the report date.
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Fund Management
 |
Agnes Hong, CFA, Vice President and Senior Portfolio Manager, is responsible for the day-to-day co-management of the funds. Prior to joining CSIM in 2009, Ms. Hong spent five years as a portfolio manager at Barclays Global Investors (subsequently acquired by BlackRock), where she managed institutional index funds and quantitative active funds. Prior to that, Ms. Hong worked in management consulting and product management, servicing global financial services clients. |
 |
Ferian Juwono, CFA, Managing Director and Senior Portfolio Manager, is responsible for the day-to-day co-management of the funds. Prior to joining CSIM in 2010, Mr. Juwono worked at BlackRock (formerly Barclays Global Investors), where he spent more than three years as a portfolio manager, managing equity index funds for institutional clients, and nearly two years as a senior business analyst. Prior to that, Mr. Juwono worked for more than four years as a senior financial analyst with Union Bank of California. |
 |
Jane Qin, Portfolio Manager, is responsible for the day-to-day co-management of the Schwab Fundamental US Large Company Index Fund, Schwab Fundamental US Small Company Index Fund, Schwab Fundamental International Large Company Index Fund, and Schwab Fundamental International Small Company Index Fund. Prior to joining CSIM in December 2012, Ms. Qin spent more than four years at The Bank of New York Mellon Corporation. During that time, Ms. Qin spent more than two years as an associate equity portfolio manager and nearly two years as a performance analyst. She also worked at Wells Fargo Funds Management as a mutual fund analyst and at CIGNA Reinsurance in Risk Management group as a risk analyst. |
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Schwab Fundamental Index Funds | Annual
Report
Schwab Fundamental US Large Company Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Fundamental US Large Company Index Fund (the fund) seeks investment results that correspond generally (before fees and expenses) to the total return of the Russell RAFI U.S. Large Company Index1 (the index), which measures the performance of the large company size segment by fundamental overall company scores which are created using as the universe
the companies in the Russell 3000® Index. To pursue its investment objective, the fund uses a replication investment approach and generally gives
the same weight to a given stock as does the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights. U.S. stocks
performed well over the reporting period, with both large-cap and small-cap stocks posting moderate gains. The Federal Reserve raised the federal funds rate in December 2015, but held steady for the remainder of the reporting period, while many U.S.
economic data points showed signs of stability and improvement, including in the labor and housing markets. Market volatility declined somewhat after concerns lessened surrounding global growth and the United Kingdom’s decision to leave the
European Union (also known as Brexit), though picked up toward the end of the reporting period as uncertainty increased surrounding the U.S. presidential election.
Performance. The
fund generally tracked the index for the reporting period. The fund returned 5.61% for the 12-month reporting period ended October 31, 2016, while the index returned 5.94%. Differences between the return of the fund and the return of the index may
be attributable to, among other things, the operational and transactional costs incurred by the fund and not the index.
Contributors and Detractors.
From a sector standpoint, the Consumer Discretionary sector was the only detractor from the returns of both the index and the fund. The Consumer Discretionary sector represented an average weight of approximately 12% of the fund’s investments
and returned approximately -2% for the reporting period. Within this sector, the Walt Disney Company was one of the largest detractors, with the fund’s holdings of this company returning approximately -17%.
Over the reporting period, the Financials sector was the
smallest contributor to overall fund performance. Financials stocks represented an average weight of approximately 12% of the fund’s investments and returned less than 3% for the reporting period.
The Information Technology sector, which includes companies
involved in Internet and software services, contributed the most to the returns of the index and the fund. Representing an average weight of approximately 14% of the fund’s investments, the Information Technology sector returned approximately
13% for the reporting period. One example from this sector is Microsoft Corporation. Due in part to the increased popularity of cloud computing, the fund’s holdings of Microsoft Corporation returned approximately 17% for the reporting
period.
The fund’s holdings in the Consumer
Staples sector also meaningfully contributed to overall fund performance, representing an average weight of approximately 12% of the fund’s investments and returning approximately 9%.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
8
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental US Large Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
| 1 | This list is not a recommendation of any security by the investment adviser. |
9
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental US Large Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (April 2, 2007
– October 31, 2016)1,2,3
Average Annual Total Returns1,2,4
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Fundamental US Large Company Index Fund (4/2/07) | 5.61% | 13.14% | 6.88% |
| Russell RAFI U.S. Large Company Index3 | 5.94% | 13.66% | N/A |
| Fundamental U.S. Large Company Spliced Index | 5.94% | 13.57% | 7.12% |
| Fund Category: Morningstar Large Value | 3.72% | 11.34% | 4.26% |
| Fund Expense Ratios5: Net 0.35%; Gross 0.39% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Index ownership—"Russell RAFI Developed ex-U.S. Large
Company Index" is a joint trademark of Frank Russell Company (Russell) and Research Affiliates LLC (RA) and is used by the fund under license. "Research Affiliates," "Fundamental Index" and "RAFI" are trademarks of RA. Subject to RA’s
intellectual property rights in certain content, Russell is the owner of all copyrights related to the Russell RAFI Index Series. Russell is the owner of the trademarks and copyrights related to the Russell Indexes. Schwab Fundamental International
Large Company Index Fund is not sponsored, endorsed, sold or promoted by Russell or RA, and Russell and RA do not make any representation regarding the advisability of investing in shares of the fund. Effective December 1, 2016, the name of the
index was changed by the index provider. No other changes have occurred.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 27, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund prior to October 27, 2009 is that of the fund’s former Institutional Shares. |
| 3 | The inception date of the Russell RAFI U.S. Large Company Index is February 24, 2011. The fund began tracking the index on October 19, 2012. |
| 4 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 5 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
10
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental US Small Company Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Fundamental US Small Company Index Fund (the fund) seeks investment results that correspond generally (before fees and expenses) to the total return of the Russell RAFI U.S. Small Company Index1 (the index), which measures the performance of the small company size segment by fundamental overall company scores which are created using as the universe
the companies in the Russell 3000® Index. To pursue its investment objective, the fund uses a replication investment approach and generally gives
the same weight to a given stock as does the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market Highlights.
U.S. stocks performed well over the reporting period, with both large-cap and small-cap stocks posting moderate gains. The Federal Reserve raised the federal funds rate in December 2015, but held steady for the remainder of the reporting period,
while many U.S. economic data points showed signs of stability and improvement, including in the labor and housing markets. Market volatility declined somewhat after concerns lessened surrounding global growth and the United Kingdom’s decision
to leave the European Union (also known as Brexit), though picked up toward the end of the reporting period as uncertainty increased surrounding the U.S. presidential election.
Performance. The
fund generally tracked the index for the reporting period. The fund returned 5.37% for the 12-month reporting period ended October 31, 2016, while the index returned 5.63%. Differences between the return of the fund and the return of the index may
be attributable to, among other things, the operational and transactional costs incurred by the fund and not the index.
Contributors and
Detractors. Energy stocks were the largest detractors from the returns of both the index and the fund, despite the relative stabilization of oil and commodity prices toward the end of the reporting
period. The Energy sector, which includes companies engaged in exploration, production, refining, marketing, storage and transportation of oil and gas, represented an average weight of approximately 5% of the fund’s investments and returned
approximately -18% for the reporting period. One example from this sector is Western Refining, Inc. The fund’s holdings of Western Refining, Inc. returned approximately -55%.
The Consumer Discretionary sector was another detractor from
overall fund performance, representing an average weight of approximately 16% of the fund’s investments and returning approximately -6% for the reporting period.
The fund’s holdings in the Industrials sector were the
largest contributors to the return of the fund. Industrials stocks represented an average weight of approximately 20% of the fund’s investments and returned approximately 11%, representing the overall positive performance of companies involved
in capital goods, commercial and professional services, as well as transportation. Within this sector, the fund’s Class A holdings of Quad/Graphics, Inc. are one example, returning approximately 99%.
The Information Technology sector was another contributor to
overall fund performance. Information Technology stocks represented an average weight of approximately 13% of the fund’s investments and returned approximately 14% for the reporting period.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
11
Schwab Fundamental Index Funds | Annual
Report
Schwab Fundamental US Small Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Equity Holdings % of Net Assets1
Management views and portfolio holdings may have changed
since the report date.
Source of Sector Classification:
S& P and MSCI.
Small-company stocks are subject to
greater volatility than many other asset classes.
| 1 | This list is not a recommendation of any security by the investment adviser. |
12
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental US Small Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (April 2, 2007
– October 31, 2016)1,2,3
Average Annual Total Returns1,2,4
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Fundamental US Small Company Index Fund (4/2/07) | 5.37% | 12.60% | 7.40% |
| Russell RAFI U.S. Small Company Index3 | 5.63% | 13.13% | N/A |
| Fundamental U.S. Small Company Spliced Index | 5.63% | 12.91% | 7.91% |
| Fund Category: Morningstar Small Blend | 2.91% | 10.53% | 5.05% |
| Fund Expense Ratios5: Net 0.35%; Gross 0.43% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
Index ownership—"Russell RAFI U.S. Small Company Index" is
a joint trademark of Frank Russell Company (Russell) and Research Affiliates LLC (RA) and is used by the fund under license. "Research Affiliates," "Fundamental Index" and "RAFI" are trademarks of RA. Subject to RA’s intellectual property
rights in certain content, Russell is the owner of all copyrights related to the Russell RAFI Index Series. Russell is the owner of the trademarks and copyrights related to the Russell Indexes. Schwab Fundamental US Small Company Index Fund is not
sponsored, endorsed, sold or promoted by Russell or RA, and Russell and RA do not make any representation regarding the advisability of investing in shares of the fund. Effective December 1, 2016, the name of the index was changed by the index
provider. No other changes have occurred.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 27, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund prior to October 27, 2009 is that of the fund’s former Institutional Shares. |
| 3 | The inception date of the Russell RAFI U.S. Small Company Index is February 24, 2011. The fund began tracking the index on October 19, 2012. |
| 4 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 5 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
13
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental International Large Company Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Fundamental International Large Company Index Fund (the fund) seeks investment results that correspond generally (before fees and expenses) to the total return of the Russell RAFI Developed ex-U.S. Large Company Index1 (Net) (the index), which measures the performance of the large company size segment by fundamental overall company scores which are created using as the
universe the companies in the Russell Developed ex-U.S. Index. To pursue its investment objective, the fund uses a replication investment approach and generally gives the same weight to a given stock as does the index. For more information
concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market
Highlights. Stocks of large companies in developed international markets generated slightly negative overall returns for the 12-month reporting period. Market volatility spiked in June after the United
Kingdom’s vote to leave the European Union (also known as Brexit), as global stocks sold off and the British pound fell sharply, though many markets calmed and even rebounded in the following months. Accommodative monetary policies in Europe
and Japan contributed to signs of improvement in those regions, though uncertainty remained surrounding the stability of global economic growth and the effects of the Brexit referendum.
Performance. The
fund closely tracked the index for the reporting period. The fund returned 0.07% for the 12-month reporting period ended October 31, 2016, while the index returned -0.09%. Also, timing differences in foreign exchange calculations and fair valuation
of the fund’s holdings contributed to the fund’s relative performance.2
Contributors and
Detractors. From a country standpoint, stocks from Canada were the largest contributors to the returns of both the index and the fund. Canadian stocks represented an average weight of approximately 7% of
the fund’s investments and returned approximately 17% in U.S. dollar terms. Teck Resources, Ltd., a company engaged in the business of exploring for, acquiring, developing, and producing natural resources, is one example from this country. The
fund’s Class B holdings of Teck Resources, Ltd. generated a triple-digit return of approximately 274% in U.S. dollar terms for the reporting period.
The fund’s holdings in Australia also contributed to
overall fund performance, representing an average weight of approximately 6% of the fund’s investments and returning approximately 15% in U.S. dollar terms.
Italian stocks detracted the most from the returns of the
index and the fund. Representing an average weight of approximately 3% of the fund’s investments, stocks from Italy returned approximately -27% in U.S. dollar terms for the reporting period, in part due to continued problems in the Italian
banking system. One example from this country is UniCredit S.p.A, an Italy-based holding company engaged in the Financials sector. The fund’s holdings of UniCredit S.p.A returned approximately -60% in U.S. dollar terms.
Stocks from the United Kingdom also detracted from the return
of both the index and the fund, in large part due to increased volatility and uncertainty after the June Brexit vote. United Kingdom stocks represented approximately 16% of the fund’s investments and returned approximately -7% in U.S. dollar
terms for the reporting period.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
| 2 | Typically, the securities in the index are valued using foreign exchange rates obtained at the close of the London foreign currency exchange (11:00 AM EST). Securities in the fund, however, are valued using foreign exchange rates obtained at the close of the New York foreign currency exchange (4:00 PM EST). This difference in closing times can result in different foreign currency exchange rates between the two exchanges, and thus different foreign currency exchange rates used in the valuation of the index’s and fund’s securities. |
14
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental International Large Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Management views and portfolio holdings may have
changed since the report date.
Source of Sector
Classification: S&P and MSCI.
International
investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
15
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental International Large Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (April 2, 2007
– October 31, 2016)1,2,3,4
Average Annual Total Returns1,2,5
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Fundamental International Large Company Index Fund (4/2/07) | 0.07% | 5.09% | 0.49% |
| Russell RAFI Developed ex-U.S. Large Company Index (Net)3,4 | -0.09% | 5.09% | N/A |
| Fundamental Developed ex-U.S. Large Company Spliced Index | -0.09% | 5.16% | 1.19% |
| Fund Category: Morningstar Foreign Large Value | -1.81% | 4.11% | -0.28% |
| Fund Expense Ratios6: Net 0.35%; Gross 0.46% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The fund’s performance relative to the index may be
affected by fair-value pricing, see financial note 2 for more information.
Index ownership—"Russell RAFI Developed ex-U.S. Large
Company Index" is a joint trademark of Frank Russell Company (Russell) and Research Affiliates LLC (RA) and is used by the fund under license. "Research Affiliates," "Fundamental Index" and "RAFI" are trademarks of RA. Subject to RA’s
intellectual property rights in certain content, Russell is the owner of all copyrights related to the Russell RAFI Index Series. Russell is the owner of the trademarks and copyrights related to the Russell Indexes. Schwab Fundamental International
Large Company Index Fund is not sponsored, endorsed, sold or promoted by Russell or RA, and Russell and RA do not make any representation regarding the advisability of investing in shares of the fund. Effective December 1, 2016, the name of the
index was changed by the index provider. No other changes have occurred.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 19, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund prior to October 19, 2009 is that of the fund’s former Institutional Shares. |
| 3 | The inception date of the Russell RAFI Developed ex-U.S. Large Company Index (Net) is February 24, 2011. The fund began tracking the index on October 19, 2012. |
| 4 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 5 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 6 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
16
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental International Small Company Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Fundamental International Small Company Index Fund (the fund) seeks investment results that correspond generally (before fees and expenses) to the total return of the Russell RAFI Developed ex-U.S. Small Company Index1 (Net) (the index), which measures the performance of the small company size segment by fundamental overall company scores which are created using as the
universe the companies in the Russell Developed ex-U.S. Index. To pursue its investment objective, the fund uses a replication investment approach and generally gives the same weight to a given stock as does the index. For more information
concerning the fund’s investment objective, strategies, and risks, please see the fund’s prospectus.
Market
Highlights. Stocks of small companies in developed international markets generated solid overall returns for the 12-month reporting period. Market volatility spiked in June after the United
Kingdom’s vote to leave the European Union (also known as Brexit), as global stocks sold off and the British pound fell sharply, though many markets calmed and even rebounded in the following months. Accommodative monetary policies in Europe
and Japan contributed to signs of improvement in those regions, though uncertainty remained surrounding the stability of global economic growth and the effects of the Brexit referendum.
Performance. The
fund closely tracked the index for the reporting period. The fund returned 8.29% for the 12-month reporting period ended October 31, 2016, while the index returned 8.21%. Also, timing differences in foreign exchange calculations and fair valuation
of the fund’s holdings contributed to the fund’s relative performance.2
Contributors and
Detractors. Stocks from Japan were among the largest contributors to the fund’s return, representing an average weight of approximately 40% of the fund’s investments and returning
approximately 13% in U.S. dollar terms. Among the fund’s Japanese stocks, one of the strongest contributors to fund performance was social media and Internet marketing services provider DeNA Co., Ltd. The fund’s holdings of DeNA Co.,
Ltd. generated a triple-digit return of approximately 101% in U.S. dollar terms.
The fund’s holdings in the Australia also contributed to
overall fund performance, representing an average weight of approximately 6% of the fund’s investments and returning approximately 30% in U.S. dollar terms for the reporting period.
Stocks from the United Kingdom detracted the most from overall
fund performance, in large part due to increased volatility and uncertainty after the June Brexit vote. Representing an average weight of approximately 11% of the fund’s investments, United Kingdom stocks returned approximately -11% in U.S.
dollar terms. One example from this country is Debenhams plc, a company engaged in multi-channel business. The fund’s holdings of Debenhams plc returned approximately -47% in U.S. dollar terms.
Italian stocks also detracted from the return of both the
index and the fund, in part due to continued problems in Italy’s banking system. The fund’s holdings in this country represented an average weight of approximately 3% of the fund’s investments and returned approximately -9% in U.S.
dollar terms for the reporting period.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
| 2 | Typically, the securities in the index are valued using foreign exchange rates obtained at the close of the London foreign currency exchange (11:00 AM EST). Securities in the fund, however, are valued using foreign exchange rates obtained at the close of the New York foreign currency exchange (4:00 PM EST). This difference in closing times can result in different foreign currency exchange rates between the two exchanges, and thus different foreign currency exchange rates used in the valuation of the index’s and fund’s securities. |
17
Schwab Fundamental Index Funds | Annual
Report
Schwab Fundamental International Small Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Management views and portfolio holdings may have
changed since the report date.
Source of Sector
Classification: S&P and MSCI.
Small-company
stocks are subject to greater volatility than many other asset classes.
International investments are subject to additional
risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
18
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental International Small Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (January 31, 2008
– October 31, 2016)1,2,3,4
Average Annual Total Returns1,2,5
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Fundamental International Small Company Index Fund (1/31/08) | 8.29% | 8.34% | 5.34% |
| Russell RAFI Developed ex-U.S. Small Company Index (Net)3,4 | 8.21% | 9.23% | N/A |
| Fundamental Developed ex-U.S. Small Company Spliced Index | 8.21% | 8.63% | 6.59% |
| Fund Category: Morningstar Foreign Small/Mid Blend | 1.77% | 7.52% | 3.51% |
| Fund Expense Ratios6: Net 0.49%; Gross 0.71% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The fund’s performance relative to the index may be
affected by fair-value pricing, see financial note 2 for more information.
Index ownership—"Russell RAFI Developed ex-U.S. Small
Company Index" is a joint trademark of Frank Russell Company (Russell) and Research Affiliates LLC (RA) and is used by the fund under license. "Research Affiliates," "Fundamental Index" and "RAFI" are trademarks of RA. Subject to RA’s
intellectual property rights in certain content, Russell is the owner of all copyrights related to the Russell RAFI Index Series. Russell is the owner of the trademarks and copyrights related to the Russell Indexes. Schwab Fundamental International
Small Company Index Fund is not sponsored, endorsed, sold or promoted by Russell or RA, and Russell and RA do not make any representation regarding the advisability of investing in shares of the fund. Effective December 1, 2016, the name of the
index was changed by the index provider. No other changes have occurred.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 19, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund prior to October 19, 2009 is that of the fund’s former Institutional Shares. |
| 3 | The inception date of the Russell RAFI Developed ex-U.S. Small Company Index (Net) is February 24, 2011. The fund began tracking the index on October 19, 2012. |
| 4 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 5 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 6 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
19
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Emerging Markets Large Company Index Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Fundamental Emerging Markets Large Company Index Fund (the fund) seeks investment results that correspond generally (before fees and expenses) to the total return of the Russell RAFI Emerging Markets Large Company Index1 (Net) (the index), which measures the performance of the large company size segment by fundamental overall company scores which are created using as the
universe the companies in the Russell Emerging Markets Index. To pursue its investment objective, the fund invests in a statistical sample of the securities included in the index that collectively are expected to perform similarly to the index as a
whole. Due to the use of statistical sampling, the fund may not hold all of the securities in the index. For more information concerning the fund’s investment objective, strategies, and risks, please see the fund’s
prospectus.
Market Highlights. Emerging market stocks performed well over the 12-month reporting period. Continued low interest rates in the U.S. and the stabilization of oil prices supported many emerging market economies, contributing to
a strong rebound in performance in 2016 from the year prior. Additionally, the Brazilian real and the Russian ruble appreciated versus the U.S. dollar over the reporting period, while the Argentine peso and the Chinese yuan depreciated versus the
U.S. dollar. (When international currencies appreciate versus the U.S. dollar, returns on overseas investments are generally enhanced in U.S. dollar terms, while the depreciation of international currencies versus the U.S. dollar generally reduces
returns in U.S. dollar terms.)
Performance. The fund generally tracked the index for the reporting period. The fund returned 21.64% for the 12-month reporting period ended October 31, 2016, while the index returned 22.48%. Differences between the return of the
fund and the return of the index may be attributable to, among other things, the operational and transactional costs incurred by the fund and not the index.
Contributors and Detractors.
From a country standpoint, stocks from China were the largest detractors from the returns of both the index and the fund. Chinese stocks represented an average weight of approximately 15% of the fund’s investments and returned less than 1% in
U.S. dollar terms. Oil and gas producer and distributor PetroChina Company, Ltd. is one example from this country. The fund’s Class H holdings of PetroChina Company, Ltd returned approximately -12% in U.S. dollar terms for the reporting
period.
The fund’s holdings in Mexico also
detracted from overall fund performance, representing an average weight of approximately 3% of the fund’s investments and returning approximately -3% in U.S. dollar terms.
Brazilian stocks contributed the most to the returns of both
the index and the fund. Representing an average weight of approximately 15% of the fund’s investments, stocks from Brazil generated a triple-digit return of approximately 106% in U.S. dollar terms. One example from this country is energy
company Petroleo Brasileiro SA. The fund’s preferred holdings of Petroleo Brasileiro SA returned approximately 179% in U.S. dollar terms.
Stocks from Taiwan also meaningfully contributed to overall
fund performance representing an average weight of approximately 12% of the fund’s investments and returning approximately 22% in U.S. dollar terms for the reporting period.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
20
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Emerging Markets Large Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Management views and portfolio holdings may have
changed since the report date.
Source of Sector
Classification: S&P and MSCI.
International
investments are subject to additional risks such as currency fluctuation, geopolitical risk and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
| 1 | This list is not a recommendation of any security by the investment adviser. |
21
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Emerging Markets Large Company Index Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (January 31, 2008
– October 31, 2016)1,2,3,4
Average Annual Total Returns1,2,5
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Fundamental Emerging Markets Large Company Index Fund (1/31/08) | 21.64% | -0.04% | -0.05% |
| Russell RAFI Emerging Markets Large Company Index (Net)3,4 | 22.48% | 1.13% | N/A |
| Fundamental Emerging Markets Large Company Spliced Index | 22.48% | 0.80% | 1.50% |
| Fund Category: Morningstar Diversified Emerging Markets | 8.11% | 1.30% | -0.30% |
| Fund Expense Ratios6: Net 0.49%; Gross 0.85% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
The fund’s performance relative to the index may be
affected by fair-value pricing, see financial note 2 for more information.
Index ownership—“Russell RAFI Emerging Markets Large
Company Index” is a joint trademark of Frank Russell Company (Russell) and Research Affiliates LLC(RA) and is used by the fund under license. “Research Affiliates,” “Fundamental Index” and “RAFI” are
trademarks of RA. Subject to RA’s intellectual property rights in certain content, Russell is the owner of all copyrights related to the Russell RAFI Index Series. Russell is the owner of the trademarks and copyrights related to the Russell
Indexes. Schwab Fundamental Emerging Markets Large Company Index Fund is not sponsored, endorsed, sold or promoted by Russell or RA, and Russell and RA do not make any representation regarding the advisability of investing in shares of the fund.
Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | On October 19, 2009, the Investor Share class, Select Share class and Institutional Share class were combined into a single class of shares of the fund, and the fund no longer offers multiple classes of shares. The performance history of the fund prior to October 19, 2009 is that of the fund’s former Institutional Shares. |
| 3 | The inception date of the Russell RAFI Emerging Markets Large Company Index (Net) is February 24, 2011. The fund began tracking the index on October 19, 2012. |
| 4 | The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes. |
| 5 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 6 | As stated in the prospectus. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
22
Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Schwab Fundamental US Large Company Index Fund | ||||
| Actual Return | 0.35% | $1,000.00 | $1,027.20 | $1.78 |
| Hypothetical 5% Return | 0.35% | $1,000.00 | $1,023.34 | $1.78 |
| Schwab Fundamental US Small Company Index Fund | ||||
| Actual Return | 0.35% | $1,000.00 | $1,040.20 | $1.79 |
| Hypothetical 5% Return | 0.35% | $1,000.00 | $1,023.34 | $1.78 |
| Schwab Fundamental International Large Company Index Fund | ||||
| Actual Return | 0.35% | $1,000.00 | $1,020.50 | $1.78 |
| Hypothetical 5% Return | 0.35% | $1,000.00 | $1,023.34 | $1.78 |
| Schwab Fundamental International Small Company Index Fund | ||||
| Actual Return3 | 0.49% | $1,000.00 | $1,050.20 | $2.53 |
| Hypothetical 5% Return3 | 0.49% | $1,000.00 | $1,022.64 | $2.49 |
| Schwab Fundamental Emerging Markets Large Company Index Fund | ||||
| Actual Return | 0.49% | $1,000.00 | $1,127.70 | $2.62 |
| Hypothetical 5% Return | 0.49% | $1,000.00 | $1,022.64 | $2.49 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12- month period. This ratio does not include certain non-routine expenses, such as proxy expenses. |
| 2 | Expenses for each fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year. |
| 3 | The expenses incurred by the underlying funds in which the fund invests are not included in this ratio. |
23
Schwab Fundamental Index Funds | Annual
Report
Schwab Fundamental US Large Company Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $15.14 | $15.56 | $13.65 | $10.76 | $9.51 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.34 1 | 0.33 1 | 0.26 | 0.24 | 0.21 | |
| Net realized and unrealized gains (losses) | 0.44 | (0.10) | 1.87 | 2.89 | 1.22 | |
| Total from investment operations | 0.78 | 0.23 | 2.13 | 3.13 | 1.43 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.34) | (0.26) | (0.22) | (0.24) | (0.18) | |
| Distributions from net realized gains | (0.46) | (0.39) | — | — | — | |
| Total distributions | (0.80) | (0.65) | (0.22) | (0.24) | (0.18) | |
| Net asset value at end of period | $15.12 | $15.14 | $15.56 | $13.65 | $10.76 | |
| Total return | 5.61% | 1.44% | 15.74% | 29.67% | 15.29% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.35% | 0.35% | 0.35% | 0.35% | 0.32% 2 | |
| Gross operating expenses | 0.39% | 0.39% | 0.39% | 0.41% | 0.44% | |
| Net investment income (loss) | 2.33% | 2.16% | 1.95% | 2.03% | 2.13% | |
| Portfolio turnover rate | 11% | 12% | 14% | 10% | 32% 3 | |
| Net assets, end of period (x 1,000,000) | $4,569 | $4,886 | $4,465 | $3,020 | $1,960 | |
1
Calculated based on the average shares outstanding during
the period.
2
The ratio of net operating expenses would have been 0.35%,
if voluntary waiver by CSIM had not been included.
3
Portfolio turnover would have been 12%, if rebalancing
trades had not been included due to a change in the fund's index.
24
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
25
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
26
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $4,539,101,489 | $— | $— | $4,539,101,489 | |
| Other Investment Companies1 | 29,213,906 | — | — | 29,213,906 | |
| Total | $4,568,315,395 | $— | $— | $4,568,315,395 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($254,824) | $— | $— | ($254,824) |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
27
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Large Company Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investment in affiliated issuer, at value (cost $1,270,946) | $2,305,066 | |
| Investments in unaffiliated issuers, at value (cost $3,709,000,338) including securities on loan of $8,591,040 | 4,556,728,854 | |
| Collateral invested for securities on loan, at value (cost $9,281,475) | + | 9,281,475 |
| Total investments, at value (cost $3,719,552,759) | 4,568,315,395 | |
| Deposit with broker for futures contracts | 1,080,000 | |
| Receivables: | ||
| Fund shares sold | 9,074,973 | |
| Dividends | 6,493,192 | |
| Income from securities on loan | 79,043 | |
| Prepaid expenses | + | 58,046 |
| Total assets | 4,585,100,649 | |
| Liabilities | ||
| Collateral held for securities on loan | 9,281,475 | |
| Payables: | ||
| Investments bought | 1,277,695 | |
| Investment adviser and administrator fees | 895,600 | |
| Shareholder service fees | 176,969 | |
| Fund shares redeemed | 3,244,333 | |
| Variation margin on futures contracts | 44,400 | |
| Accrued expenses | + | 1,242,710 |
| Total liabilities | 16,163,182 | |
| Net Assets | ||
| Total assets | 4,585,100,649 | |
| Total liabilities | – | 16,163,182 |
| Net assets | $4,568,937,467 | |
| Net Assets by Source | ||
| Capital received from investors | 3,410,815,831 | |
| Net investment income not yet distributed | 87,137,069 | |
| Net realized capital gains | 222,476,755 | |
| Net unrealized capital appreciation | 848,507,812 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $4,568,937,467 | 302,263,284 | $15.12 | ||
28
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Large Company Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated issuer | $19,416 | |
| Dividends received from unaffiliated issuers (net of foreign withholding taxes of $23,705) | 124,093,783 | |
| Securities on loan | + | 1,152,060 |
| Total investment income | 125,265,259 | |
| Expenses | ||
| Investment adviser and administrator fees | 10,679,584 | |
| Shareholder service fees | 3,240,775 | |
| Index fees | 2,861,901 | |
| Transfer agent fees | 804,734 | |
| Shareholder reports | 278,528 | |
| Portfolio accounting fees | 103,333 | |
| Proxy fees | 96,867 | |
| Custodian fees | 74,184 | |
| Professional fees | 64,516 | |
| Registration fees | 53,927 | |
| Independent trustees' fees | 35,903 | |
| Interest expense | 3,131 | |
| Other expenses | + | 103,415 |
| Total expenses | 18,400,798 | |
| Expense reduction by CSIM and its affiliates | – | 1,946,916 |
| Net expenses | – | 16,453,882 |
| Net investment income | 108,811,377 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on affiliated issuer | 84,291 | |
| Net realized gains on unaffiliated issuers | 234,459,231 | |
| Net realized gains on futures contracts | + | 2,925,995 |
| Net realized gains | 237,469,517 | |
| Net change in unrealized appreciation (depreciation) on affiliated issuer | (43,311) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated issuers | (95,950,250) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (516,934) |
| Net change in unrealized appreciation (depreciation) | + | (96,510,495) |
| Net realized and unrealized gains | 140,959,022 | |
| Increase in net assets resulting from operations | $249,770,399 | |
29
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Large Company Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $108,811,377 | $105,432,655 | ||
| Net realized gains | 237,469,517 | 147,141,065 | ||
| Net change in unrealized appreciation (depreciation) | + | (96,510,495) | (189,185,954) | |
| Increase in net assets from operations | 249,770,399 | 63,387,766 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (108,957,758) | (76,925,735) | ||
| Distributions from net realized gains | + | (146,034,638) | (114,155,826) | |
| Total distributions | ($254,992,396) | ($191,081,561) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 60,574,518 | $881,245,699 | 98,386,452 | $1,496,556,101 | ||||
| Shares reinvested | 11,581,875 | 160,408,965 | 7,976,908 | 122,684,844 | ||||
| Shares redeemed | + | (92,533,795) | (1,353,159,351) | (70,618,440) | (1,070,631,347) | |||
| Net transactions in fund shares | (20,377,402) | ($311,504,687) | 35,744,920 | $548,609,598 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 322,640,686 | $4,885,664,151 | 286,895,766 | $4,464,748,348 | ||||
| Total increase or decrease | + | (20,377,402) | (316,726,684) | 35,744,920 | 420,915,803 | |||
| End of period | 302,263,284 | $4,568,937,467 | 322,640,686 | $4,885,664,151 | ||||
| Net investment income not yet distributed | $87,137,069 | $87,683,099 | ||||||
30
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $12.82 | $13.51 | $12.78 | $10.31 | $10.11 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.18 1 | 0.18 1 | 0.14 | 0.16 | 0.15 | |
| Net realized and unrealized gains (losses) | 0.43 | (0.03) | 1.23 | 3.35 | 0.88 | |
| Total from investment operations | 0.61 | 0.15 | 1.37 | 3.51 | 1.03 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.18) | (0.16) | (0.12) | (0.20) | (0.12) | |
| Distributions from net realized gains | (0.56) | (0.68) | (0.52) | (0.84) | (0.71) | |
| Total distributions | (0.74) | (0.84) | (0.64) | (1.04) | (0.83) | |
| Net asset value at end of period | $12.69 | $12.82 | $13.51 | $12.78 | $10.31 | |
| Total return | 5.37% | 1.01% | 10.99% | 37.55% | 11.37% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.35% | 0.35% | 0.35% | 0.35% | 0.32% 2 | |
| Gross operating expenses | 0.43% | 0.43% | 0.44% | 0.48% | 0.50% | |
| Net investment income (loss) | 1.50% | 1.37% | 1.14% | 1.41% | 1.46% | |
| Portfolio turnover rate | 30% | 31% | 29% | 27% | 92% 3 | |
| Net assets, end of period (x 1,000,000) | $1,361 | $1,416 | $1,208 | $849 | $619 | |
1
Calculated based on the average shares outstanding during
the period.
2
The ratio of net operating expenses would have been 0.35%,
if voluntary waiver by CSIM had not been included.
3
Portfolio turnover would have been 29%, if rebalancing
trades had not been included due to a change in the fund's index.
31
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
32
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
33
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $1,348,732,855 | $— | $— * | $1,348,732,855 | |
| Rights 1 | — | — | 317,100 * | 317,100 | |
| Other Investment Companies | 38,237,722 | — | — | 38,237,722 | |
| Total | $1,386,970,577 | $— | $317,100 | $1,387,287,677 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($449,989) | $— | $— | ($449,989) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between
Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
34
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $1,128,500,489) including securities on loan of $26,051,203 | $1,359,838,677 | |
| Collateral invested for securities on loan, at value (cost $27,449,000) | + | 27,449,000 |
| Total investments, at value (cost $1,155,949,489) | 1,387,287,677 | |
| Foreign currency, at value (cost $34) | 25 | |
| Cash | 446 | |
| Deposit with broker for futures contracts | 483,800 | |
| Receivables: | ||
| Fund shares sold | 1,132,860 | |
| Dividends | 728,520 | |
| Income from securities on loan | 104,598 | |
| Variation margin on futures contracts | 27,799 | |
| Prepaid expenses | + | 21,169 |
| Total assets | 1,389,786,894 | |
| Liabilities | ||
| Collateral held for securities on loan | 27,449,000 | |
| Payables: | ||
| Investment adviser and administrator fees | 291,387 | |
| Shareholder service fees | 47,185 | |
| Fund shares redeemed | 779,114 | |
| Accrued expenses | + | 403,355 |
| Total liabilities | 28,970,041 | |
| Net Assets | ||
| Total assets | 1,389,786,894 | |
| Total liabilities | – | 28,970,041 |
| Net assets | $1,360,816,853 | |
| Net Assets by Source | ||
| Capital received from investors | 1,109,818,885 | |
| Net investment income not yet distributed | 13,738,912 | |
| Net realized capital gains | 6,370,866 | |
| Net unrealized capital appreciation | 230,888,190 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $1,360,816,853 | 107,203,175 | $12.69 | ||
35
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Small Company Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $3,007) | $22,602,155 | |
| Securities on loan | + | 2,531,960 |
| Total investment income | 25,134,115 | |
| Expenses | ||
| Investment adviser and administrator fees | 3,387,052 | |
| Shareholder service fees | 1,251,981 | |
| Index fees | 831,622 | |
| Shareholder reports | 80,348 | |
| Portfolio accounting fees | 67,197 | |
| Transfer agent fees | 48,610 | |
| Custodian fees | 46,271 | |
| Professional fees | 46,194 | |
| Registration fees | 30,900 | |
| Proxy fees | 24,937 | |
| Independent trustees' fees | 16,068 | |
| Interest expense | 727 | |
| Other expenses | + | 22,726 |
| Total expenses | 5,854,633 | |
| Expense reduction by CSIM and its affiliates | – | 1,076,840 |
| Net expenses | – | 4,777,793 |
| Net investment income | 20,356,322 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 11,893,863 | |
| Net realized losses on futures contracts | + | (1,032) |
| Net realized gains | 11,892,831 | |
| Net change in unrealized appreciation (depreciation) on investments | 38,701,203 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | + | (657,825) |
| Net change in unrealized appreciation (depreciation) | + | 38,043,378 |
| Net realized and unrealized gains | 49,936,209 | |
| Increase in net assets resulting from operations | $70,292,531 | |
36
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $20,356,322 | $19,445,379 | ||
| Net realized gains | 11,892,831 | 60,741,342 | ||
| Net change in unrealized appreciation (depreciation) | + | 38,043,378 | (72,464,259) | |
| Increase in net assets from operations | 70,292,531 | 7,722,462 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (20,210,722) | (14,333,166) | ||
| Distributions from net realized gains | + | (61,589,342) | (60,933,871) | |
| Total distributions | ($81,800,064) | ($75,267,037) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 27,387,772 | $327,990,889 | 39,068,787 | $512,965,419 | ||||
| Shares reinvested | 4,713,120 | 54,342,269 | 3,422,676 | 44,597,473 | ||||
| Shares redeemed | + | (35,294,191) | (425,576,331) | (21,506,579) | (281,966,672) | |||
| Net transactions in fund shares | (3,193,299) | ($43,243,173) | 20,984,884 | $275,596,220 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 110,396,474 | $1,415,567,559 | 89,411,590 | $1,207,515,914 | ||||
| Total increase or decrease | + | (3,193,299) | (54,750,706) | 20,984,884 | 208,051,645 | |||
| End of period | 107,203,175 | $1,360,816,853 | 110,396,474 | $1,415,567,559 | ||||
| Net investment income not yet distributed | $13,738,912 | $14,165,949 | ||||||
37
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $8.19 | $8.84 | $9.05 | $7.16 | $7.26 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.24 1 | 0.25 1 | 0.30 | 0.23 | 0.22 | |
| Net realized and unrealized gains (losses) | (0.25) | (0.60) | (0.26) | 1.87 | (0.08) 2 | |
| Total from investment operations | (0.01) | (0.35) | 0.04 | 2.10 | 0.14 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.22) | (0.30) | (0.25) | (0.21) | (0.24) | |
| Net asset value at end of period | $7.96 | $8.19 | $8.84 | $9.05 | $7.16 | |
| Total return | 0.07% | (4.07%) | 0.39% | 30.12% | 2.24% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.35% | 0.35% | 0.35% | 0.34% 3 | 0.31% 3 | |
| Gross operating expenses | 0.46% | 0.46% | 0.48% | 0.52% | 0.56% | |
| Net investment income (loss) | 3.20% | 2.96% | 3.52% | 2.95% | 3.58% | |
| Portfolio turnover rate | 18% | 11% | 8% | 22% | 61% 4 | |
| Net assets, end of period (x 1,000,000) | $971 | $1,173 | $908 | $646 | $501 | |
1
Calculated based on the average shares outstanding during
the period.
2
The per share amount does not accord with the change in
aggregate gains and losses in securities during the period because of the timing of fund transactions in relation to fluctuating market values.
3
The ratio of net operating expenses would have been 0.35%,
if voluntary waiver by CSIM had not been included.
4
Portfolio turnover would have been 37%, if rebalancing
trades had not been included due to a change in the fund's index.
38
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
39
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
40
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
41
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $— | $418,944,634 | $— | $418,944,634 | |
| Australia | — | 61,943,649 | 66,019 | 62,009,668 | |
| Belgium | 2,640,279 | 4,528,451 | — | 7,168,730 | |
| Canada | 72,814,292 | — | — * | 72,814,292 | |
| Germany | 287,102 | 82,206,593 | — | 82,493,695 | |
| Hong Kong | 925,832 | 12,161,984 | — | 13,087,816 | |
| Ireland | 2,554,818 | 3,486,721 | — | 6,041,539 | |
| Israel | 288,603 | 3,471,459 | — | 3,760,062 | |
| Netherlands | 541,059 | 52,540,543 | — * | 53,081,602 | |
| Singapore | 742,350 | 6,911,598 | — | 7,653,948 | |
| Sweden | 546,481 | 20,248,333 | — | 20,794,814 | |
| Switzerland | 1,181,948 | 58,380,148 | — | 59,562,096 | |
| United Kingdom | 2,109,700 | 146,507,540 | 9,047 | 148,626,287 | |
| Preferred Stock1 | — | 6,972,658 | — | 6,972,658 | |
| Rights | |||||
| Italy | — | — | — * | — | |
| Spain | 13,492 | — | — | 13,492 | |
| Sweden | — | — | 26,147 | 26,147 | |
| Other Investment Company1 | 6,974,447 | — | — | 6,974,447 | |
| Short-Term Investments1 | — | 4,242,264 | — | 4,242,264 | |
| Total | $91,620,403 | $882,546,575 | $101,213 | $974,268,191 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($159,730) | $— | $— | ($159,730) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund’s policy is to recognize transfers between Level
1, Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016. The transfers in the amount of $4,383,172 and $2,302,464 from Level 1 to Level 2
and from Level 2 to Level 1, respectively, were primarily due to the use of international fair valuation by the fund. The transfers into Level 3 from Level 1 or Level 2 were due to the result of fair valued securities for which no quoted value was
available.
42
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $1,051,176,112) including securities on loan of $6,449,085 | $967,293,744 | |
| Collateral invested for securities on loan, at value (cost $6,974,447) | + | 6,974,447 |
| Total investments, at value (cost $1,058,150,559) | 974,268,191 | |
| Foreign currency, at value (cost $844) | 832 | |
| Deposit with broker for futures contracts | 672,000 | |
| Receivables: | ||
| Investments sold | 7,971 | |
| Dividends | 2,232,505 | |
| Fund shares sold | 1,172,410 | |
| Foreign tax reclaims | 928,231 | |
| Income from securities on loan | 37,088 | |
| Variation margin on futures contracts | 3,825 | |
| Interest | 16 | |
| Prepaid expenses | + | 14,770 |
| Total assets | 979,337,839 | |
| Liabilities | ||
| Collateral held for securities on loan | 6,974,447 | |
| Payables: | ||
| Investments bought | 14,115 | |
| Investment adviser and administrator fees | 209,909 | |
| Shareholder service fees | 1,419 | |
| Fund shares redeemed | 431,007 | |
| Accrued expenses | + | 299,458 |
| Total liabilities | 7,930,355 | |
| Net Assets | ||
| Total assets | 979,337,839 | |
| Total liabilities | – | 7,930,355 |
| Net assets | $971,407,484 | |
| Net Assets by Source | ||
| Capital received from investors | 1,104,372,056 | |
| Net investment income not yet distributed | 26,747,894 | |
| Net realized capital losses | (75,557,274) | |
| Net unrealized capital depreciation | (84,155,192) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $971,407,484 | 122,021,408 | $7.96 | ||
43
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $3,434,251) | $33,789,503 | |
| Interest | 4,715 | |
| Securities on loan | + | 1,106,132 |
| Total investment income | 34,900,350 | |
| Expenses | ||
| Investment adviser and administrator fees | 2,561,585 | |
| Shareholder service fees | 655,568 | |
| Index fees | 601,805 | |
| Custodian fees | 262,963 | |
| Professional fees | 98,145* | |
| Portfolio accounting fees | 93,077 | |
| Transfer agent fees | 63,542 | |
| Shareholder reports | 54,864 | |
| Registration fees | 36,429 | |
| Proxy fees | 15,283 | |
| Independent trustees' fees | 13,867 | |
| Interest expense | 10,065 | |
| Other expenses | + | 38,667 |
| Total expenses | 4,505,860 | |
| Expense reduction by CSIM and its affiliates | – | 1,041,627 |
| Net expenses | – | 3,464,233 |
| Net investment income | 31,436,117 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 23,919,280 | |
| Net realized losses on futures contracts | (145,314) | |
| Net realized gains on foreign currency transactions | + | 5,818 |
| Net realized gains | 23,779,784 | |
| Net change in unrealized appreciation (depreciation) on investments | (76,734,681) | |
| Net change in unrealized appreciation (depreciation) on futures contracts | (169,149) | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | (67,568) |
| Net change in unrealized appreciation (depreciation) | + | (76,971,398) |
| Net realized and unrealized losses | (53,191,614) | |
| Decrease in net assets resulting from operations | ($21,755,497) | |
| * | Includes professional fees of $47,807 associated with the filing of tax claims in the European Union deemed to be non-routine expenses of the fund. See financial notes 2 and 4 for additional information. |
44
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $31,436,117 | $30,904,722 | ||
| Net realized gains | 23,779,784 | 18,843,077 | ||
| Net change in unrealized appreciation (depreciation) | + | (76,971,398) | (94,794,551) | |
| Decrease in net assets from operations | (21,755,497) | (45,046,752) | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($31,819,112) | ($30,718,378) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 40,777,391 | $309,566,525 | 77,124,870 | $646,716,280 | ||||
| Shares reinvested | 2,600,103 | 19,448,771 | 2,428,390 | 20,277,055 | ||||
| Shares redeemed | + | (64,663,235) | (477,115,945) | (38,940,325) | (326,201,774) | |||
| Net transactions in fund shares | (21,285,741) | ($148,100,649) | 40,612,935 | $340,791,561 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 143,307,149 | $1,173,082,742 | 102,694,214 | $908,056,311 | ||||
| Total increase or decrease | + | (21,285,741) | (201,675,258) | 40,612,935 | 265,026,431 | |||
| End of period | 122,021,408 | $971,407,484 | 143,307,149 | $1,173,082,742 | ||||
| Net investment income not yet distributed | $26,747,894 | $26,399,326 | ||||||
45
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $11.25 | $11.15 | $11.47 | $9.13 | $9.53 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss)1 | 0.25 | 0.22 | 0.22 | 0.22 | 0.21 | |
| Net realized and unrealized gains (losses) | 0.66 | 0.12 | (0.23) | 2.42 | 0.03 | |
| Total from investment operations | 0.91 | 0.34 | (0.01) | 2.64 | 0.24 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.19) | (0.31) | (0.30) | (0.25) | |
| Distributions from net realized gains | — | (0.05) | — | — | (0.39) | |
| Total distributions | (0.23) | (0.24) | (0.31) | (0.30) | (0.64) | |
| Net asset value at end of period | $11.93 | $11.25 | $11.15 | $11.47 | $9.13 | |
| Total return | 8.29% | 3.09% | (0.07%) | 29.75% | 3.13% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.49% | 0.49% | 0.49% | 0.47% 2,3 | 0.46% 4,5 | |
| Gross operating expenses | 0.68% | 0.71% | 0.80% | 0.93% | 0.92% 5 | |
| Net investment income (loss) | 2.24% | 1.98% | 1.87% | 2.21% | 2.42% | |
| Portfolio turnover rate | 40% | 37% | 41% | 29% | 89% 6 | |
| Net assets, end of period (x 1,000,000) | $476 | $427 | $275 | $150 | $90 | |
1
Calculated based on the average shares outstanding during
the period.
2
Effective June 11, 2013, the net operating expense
limitation was lowered. The ratio presented for period ended 10/31/13 is a blended ratio.
3
The ratio of net operating expenses would have been 0.52%,
if voluntary waiver by CSIM had not been included.
4
The ratio of net operating expenses would have been 0.51%,
if voluntary waiver by CSIM had not been included.
5
The net operating and gross operating expense ratios would
have been 0.50% and 0.97%, respectively, if vendor payments had not been included.
6
Portfolio turnover would have been 48%, if rebalancing
trades had not been included due to a change in the fund's index.
46
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
47
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
48
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
49
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $— | $5,907,980 | $— | $5,907,980 | |
| Australia | 215,238 | 29,256,960 | — * | 29,472,198 | |
| Austria | 362,650 | 3,808,470 | — | 4,171,120 | |
| Belgium | 688,211 | 4,676,230 | — | 5,364,441 | |
| Canada | 38,454,171 | — | — | 38,454,171 | |
| Finland | 223,099 | 7,655,524 | — | 7,878,623 | |
| France | 212,826 | 17,194,443 | — | 17,407,269 | |
| Germany | 95,278 | 13,895,429 | — | 13,990,707 | |
| Greece | — | — | — * | — | |
| Hong Kong | 182,935 | 19,859,951 | — | 20,042,886 | |
| Ireland | 2,522,883 | 1,218,209 | — | 3,741,092 | |
| Israel | 350,300 | 3,928,208 | — | 4,278,508 | |
| Italy | 1,071,877 | 10,746,574 | — * | 11,818,451 | |
| Japan | 401,194 | 190,167,324 | — | 190,568,518 | |
| Luxembourg | 941,914 | 1,637,926 | — * | 2,579,840 | |
| Netherlands | 2,278,928 | 7,174,912 | — | 9,453,840 | |
| New Zealand | 401,251 | 4,538,599 | — | 4,939,850 | |
| Norway | 761,991 | 5,739,615 | — | 6,501,606 | |
| Portugal | 214,187 | 1,692,585 | — * | 1,906,772 | |
| Singapore | 262,509 | 8,862,439 | — * | 9,124,948 | |
| Spain | 704,032 | 7,663,656 | — * | 8,367,688 | |
| Sweden | 72,119 | 9,096,971 | — | 9,169,090 | |
| Switzerland | 2,057,930 | 11,655,521 | — | 13,713,451 | |
| United Kingdom | 11,648,356 | 36,328,348 | 23,914 * | 48,000,618 | |
| Preferred Stock1 | — | 1,189,301 | — | 1,189,301 | |
| Sweden | 188,453 | — | — | 188,453 | |
| United Kingdom | — | — | 975 | 975 | |
| Rights 1 | 4,584 | — | — | 4,584 | |
| Other Investment Company | |||||
| United States1 | 12,674,005 | — | — | 12,674,005 | |
| Short-Term Investments1 | — | 5,042,424 | — | 5,042,424 | |
| Total | $76,990,921 | $408,937,599 | $24,889 | $485,953,409 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($50,330) | $— | $— | ($50,330) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
50
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
The fund’s policy is to recognize transfers between Level
1, Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016. The transfers in the amount of $4,796,360 and $14,247,982 from Level 1 to Level
2 and from Level 2 to Level 1, respectively, were primarily due to the use of international fair valuation by the fund. The transfers from Level 3 to Level 1 or Level 2 are a result of the availability of current and reliable market-based data
provided by third-party pricing services or other valuation techniques which utilize significant observable inputs.
51
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $424,650,217) including securities on loan of $11,642,227 | $473,279,404 | |
| Collateral invested for securities on loan, at value (cost $12,674,005) | + | 12,674,005 |
| Total investments, at value (cost $437,324,222) | 485,953,409 | |
| Deposit with broker for futures contracts | 420,000 | |
| Receivables: | ||
| Investments sold | 191,034 | |
| Dividends | 1,395,279 | |
| Fund shares sold | 848,872 | |
| Foreign tax reclaims | 164,634 | |
| Income from securities on loan | 40,155 | |
| Variation margin on futures contracts | 3,152 | |
| Interest | 15 | |
| Prepaid expenses | + | 11,346 |
| Total assets | 489,027,896 | |
| Liabilities | ||
| Collateral held for securities on loan | 12,674,005 | |
| Payables: | ||
| Investment adviser and administrator fees | 126,617 | |
| Shareholder service fees | 780 | |
| Fund shares redeemed | 236,311 | |
| Due to custodian | 13,706 | |
| Accrued expenses | + | 351,493 |
| Total liabilities | 13,402,912 | |
| Net Assets | ||
| Total assets | 489,027,896 | |
| Total liabilities | – | 13,402,912 |
| Net assets | $475,624,984 | |
| Net Assets by Source | ||
| Capital received from investors | 426,353,621 | |
| Net investment income not yet distributed | 6,730,088 | |
| Net realized capital losses | (5,981,800) | |
| Net unrealized capital appreciation | 48,523,075 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $475,624,984 | 39,872,738 | $11.93 | ||
52
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $1,272,585) | $11,083,850 | |
| Interest | 4,035 | |
| Securities on loan | + | 603,029 |
| Total investment income | 11,690,914 | |
| Expenses | ||
| Investment adviser and administrator fees | 1,711,622 | |
| Shareholder service fees | 379,086 | |
| Index fees | 366,931 | |
| Custodian fees | 171,960 | |
| Portfolio accounting fees | 91,491 | |
| Professional fees | 45,045 | |
| Shareholder reports | 42,278 | |
| Transfer agent fees | 29,409 | |
| Registration fees | 28,422 | |
| Proxy fees | 14,595 | |
| Independent trustees' fees | 10,468 | |
| Interest expense | 2,193 | |
| Other expenses | + | 36,635 |
| Total expenses | 2,930,135 | |
| Expense reduction by CSIM and its affiliates | – | 816,610 |
| Net expenses | – | 2,113,525 |
| Net investment income | 9,577,389 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized gains on investments | 191,965 | |
| Net realized losses on futures contracts | (93,457) | |
| Net realized gains on foreign currency transactions | + | 68,033 |
| Net realized gains | 166,541 | |
| Net change in unrealized appreciation (depreciation) on investments | 26,234,518 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | (50,330) | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | (46,681) |
| Net change in unrealized appreciation (depreciation) | + | 26,137,507 |
| Net realized and unrealized gains | 26,304,048 | |
| Increase in net assets resulting from operations | $35,881,437 | |
53
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $9,577,389 | $7,361,535 | ||
| Net realized gains (losses) | 166,541 | (3,607,548) | ||
| Net change in unrealized appreciation (depreciation) | + | 26,137,507 | 6,250,814 | |
| Increase in net assets from operations | 35,881,437 | 10,004,801 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (8,387,388) | (4,674,757) | ||
| Distributions from net realized gains | + | — | (1,212,255) | |
| Total distributions | ($8,387,388) | ($5,887,012) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 13,213,332 | $147,536,415 | 21,683,419 | $240,269,549 | ||||
| Shares reinvested | 604,755 | 6,525,310 | 378,138 | 4,049,856 | ||||
| Shares redeemed | + | (11,915,246) | (132,914,627) | (8,780,138) | (96,851,042) | |||
| Net transactions in fund shares | 1,902,841 | $21,147,098 | 13,281,419 | $147,468,363 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 37,969,897 | $426,983,837 | 24,688,478 | $275,397,685 | ||||
| Total increase | + | 1,902,841 | 48,641,147 | 13,281,419 | 151,586,152 | |||
| End of period | 39,872,738 | $475,624,984 | 37,969,897 | $426,983,837 | ||||
| Net investment income not yet distributed | $6,730,088 | $4,752,504 | ||||||
54
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $6.67 | $8.60 | $9.24 | $8.86 | $9.17 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.16 1 | 0.20 1 | 0.20 | 0.19 | 0.25 | |
| Net realized and unrealized gains (losses) | 1.22 | (1.92) | (0.66) | 0.43 | (0.17) | |
| Total from investment operations | 1.38 | (1.72) | (0.46) | 0.62 | 0.08 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.19) | (0.21) | (0.18) | (0.24) | (0.22) | |
| Distributions from net realized gains | — | — | — | — | (0.17) | |
| Total distributions | (0.19) | (0.21) | (0.18) | (0.24) | (0.39) | |
| Net asset value at end of period | $7.86 | $6.67 | $8.60 | $9.24 | $8.86 | |
| Total return | 21.64% | (20.28%) | (5.03%) | 7.11% | 1.18% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses | 0.49% | 0.49% | 0.49% | 0.51% 2,3 | 0.56% 4 | |
| Gross operating expenses | 0.88% | 0.85% | 0.85% | 0.88% | 0.91% | |
| Net investment income (loss) | 2.41% | 2.61% | 2.35% | 2.22% | 2.75% | |
| Portfolio turnover rate | 20% | 27% | 19% | 22% | 86% 5 | |
| Net assets, end of period (x 1,000,000) | $336 | $304 | $346 | $353 | $314 | |
1
Calculated based on the average shares outstanding during
the period.
2
Effective June 11, 2013, the net operating expense
limitation was lowered. The ratio presented for period ended 10/31/13 is a blended ratio.
3
The ratio of net operating expenses would have been 0.56%,
if voluntary waiver by CSIM had not been included.
4
The ratio of net operating expenses would have been 0.60%,
if voluntary waiver by CSIM had not been included.
5
Portfolio turnover would have been 51%, if rebalancing
trades had not been included due to a change in the fund's index.
55
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016
This section shows the fund's 50 largest portfolio holdings in
unaffiliated issuers, and any holdings exceeding 1% of the fund's net assets as of the report date, and any affiliated issuers. The remaining securities held by the fund are grouped as "Other Securities" in each category. You can request a complete
schedule of portfolio holdings as of the report date, free of charge, by calling Schwab Funds® at 1-877-824-5615. This complete schedule, filed on
the fund's N-CSR(S), is also available on the SEC's website at www.sec.gov.
In addition, the fund files its complete schedule of portfolio
holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website and may be viewed and copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for
information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15-20 days after calendar quarters on the fund's website at
www.csimfunds.com/schwabfunds_prospectus.
56
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
57
Schwab Fundamental Index Funds | Annual
Report
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notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Condensed Portfolio
Holdings as of October 31, 2016 (continued)
In additional to the above the fund held the following at
10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| MSCI EMG MKT, e-mini, Long, expires 12/16/16 | 15 | 677,625 | (12,533) | |||
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
Assets Valuation Input
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Common Stock1 | $— | $124,504,877 | $— | $124,504,877 | |
| Brazil | 29,019,738 | — | — | 29,019,738 | |
| Chile | 1,187,540 | 883,342 | — | 2,070,882 | |
| China | 828,248 | 49,546,855 | — | 50,375,103 | |
| Colombia | 1,447,545 | — | — | 1,447,545 | |
| Malaysia | 2,550,526 | 3,217,635 | — | 5,768,161 | |
| Mexico | 9,623,206 | — | — | 9,623,206 | |
| Peru | 426,712 | — | — | 426,712 | |
| Russia | 34,283,484 | 3,785,829 | — | 38,069,313 | |
| South Africa | 349,988 | 20,411,247 | — * | 20,761,235 | |
| Thailand | 4,399,086 | 615,497 | — | 5,014,583 | |
| Preferred Stock1 | — | 3,392,982 | — | 3,392,982 | |
| Brazil | 40,714,167 | — | — | 40,714,167 | |
| Colombia | 406,851 | — | — | 406,851 | |
| Russia | 3,601,382 | — | — | 3,601,382 | |
| Short-Term Investments1 | — | 981,984 | — | 981,984 | |
| Total | $128,838,473 | $207,340,248 | $— | $336,178,721 | |
| Liabilities
Valuation Input |
|||||
| Other Financial Instruments | |||||
| Futures Contracts2 | ($12,533) | $— | $— | ($12,533) |
| * | Level 3 amount shown includes securities determined to have no value at October 31, 2016. |
| 1 | As categorized in the complete schedule of Portfolio Holdings. |
| 2 | Futures contracts are not included in Investments in the schedule of Condensed Portfolio Holdings and are valued at unrealized appreciation or depreciation. |
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were security transfers in the amount of $1,791,124 and $38,801,773 from Level 1 to Level 2 and from Level 2 to Level 1, respectively, for the period ended October 31, 2016. The
transfers between Level 1 and Level 2 were primarily due to the use of international fair valuation by the fund. There were no transfers in or out of Level 3 during the period.
58
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments, at value (cost $310,936,779) | $336,178,721 | |
| Foreign currency, at value (cost $365,923) | 362,646 | |
| Deposit with broker for futures contracts | 148,000 | |
| Receivables: | ||
| Fund shares sold | 365,697 | |
| Dividends | 331,836 | |
| Variation margin on futures contracts | 8,748 | |
| Foreign tax reclaims | 2,326 | |
| Prepaid expenses | + | 6,018 |
| Total assets | 337,403,992 | |
| Liabilities | ||
| Payables: | ||
| Investment adviser and administrator fees | 72,107 | |
| Shareholder service fees | 34 | |
| Fund shares redeemed | 1,307,196 | |
| Foreign capital gains tax | 170,335 | |
| Accrued expenses and other liabilities | + | 260,107 |
| Total liabilities | 1,809,779 | |
| Net Assets | ||
| Total assets | 337,403,992 | |
| Total liabilities | – | 1,809,779 |
| Net assets | $335,594,213 | |
| Net Assets by Source | ||
| Capital received from investors | 390,500,306 | |
| Net investment income not yet distributed | 6,137,971 | |
| Net realized capital losses | (86,108,952) | |
| Net unrealized capital appreciation | 25,064,888 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $335,594,213 | 42,693,193 | $7.86 | ||
59
Schwab Fundamental Index Funds | Annual
Report
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notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends (net of foreign withholding tax of $1,369,976) | $8,749,278 | |
| Interest | 4,474 | |
| Securities on loan | + | 4,512 |
| Total investment income | 8,758,264 | |
| Expenses | ||
| Investment adviser and administrator fees | 1,505,913 | |
| Shareholder service fees | 220,183 | |
| Custodian fees | 377,509 | |
| Index fees | 258,266 | |
| Portfolio accounting fees | 72,076 | |
| Professional fees | 46,805 | |
| Shareholder reports | 42,796 | |
| Transfer agent fees | 34,223 | |
| Registration fees | 29,939 | |
| Proxy fees | 10,548 | |
| Independent trustees' fees | 9,726 | |
| Interest expense | 1,836 | |
| Other expenses | + | 27,702 |
| Total expenses | 2,637,522 | |
| Expense reduction by CSIM and its affiliates | – | 1,149,343 |
| Net expenses | – | 1,488,179 |
| Net investment income | 7,270,085 | |
| Realized and Unrealized Gains (Losses) | ||
| Net realized losses on investments (net of foreign capital gain tax paid of ($156)) | (38,789,026) | |
| Net realized losses on futures contracts | (275,239) | |
| Net realized losses on foreign currency transactions | + | (158,338) |
| Net realized losses | (39,222,603) | |
| Net change in unrealized appreciation (depreciation) on investments (net of change in foreign capital gains tax of ($12,591)) | 93,326,896 | |
| Net change in unrealized appreciation (depreciation) on futures contracts | 9,400 | |
| Net change in unrealized appreciation (depreciation) on foreign currency translations | + | 28,959 |
| Net change in unrealized appreciation (depreciation) | + | 93,365,255 |
| Net realized and unrealized gains | 54,142,652 | |
| Increase in net assets resulting from operations | $61,412,737 | |
60
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $7,270,085 | $9,002,515 | ||
| Net realized losses | (39,222,603) | (24,092,672) | ||
| Net change in unrealized appreciation (depreciation) | + | 93,365,255 | (57,788,193) | |
| Increase (decrease) in net assets from operations | 61,412,737 | (72,878,350) | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($8,647,638) | ($8,501,798) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 15,830,412 | $100,588,374 | 28,202,624 | $207,886,222 | ||||
| Shares reinvested | 944,255 | 5,589,988 | 686,509 | 5,279,258 | ||||
| Shares redeemed | + | (19,713,318) | (127,760,306) | (23,465,190) | (172,997,984) | |||
| Net transactions in fund shares | (2,938,651) | ($21,581,944) | 5,423,943 | $40,167,496 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 45,631,844 | $304,411,058 | 40,207,901 | $345,623,710 | ||||
| Total increase or decrease | + | (2,938,651) | 31,183,155 | 5,423,943 | (41,212,652) | |||
| End of period | 42,693,193 | $335,594,213 | 45,631,844 | $304,411,058 | ||||
| Net investment income not yet distributed | $6,137,971 | $7,562,010 | ||||||
61
Schwab Fundamental Index Funds | Annual
Report
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notes
Schwab Fundamental Index Funds
Financial Notes
1. Business Structure of the Funds:
Each of the
funds in this report is a series of Schwab Capital Trust (the trust), a no-load, open-end management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended
(the 1940 Act). The list below shows all the funds in the trust as of the end of the period, including the funds discussed in this report, which are highlighted:
| SCHWAB CAPITAL TRUST (ORGANIZED MAY 7, 1993) | |
| Schwab Fundamental US Large Company Index Fund | Schwab Target 2015 Fund |
| Schwab Fundamental US Small Company Index Fund | Schwab Target 2020 Fund |
| Schwab Fundamental International Large Company Index Fund | Schwab Target 2025 Fund |
| Schwab Fundamental International Small Company Index Fund | Schwab Target 2030 Fund |
| Schwab Fundamental Emerging Markets Large Company Index Fund | Schwab Target 2035 Fund |
| Schwab Fundamental Global Real Estate Index Fund | Schwab Target 2040 Fund |
| Schwab ® S&P 500 Index Fund | Schwab Target 2045 Fund |
| Schwab Small-Cap Index Fund® | Schwab Target 2050 Fund |
| Schwab Total Stock Market Index Fund® | Schwab Target 2055 Fund |
| Schwab International Index Fund® | Schwab Target 2060 Fund |
| Schwab MarketTrack All Equity Portfolio™ | Schwab Target 2010 Index Fund |
| Schwab MarketTrack Growth Portfolio™ | Schwab Target 2015 Index Fund |
| Schwab MarketTrack Balanced Portfolio™ | Schwab Target 2020 Index Fund |
| Schwab MarketTrack Conservative Portfolio™ | Schwab Target 2025 Index Fund |
| Laudus Small-Cap MarketMasters Fund™ | Schwab Target 2030 Index Fund |
| Laudus International MarketMasters Fund™ | Schwab Target 2035 Index Fund |
| Schwab Balanced Fund™ | Schwab Target 2040 Index Fund |
| Schwab Core Equity Fund™ | Schwab Target 2045 Index Fund |
| Schwab Dividend Equity Fund™ | Schwab Target 2050 Index Fund |
| Schwab Large-Cap Growth Fund™ | Schwab Target 2055 Index Fund |
| Schwab Small-Cap Equity Fund™ | Schwab Target 2060 Index Fund |
| Schwab Hedged Equity Fund™ | Schwab ® Monthly Income Fund - Moderate Payout |
| Schwab Health Care Fund™ | Schwab ® Monthly Income Fund - Enhanced Payout |
| Schwab ® International Core Equity Fund | Schwab ® Monthly Income Fund - Maximum Payout |
| Schwab Target 2010 Fund | |
Each fund in this report offers one share class. Shares are
bought and sold (subject to a redemption fee, see financial note 9) at closing net asset value per share (NAV), which is the price for all outstanding shares of a fund. Each share has a par value of 1/1,000 of a cent, and the funds' Board of
Trustees (the Board) may authorize the issuance of as many shares as necessary.
Each fund maintains its own account for purposes of holding
assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the funds use in their preparation of financial statements. The funds follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The funds may invest in certain other investment companies
(underlying funds). For specific investments in underlying funds, please refer to the complete schedule of portfolio holdings on Form N-CSR(S) for this reporting period, which is filed with the U.S. Securities and Exchange Commission (SEC). For more
information about the underlying funds’ operations and policies, please refer to those funds’ semiannual and annual reports, which are filed with the SEC.
(a) Security Valuation:
Under procedures approved by the Board, the investment adviser
has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect fair market value. Among other
things, these procedures allow the funds to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Financial Notes (continued)
2. Significant Accounting
Policies (continued):
The funds value the
securities in their portfolios every business day. The funds use the following policies to value various types of securities:
•
Securities traded on an exchange or over-the-counter: Traded securities are valued at the closing value for the day, or, on days when no closing value has been reported, at halfway between the most recent
bid and ask quotes. Securities that are primarily traded on foreign exchanges are valued at the official closing price or the last sales price on the exchange where the securities are principally traded with these values then translated into U.S.
dollars at the current exchange rate, unless these securities are fair valued as discussed below.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable.
For example, a fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is
closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of factors, including unobservable market inputs when
arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market multiples, book values, transactional back-testing,
disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a
fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the funds pursuant to the valuation procedures.
•
Foreign equity security fair valuation: The Board has adopted procedures to fair value foreign equity securities that are traded in markets that close prior to the funds valuing their holdings. By fair
valuing securities whose prices may have been affected by events occurring after the close of trading, each fund seeks to establish prices that investors might expect to realize upon the current sales of these securities. This methodology is
designed to deter “arbitrage” market timers, who seek to exploit delays between the change in the value of a fund’s portfolio holdings and the NAV of the fund’s shares, and seeks to help ensure that the prices at which the
fund’s shares are purchased and redeemed are fair and do not result in dilution of shareholder interest or other harm to shareholders. When fair value pricing is used at the open or close of a reporting period, it may cause a temporary
divergence between the return of a fund and that of its comparative index or benchmark. The Board regularly reviews fair value determinations made by the funds pursuant to these procedures.
• Futures contracts: Futures contracts are valued at their settlement prices as of the close of their exchanges.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
•
Underlying funds: Mutual funds are valued at their respective NAVs. Exchange-traded funds (ETFs) traded on a recognized securities exchange are valued at the last reported sale price that day or the
official closing price, if applicable.
In accordance
with the authoritative guidance on fair value measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair
value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that
are significant to the valuation (Level 3 measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation.
If the funds determine that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with
orderly transactions, increased analysis and management judgment will be required to estimate fair value.
The three levels of the fair value hierarchy are as
follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities, ETFs and futures contracts. Investments in mutual funds are valued daily at their NAVs,
and investments in ETFs are valued daily at the last reported sale price or the official closing price, which are classified as Level 1 prices, without consideration to the classification level of the specific investments held by an underlying
fund.
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations. In addition, international securities whose markets close hours before the funds value their holdings may require fair valuations due to significant movement in
the U.S. markets occurring after the daily close of the foreign markets. The Board has approved a vendor that calculates fair valuations of international equity securities based on a number of factors that appear to correlate to the movements in the
U.S. markets.
•
Level 3—significant unobservable inputs (including the funds' own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial ratios or cash flows. Level 3
prices may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may
significantly impact the resulting fair value and therefore the funds' results of operations.
The inputs or methodology used for valuing securities are
not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the funds' investments
as of October 31, 2016 are disclosed in the Condensed Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Futures Contracts: Futures contracts are instruments that represent an agreement between two parties that obligates one party to buy, and the other party to sell, specific instruments at an agreed upon price on a stipulated future date. A
fund must give the broker a deposit of cash and/or securities (initial margin) whenever it enters into a futures contract. The amount of the deposit may vary from one contract to another. Subsequent payments (variation margin) are made or received
by a fund depending on the daily fluctuations in the value of the futures contract and are accounted for as unrealized appreciation or depreciation until the contract is closed, at which time the gains or losses are realized. Futures contracts are
traded publicly on exchanges, and their market value may change daily.
Securities Lending: Under
the trust’s Securities Lending Program, a fund (lender) may make short-term loans of its securities to another party (borrower) to generate additional revenue for the fund. The borrower pledges collateral in the form of cash, securities issued
or fully guaranteed by the U.S. government or foreign governments, or letters of credit issued by a bank. Collateral at the individual loan level is required to be maintained on a daily marked-to-market basis in an amount at least equal to the
current value of the securities loaned. The lending agent provides a fund with indemnification against borrower default (the borrower fails to return the security on loan) reducing the risk of loss as a result of default. The cash collateral of
securities loaned is currently invested in money market portfolios operating under Rule 2a-7 of the 1940 Act. Each fund bears the risk of loss with respect to the investment of cash collateral. The terms of the securities lending agreements allow
the funds or the lending agent to terminate any loan at any given time and the securities must be returned within the earlier of the standard trade settlement period or the specified time period under the relevant securities lending agreement.
Securities lending income, as disclosed in each fund’s Statement of Operations, if applicable, represents the income earned from the investment of the cash collateral plus any fees paid by borrowers, less the fees paid to the lending agent and
broker rebates which are subject to adjustments pursuant to the securities lending agreement. On loans not collateralized by cash, a fee is received from the borrower, and is allocated between a fund and the lending agent. The aggregate market value
of securities loaned will not at any time exceed one-third of the total assets of a fund, including collateral received from the loan (at market value computed at the time of the loan). Total costs and expenses, including lending agent fees and
broker rebates, associated with securities lending activities under the trust’s Securities Lending Program paid to the unaffiliated lending agents ranged from 10% to 15%, with subsequent breakpoints to a low of 7.5%, of gross lending revenue
through November 30, 2015. After December 1, 2015, the total costs and expenses paid to the unaffiliated lending agents start at 10% of gross lending revenue, with subsequent breakpoints to a low of 7.5%.
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Schwab Fundamental Index Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
As of October
31, 2016, the funds had securities on loan, all of which were classified as common stocks. The value of the securities on loan and the related collateral as of October 31, 2016, if any, are disclosed in each fund's Condensed Portfolio Holdings. The
value of the securities on loan and the investment of cash collateral are also disclosed in each fund's Statement of Assets and Liabilities.
Cash Management Transactions: The funds may subscribe to the Brown Brothers Harriman & Co. (BBH) Cash Management Service Sweep (CMS Sweep). The BBH CMS Sweep is an investment product that automatically sweeps the funds’ cash balances into
overnight offshore time deposits with either the BBH Grand Cayman branch or a branch of a pre-approved commercial bank. This fully automated program allows the funds to earn interest on cash balances. Excess cash invested with deposit institutions
domiciled outside of the U.S., as with any offshore deposit, may be subject to sovereign actions in the jurisdiction of the deposit institution including, but not limited to, freeze, seizure or diminution. The funds bear the risk associated with the
repayment of principal and payment of interest on such instruments by the institution with which the deposit is ultimately placed. Balances in the CMS Sweep are accounted for on a cost basis, which approximates market value.
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
Assets and liabilities denominated in foreign currencies
are reported in U.S. dollars. For assets and liabilities held on a given date, the dollar value is based on market exchange rates in effect on that date. Transactions involving foreign currencies, including purchases, sales, income receipts and
expense payments, are calculated using exchange rates in effect on the transaction date. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on
securities transactions and the differences between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange appreciation or
depreciation arises from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. These realized and unrealized foreign exchange gains or losses are
reported in foreign currency transactions or translations in the Statement of Operations. The funds do not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in
market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Gains realized by the funds on the sale of securities in
certain foreign countries may be subject to non-U.S. taxes. In those instances, the funds record a liability based on unrealized appreciation to provide for potential non-U.S. taxes payable upon the sale of these securities.
When a fund closes out a futures contract position, it
calculates the difference between the value of the position at the beginning and at the end of the contract, and records a realized gain or loss accordingly.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date. Any
distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
Income received from foreign sources may result in
withholding tax. Withholding taxes are accrued at the same time as the related income if the tax rate is fixed and known, unless a tax withheld is reclaimable from the local tax authorities in which case it is recorded as receivable. If the tax rate
is not known or estimable, such expense or reclaim receivable is recorded when the net proceeds are received.
In 2015, the Schwab Fundamental International Large Company
Index Fund filed claims to recover taxes previously withheld in certain European Union countries on the basis that those countries had purportedly violated certain provisions in the Treaty on the Functioning of the European Union. These filings are
subject to various administrative and judicial proceedings within these countries, and all professional fees associated with these filings have been paid by CSIM. No other amounts for additional tax reclaims are reflected in the financial statements
due to the uncertainty surrounding the ultimate resolution of proceedings, the likelihood of receipt of these claims, and the potential timing of payment.
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Financial Notes (continued)
2. Significant
Accounting Policies (continued):
(e)
Expenses:
Expenses that are specific to a fund are
charged directly to the fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets.
(f) Distributions to Shareholders:
The funds make distributions from net investment income and
net realized capital gains, if any, once a year.
(g)
Custody Credit:
Certain funds have an arrangement
with their custodian bank, State Street Bank and Trust Company (State Street), under which the funds may receive a credit for their uninvested cash balance to offset their custody fees and accounting fees. The credit amounts, if any, are disclosed
in the Statement of Operations as a reduction to a fund's operating expenses.
(h) Accounting Estimates:
The accounting policies described in this report conform to
GAAP. 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 and these differences may be material.
(i) Federal Income Taxes:
The funds intend to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the funds distribute substantially all of their net investment income and net realized 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.
(j) Foreign Taxes:
The funds may be subject to foreign taxes (a portion of
which may be reclaimable) on income, corporate events, foreign currency exchanges and capital gains on investments. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in foreign markets in
which the funds invest. These foreign taxes, if any, are paid by the funds and are disclosed in the Statement of Operations. Foreign taxes payable as of October 31, 2016, if any, are reflected in each fund's Statement of Assets and
Liabilities.
(k) Indemnification:
Under the funds’ organizational documents, the
officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their vendors and others that provide
general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect the risk of loss attributable to
these arrangements to be remote.
3. Risk Factors:
Investing in the funds may involve
certain risks, as discussed in the funds' prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Market Risk. Equity markets
rise and fall daily. As with any investment whose performance is tied to these markets, the value of the investment in a fund will fluctuate, which means that the investors could lose money.
Equity Risk. The prices of
equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition, equity markets tend to move in cycles, which may cause stock prices to
fall over short or extended periods of time.
Tracking Error Risk. As an
index fund, each fund seeks to track the performance of its respective index, although it may not be successful in doing so. The divergence between the performance of a fund and its index, positive or negative, is called “tracking
error.” Tracking error can be caused by many factors and it may be significant.
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Financial Notes (continued)
3. Risk
Factors (continued):
Investment Style Risk. Each fund invests in companies measured by its respective index. Each fund follows these stocks during upturns as well as downturns. Because of its indexing strategy, a fund does not take steps to reduce market exposure
or to lessen the effects of a declining market. In addition, because of a fund’s expenses, a fund’s performance may be below that of its respective index.
A significant percentage of an index may be composed of
securities in a single industry or sector of the economy. If a fund is focused in an industry or sector, it may present more risks than if it were broadly diversified over numerous industries and sectors of the economy.
Sampling Index Tracking Risk. If a fund uses a sampling method, the fund will not fully replicate its respective index and may hold securities not included in the index. As a result, the fund is subject to the risk that the investment
adviser’s investment management strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. If a fund utilizes a sampling approach, it may not track the return of the index as well as it
would if the fund purchased all of the securities in the index.
Concentration Risk. To the
extent that a fund’s or its respective index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or asset class, the fund may be adversely affected by the
performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector, country or asset
class.
Large-Cap Risk. Large-cap stocks tend to go in and out of favor based on market and economic conditions. During a period when large-cap stocks fall behind other types of investments—bonds or small company stocks, for
instance—a fund’s large-cap holdings could reduce performance.
Small-Cap Risk.
Historically, small-cap stocks have been riskier than large-cap stocks. Stock prices of smaller companies may be based in substantial part on future expectations rather than current achievements and may move sharply, especially during market upturns
and downturns. Small-cap companies may be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments—large-cap stocks, for instance—a fund’s small-cap holdings could reduce performance.
Foreign Investment Risk. A
fund's investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers. These include risks of adverse changes in foreign economic, political, regulatory
and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of economic sanctions or other government restrictions; differing accounting,
auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may negatively impact the value or liquidity of a fund's investments, and could impair the fund's
ability to meet its investment objective or invest in accordance with its investment strategy. These risks may be heightened in connection with investments in emerging markets. Foreign securities also include American Depositary Receipts (ADRs),
Global Depositary Receipts (GDRs) and European Depositary Receipts (EDRs), which are depositary receipts issued by U.S. and foreign banks that represent shares of foreign-based corporations. Investments in ADRs, GDRs and EDRs may be less liquid than
the underlying shares in their primary trading market and GDRs, many of which are issued by companies in emerging markets, may be more volatile. To the extent a fund's investments in a single country or a limited number of countries represent a
larger percentage of the fund's assets, the fund's performance may be adversely affected by the economic, political and social conditions in those countries and it may be subject to increased price volatility.
Emerging Markets Risk.
Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market countries often have less uniformity in accounting and reporting
requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be more precarious than in developed countries. As a result, there will
tend to be an increased risk of price volatility associated with a fund’s investments in emerging market countries, and, at times, it may be difficult to value such investments.
ETF Risk. Certain funds may
purchase shares of ETFs to gain exposure to a particular portion of the market while awaiting an opportunity to purchase securities directly. When a fund invests in an ETF, in addition to directly bearing the expenses associated with its own
operations, it will bear a proportionate share of the ETF's expenses. Therefore, it may be more costly to own an ETF than to own the underlying securities directly. In addition, while the risks of owning shares of an ETF generally reflect the risks
of owning the underlying securities the ETF is designed to track, lack of liquidity in the market for an ETF's shares can result in its value being more volatile than the underlying portfolio securities.
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Financial Notes (continued)
3. Risk
Factors (continued):
Derivatives Risk. A fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Certain of these risks,
such as liquidity risk and market risk, are discussed elsewhere in this section. A fund’s use of derivatives is also subject to credit risk, leverage risk, lack of availability risk, valuation risk, correlation risk and tax risk. Lack of
availability risk is the risk that suitable derivative transactions may not be available in all circumstances for risk management or other purposes. Credit risk is the risk that the counterparty to a derivatives transaction may not fulfill its
obligations. Leverage risk is the risk that a small percentage of assets invested in derivatives can have a disproportionately large impact on a fund. Valuation risk is the risk that a particular derivative may be valued incorrectly. Correlation
risk is the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is the risk that the use of derivatives may cause a fund to realize higher amounts of short-term capital
gain. A fund's use of derivatives could reduce the fund's performance, increase the fund's volatility, and could cause the fund to lose more than the initial amount invested.
Liquidity Risk. A fund may
be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or the fund may have to sell them at a loss.
Securities Lending Risk.
Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.
Please refer to the funds’ prospectus for a more
complete description of the principal risks of investing in the funds.
4. Affiliates and Affiliated Transactions:
Charles
Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund's investment adviser and administrator pursuant to an Investment Advisory and Administration
Agreement between CSIM and the trust.
For its advisory
and administrative services to the funds, CSIM is entitled to receive an annual fee, payable monthly, based on a percentage of each fund’s average daily net assets as follows:
| % of Average Daily Net Assets | Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund |
| First $500 million | 0.30% | 0.30% | 0.30% | 0.40% | 0.50% |
| $500 million to $5 billion | 0.22% | 0.22% | 0.22% | 0.38% | 0.48% |
| $5 billion to $10 billion | 0.20% | 0.20% | 0.20% | 0.36% | 0.46% |
| over $10 billion | 0.18% | 0.18% | 0.18% | 0.34% | 0.44% |
For the period ended October 31,
2016, the aggregate advisory fees paid to CSIM by the funds, as a percentage of each fund's average daily net assets were as follows:
| Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund |
| 0.23% | 0.25% | 0.26% | 0.40% | 0.50% |
The Board has adopted a Shareholder
Servicing Plan (the Plan) on behalf of the funds. The Plan enables each fund to bear expenses relating to the provision by financial intermediaries, including Charles Schwab & Co., Inc. (a broker-dealer affiliate of CSIM, Schwab) (together,
service providers), of certain account maintenance, customer liaison and shareholder services to the current shareholders of the funds.
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Pursuant to
the Plan, each fund’s shares are subject to an annual shareholder servicing fee up to 0.10%. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab, as distributor of the funds
(or, in the case of payments made to Schwab acting as a service provider, pursuant to Schwab’s written agreement with the funds). Payments under the Plan are made as described above without regard to whether the fee is more or less than the
service provider’s actual cost of providing the services, and if more, such excess may be retained as profit by Schwab or the service provider.
Although these agreements specify certain fees for these
services, CSIM and its affiliates have made an additional agreement with the funds, for so long as CSIM serves as the investment adviser to the funds, which may only be amended or terminated with the approval of the Board, to limit the total annual
fund operating expenses charged, excluding interest, taxes and certain non-routine expenses (expense limitation). The expense limitation as a percentage of average daily net assets is as follows:
| Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund |
| 0.35% | 0.35% | 0.35% | 0.49% | 0.49% |
CSIM has a licensing agreement with
the Frank Russell Company to use certain Russell indices and trademarks in connection with the offering and operation of certain registered investment companies. The funds have entered into a sub-license agreement with CSIM pursuant to which CSIM
has agreed to sub-license certain Russell indices and trademarks to the funds. Under the sub-license agreement, each fund pays its pro rata share of licensing fees, as disclosed in each fund's Statement of Operations as Index fees.
The funds may engage in certain transactions involving
affiliates. For instance, a fund may own shares of The Charles Schwab Corporation if that company is included in its index. Below is the summary of investment activities involving The Charles Schwab Corporation shares owned by the Schwab Fundamental
US Large Company Index Fund during the report period:
| Fund | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Dividends
Received 11/01/15 to 10/31/16 |
| Schwab Fundamental US Large Company Index Fund | 81,215 | — | (8,500) | 72,715 | $2,305,066 | $84,291 | $19,416 |
Certain Schwab Funds may own shares
of other Schwab funds. The table below reflects the percentages of shares of each fund in this report that are owned by other Schwab Funds as of October 31, 2016, as applicable:
| Underlying Funds | |||||
| Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund | |
| Schwab MarketTrack All Equity Portfolio | 1.6% | 3.1% | 3.5% | 5.9% | 8.4% |
| Schwab MarketTrack Growth Portfolio | 1.9% | 3.1% | 2.9% | 5.0% | 7.4% |
| Schwab MarketTrack Balanced Portfolio | 1.0% | 1.7% | 1.6% | 2.7% | 4.0% |
| Schwab MarketTrack Conservative Portfolio | 0.3% | 0.5% | 0.5% | 0.8% | 1.2% |
Pursuant to an exemptive order
issued by the SEC, the funds may enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency purposes and the interest
rate to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating funds/portfolios.
The interfund lending facility is subject to the oversight and periodic review by the Board. The funds had no interfund borrowing or lending activity during the period.
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
The funds
may engage in direct transactions with certain other Schwab funds when practical. When one fund is seeking to sell a security that another is seeking to buy, an interfund transaction can allow both funds to benefit by reducing transaction costs.
This practice is limited to funds that share the same investment adviser, trustees and/or officers. For the period ended October 31, 2016, each fund’s total aggregate security transactions with other Schwab funds as well as any realized gains
(losses) were as follows:
| Total Aggregate Transactions | Realized Gains (Losses) | |
| Schwab Fundamental US Large Company Index Fund | $199,916,075 | $21,890,188 |
| Schwab Fundamental US Small Company Index Fund | 120,784,372 | 13,640,827 |
| Schwab Fundamental International Large Company Index Fund | 21,133,422 | (1,665,180) |
| Schwab Fundamental International Small Company Index Fund | 39,357,803 | (105,638) |
| Schwab Fundamental Emerging Markets Large Company Index Fund | 2,220,791 | (365,984) |
The professional fees related to
foreign withholding tax claims discussed in financial note 2 were non-routine expenses. However, the investment adviser agreed to pay these professional fees for this reporting period, subject to reimbursement by the Schwab Fundamental International
Large Company Index Fund to the extent the fund is able to successfully recover taxes withheld in the future.
5. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations
throughout the report period. The trust did not pay any of these interested persons for their services as trustees, but it did pay non-interested persons (independent trustees), as noted on each fund’s Statement of Operations. For information
regarding the trustees, please refer to the Trustees and Officers table at the end of this report.
6. Borrowing from Banks:
During the period, the funds
were participants with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit Facility, in
addition to the interest charged on any borrowings by a fund, each fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, the Credit Facility was amended to run for
a new 364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
The funds also have access to custodian overdraft facilities. A
fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
7. Derivatives:
Certain funds entered into equity
index futures contracts during the report period. The funds invested in futures contracts to equitize available cash. The fair value and variation margin for futures contracts held at October 31, 2016 are presented on the Condensed Portfolio
Holdings and Statement of Assets and Liabilities, respectively. The net realized and change in unrealized gains (losses) on futures contracts are presented on the Statement of Operations. Refer to financial note 2(b) for the funds' accounting
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Financial Notes (continued)
7.
Derivatives (continued):
policies with respect
to futures contracts and financial note 3 for disclosures concerning the risks of investing in futures contracts. During the period ended October 31, 2016, the month-end average contract values of futures contracts held by the funds and the
month-end average number of contracts held were as follows:
| Contract Values | Number of Contracts | |
| Schwab Fundamental US Large Company Index Fund | $27,189,173 | 262 |
| Schwab Fundamental US Small Company Index Fund | 12,130,926 | 107 |
| Schwab Fundamental International Large Company Index Fund | 5,945,217 | 71 |
| Schwab Fundamental International Small Company Index Fund | 1,086,190 | 13 |
| Schwab Fundamental Emerging Markets Large Company Index Fund | 3,383,526 | 81 |
8. Purchases and Sales/Maturities of Investment Securities:
For the period ended October 31, 2016, purchases and
sales/maturities of securities (excluding short-term obligations) were as follows:
| Purchases of Securities | Sales/Maturities of Securities | |
| Schwab Fundamental US Large Company Index Fund | $495,896,339 | $895,630,715 |
| Schwab Fundamental US Small Company Index Fund | 408,672,630 | 465,112,708 |
| Schwab Fundamental International Large Company Index Fund | 172,155,180 | 318,630,203 |
| Schwab Fundamental International Small Company Index Fund | 188,725,960 | 170,834,185 |
| Schwab Fundamental Emerging Markets Large Company Index Fund | 60,208,259 | 82,781,907 |
9. Redemption Fee:
The funds charge a 2.00%
redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods
were as follows:
| Current
Period (11/1/15-10/31/16) |
Prior
Period (11/1/14-10/31/15) | |
| Schwab Fundamental US Large Company Index Fund | $71,689 | $81,788 |
| Schwab Fundamental US Small Company Index Fund | 15,918 | 11,606 |
| Schwab Fundamental International Large Company Index Fund | 34,029 | 22,524 |
| Schwab Fundamental International Small Company Index Fund | 5,204 | 6,552 |
| Schwab Fundamental Emerging Markets Large Company Index Fund | 43,985 | 13,706 |
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Financial Notes (continued)
10.
Federal Income Taxes:
As of October 31, 2016, the
components of distributable earnings on a tax-basis were as follows:
| Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund | |||||
| Undistributed ordinary income | $119,863,697 | $14,240,766 | $27,991,114 | $10,609,786 | $6,649,413 | ||||
| Undistributed long-term capital gains | 201,230,533 | 10,054,845 | — | — | — | ||||
| Unrealized appreciation on investments | 1,023,735,954 | 305,762,362 | 68,512,456 | 71,389,818 | 28,923,173 | ||||
| Unrealized depreciation on investments | (186,708,548) | (79,059,996) | (169,985,600) | (31,150,728) | (30,310,921) | ||||
| Other unrealized appreciation (depreciation) | — | (9) | (113,094) | (55,782) | (164,521) | ||||
| Net unrealized appreciation (depreciation) | $837,027,406 | $226,702,357 | ($101,586,238) | $40,183,308 | ($1,552,269) |
The primary differences between
book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments are the tax deferral of losses on wash sales, Passive Foreign Investment Companies (PFIC), partnership investments and non-taxable dividends.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of October 31, 2016, the funds had capital loss carryforwards available to offset future net capital gains before the expiration dates as follows:
| Expiration Date | Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund | ||||
| October 31, 2017 | $— | $— | $38,420,971 | $— | $— | ||||
| October 31, 2018 | — | — | 20,948,477 | — | — | ||||
| No expiration* | — | — | — | 1,521,731 | 60,003,237 | ||||
| Total | $— | $— | $59,369,448 | $1,521,731 | $60,003,237 |
| * | As a result of the passage of the Regulated Investment Company Modernization Act of 2010, capital losses incurred after December 31, 2010 may now be carried forward indefinitely, but must retain the character of the original loss. |
For the year ended October 31, 2016, the funds had capital loss
carryforwards utilized as follows:
| Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund | |
| Capital loss carryforwards utilized | $— | $— | $22,391,070 | $— | $— |
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Financial Notes (continued)
10. Federal Income
Taxes (continued):
The tax-basis components of distributions
paid during the current and prior fiscal years were as follows:
| Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund | |
| Current period distributions | |||||
| Ordinary income | $172,769,868 | $20,540,783 | $31,819,112 | $8,387,388 | $8,647,638 |
| Long-term capital gains | 82,222,528 | 61,259,281 | — | — | — |
| Prior period distributions | |||||
| Ordinary income | $138,919,379 | $28,684,248 | $30,718,378 | $4,676,828 | $8,501,798 |
| Long-term capital gains | 52,162,182 | 46,582,789 | — | 1,210,184 | — |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements.
Permanent book and tax basis differences, which are mainly due
to differing treatments of paydown gains and losses and amortization of bond discounts and premiums, may result in reclassifications between components of net assets as required. The adjustments will have no impact on net assets or the results of
operations. As of October 31, 2016, the funds made the following reclassifications:
| Schwab
Fundamental US Large Company Index Fund |
Schwab
Fundamental US Small Company Index Fund |
Schwab
Fundamental International Large Company Index Fund |
Schwab
Fundamental International Small Company Index Fund |
Schwab
Fundamental Emerging Markets Large Company Index Fund | |
| Capital shares | $— | $— | $— | $— | $— |
| Undistributed net investment income | (399,649) | (572,637) | 731,563 | 787,583 | (46,486) |
| Net realized capital gains (losses) | 399,649 | 572,637 | (731,563) | (787,583) | 46,486 |
As of October 31, 2016, management
has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) as applicable to the funds, and has determined that no provision for income tax is
required in the funds’ financial statements. The funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended October 31, 2016, the funds did
not incur any interest or penalties.
11. Recent Regulatory Development:
In October 2016,
the SEC adopted new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require
standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact
that the adoption of the amendments to Regulation S-X will have on the funds' financial statements and related disclosures.
12. Subsequent Events:
Management has determined there
are no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Report of
Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab Fundamental US Large Company Index Fund
Schwab Fundamental US Small Company Index Fund
Schwab Fundamental International Large Company Index Fund
Schwab Fundamental International Small Company Index Fund
Schwab Fundamental Emerging Markets Large Company Index Fund
Schwab Fundamental US Large Company Index Fund
Schwab Fundamental US Small Company Index Fund
Schwab Fundamental International Large Company Index Fund
Schwab Fundamental International Small Company Index Fund
Schwab Fundamental Emerging Markets Large Company Index Fund
In our opinion, the accompanying statements of assets and
liabilities, including the condensed 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 Fundamental US
Large Company Index Fund, Schwab Fundamental US Small Company Index Fund, Schwab Fundamental International Large Company Index Fund, Schwab Fundamental International Small Company Index Fund and Schwab Fundamental Emerging Markets Large Company
Index Fund (five of the portfolios constituting Schwab Capital Trust, hereafter collectively referred to as the “Funds”) at October 31, 2016, and 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2016
San Francisco, California
December 16, 2016
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Other Federal Tax
Information (unaudited)
The funds elect to pass through under section 853 of the
Internal Revenue Code foreign tax credit to its shareholders for the year ended October 31, 2016, and the respective foreign source income on the funds as follows.
| Foreign Tax Credit | Foreign Source Income | |
| Schwab Fundamental US Large Company Index Fund | $— | $— |
| Schwab Fundamental US Small Company Index Fund | — | — |
| Schwab Fundamental International Large Company Index Fund | 2,634,472 | 37,210,664 |
| Schwab Fundamental International Small Company Index Fund | 1,164,108 | 12,259,281 |
| Schwab Fundamental Emerging Markets Large Company Index Fund | 1,359,404 | 10,119,254 |
For corporate shareholders, the
following percentage of the funds' dividend distributions paid during the fiscal year ended October 31, 2016, qualify for the corporate dividends received deduction:
| Percentage | |
| Schwab Fundamental US Large Company Index Fund | 68.93 |
| Schwab Fundamental US Small Company Index Fund | 77.25 |
| Schwab Fundamental International Large Company Index Fund | — |
| Schwab Fundamental International Small Company Index Fund | — |
| Schwab Fundamental Emerging Markets Large Company Index Fund | — |
For the fiscal year ended October
31, 2016, the funds designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(11) of the Internal Revenue Code. Shareholders will be notified in January 2017 via IRS
form 1099 of the amounts for use in preparing their 2016 income tax return.
| Schwab Fundamental US Large Company Index Fund | $124,982,873 |
| Schwab Fundamental US Small Company Index Fund | 16,883,023 |
| Schwab Fundamental International Large Company Index Fund | 31,569,897 |
| Schwab Fundamental International Small Company Index Fund | 7,533,950 |
| Schwab Fundamental Emerging Markets Large Company Index Fund | 7,531,158 |
Under Section 852 (b)(3)(C) of the
Internal Revenue Code, certain funds hereby designate the following amounts as long-term capital gain dividends for the fiscal year ended October 31, 2016:
| Schwab Fundamental US Large Company Index Fund | $82,222,528 |
| Schwab Fundamental US Small Company Index Fund | 61,259,281 |
| Schwab Fundamental International Large Company Index Fund | — |
| Schwab Fundamental International Small Company Index Fund | — |
| Schwab Fundamental Emerging Markets Large Company Index Fund | — |
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Schwab Fundamental Index Funds | Annual
Report
Schwab Fundamental Index Funds
Investment Advisory
Agreement Approval
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
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Schwab Fundamental Index Funds | Annual Report
Schwab Fundamental Index Funds
Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic
Trust and Laudus Trust. The Fund Complex includes 108 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the funds’ Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 108 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 108 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 108 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 108 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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Schwab Fundamental Index Funds
| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 108 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 108 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 108 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 108 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 108 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
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Schwab Fundamental Index Funds
| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); and Director, Schwab Holdings, Inc. (May 2008 – present). | 108 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 108 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer, Schwab Holdings, Inc. (May 2007 – present). | 108 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
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Schwab Fundamental Index Funds
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
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Schwab Fundamental Index Funds
Glossary
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Schwab Fundamental Index Funds
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Schwab Fundamental Index Funds
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Schwab Fundamental Index Funds | Annual Report
Notes
Notes
Notes
Schwab Fundamental Index Funds
Our straightforward
approach sets us apart.
As one of the nation’s largest asset managers, our
goal is to provide investors with a diverse selection of foundational products that aim to deliver consistent performance at a competitive cost. The list below shows all currently available Schwab Funds.
An investor should consider a fund’s investment
objectives, risks, charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-877-824-5615 for a prospectus and brochure for any Schwab Fund.
Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Schwab Funds’ website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s
website at www.sec.gov, or by contacting Schwab Funds at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s
website at www.sec.gov.
| 1 | You could lose money by investing in a money market fund. All Schwab Money Funds with the exception of Schwab Variable Share Price Money Fund seek to preserve the value of your investment at $1.00 per share, but cannot guarantee they will do so. Effective October 14, 2016, all Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab Retirement Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury Obligations Money Fund and Schwab Government Money Market Portfolio may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The money market fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. |
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MFR39592-09
00186673
00186673
Table of Contents
Annual
Report | October 31, 2016
Schwab MarketTrack Portfolios®
Schwab MarketTrack
All Equity Portfolio™
All Equity Portfolio™
Schwab
MarketTrack
Growth Portfolio™
Growth Portfolio™
Schwab MarketTrack
Balanced Portfolio™
Balanced Portfolio™
Schwab
MarketTrack
Conservative Portfolio™
Conservative Portfolio™
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Schwab MarketTrack Portfolios
In
This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab).
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com.
| Total Return for the 12 Months Ended October 31, 2016 | |
| Schwab MarketTrack All Equity Portfolio (Ticker Symbol: SWEGX) | 3.99% |
| All Equity Composite Index | 4.49% |
| Fund Category: Morningstar Allocation—85%+ Equity | 1.59% |
| Performance Details | pages 8-10 |
| Schwab MarketTrack Growth Portfolio (Ticker Symbol: SWHGX) | 3.88% |
| Growth Composite Index | 4.42% |
| Fund Category: Morningstar Allocation—70% to 85% Equity | 2.43% |
| Performance Details | pages 11-13 |
| Schwab MarketTrack Balanced Portfolio (Ticker Symbol: SWBGX) | 3.92% |
| Balanced Composite Index | 4.44% |
| Fund Category: Morningstar Allocation—50% to 70% Equity | 2.75% |
| Performance Details | pages 14-16 |
| Schwab MarketTrack Conservative Portfolio (Ticker Symbol: SWCGX) | 3.68% |
| Conservative Composite Index | 4.40% |
| Fund Category: Morningstar Allocation—30% to 50% Equity | 3.53% |
| Performance Details | pages 17-19 |
| Minimum Initial Investment1 | $ 100 |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
The components that make up each of the composite indexes may
vary over time. For index definitions, please see the Glossary.
Portfolio expenses may have been partially absorbed by CSIM and
its affiliates. Without these reductions, a portfolio’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or on the redemption of portfolio
shares.
Source for category information: Morningstar, Inc.
The Morningstar Category return represents all active and index mutual funds within the category as of the report date.
| 1 | Please see the funds’ prospectus for further detail and eligibility requirements. |
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Asset
Class Performance Comparison % returns during the 12 months ended 10/31/2016
Index figures
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Past performance is not an indication of future
results.
For index definitions, please see the
Glossary.
Data source: Index provider websites
and CSIM.
Nothing in this report represents a
recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
1 The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no
deductions for expenses or other taxes.
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
4
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
The Investment
Environment
Over the 12-month reporting period ended October 31, 2016,
global fixed-income investments and emerging market and U.S. equities performed well, while many developed international equities lagged behind. The Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and
then held steady for the remainder of the reporting period. Yields on many global government-backed securities remained historically low, with some in negative territory, while lackluster global economic growth contributed to continued investor
uncertainty. Toward the end of the reporting period, the U.S. presidential election fueled heightened market volatility in both the U.S. and abroad. For the reporting period, the S&P 500® Index, a bellwether for the overall U.S. stock market, returned 4.51%, while the MSCI EAFE Index (Net), a broad measure of developed international
equity performance, returned -3.23%. In fixed-income markets, the Bloomberg Barclays U.S. Aggregate Bond Index returned 4.37% for the reporting period, and the Citigroup Non-U.S. Dollar World Government Bond Index returned 7.34%.
U.S. economic data generally improved over the reporting
period, despite several weak measurements during the 12 months. Corporate earnings were better-than-expected for the second quarter of 2016 but contracted in the third quarter, while U.S. nonfarm payrolls came in near expectations outside of a sharp
drop in May. Consumer confidence measurements were generally below expectations for most of the reporting period, but rebounded in September to reach the highest level since the 2008 recession. However, consumer confidence fell slightly in October
as increasing uncertainty surrounding the U.S. presidential election and the stability of the labor market resulted in more cautious consumers. In addition, U.S. economic growth trended upwards after dipping slightly in the first quarter of 2016,
with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Short-term interest rate policy in the U.S. remained a source
of uncertainty and volatility during the reporting period. The Fed raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, with the possibility of four additional increases in 2016. Inconsistent U.S. economic data, weak
global growth, and persistently low inflation, however, caused the Fed to leave rates unchanged at each meeting during the reporting period. At its meeting in September, the Fed noted that although the case for a rate increase had strengthened, it
had “…decided, for the time being, to wait for further evidence of continued progress toward its objectives.” Continued low interest rates in the U.S. resulted in cheaper borrowing costs, supporting the overall performance of
emerging markets and U.S. markets during the reporting period. In addition, many emerging market economies were able to absorb the sharp drop in commodities prices and shore up their monetary reserves over the past year, lessening investor fears
about the potentially negative impact of a U.S. interest rate increase. As of the end of the reporting period, markets continued to expect one rate hike by the end of 2016.
During the 12-month reporting period, many central banks
outside the U.S. increased accommodative policy measures to help combat stalling economic growth. Both the Bank of Japan and the European Central Bank increased bond purchases and introduced negative interest rates, while the People’s Bank of
China expanded its lending facilities. Following the United Kingdom’s vote in June to leave the European Union (also known as Brexit), the Bank of England (BoE) announced its plan to take additional measures if necessary while markets
adjusted. Less than two months later in early August, the BoE cut its benchmark rate and resumed quantitative easing, and also increased lending to consumers and companies. The Central Bank of Russia also took steps aimed at stabilizing the economy
and inflation, decreasing its key interest rate in mid-September. While some of these measures initially appeared to be less effective than the central banks had hoped, the positive performance of many international equities in the second half of
the reporting period suggested that economic conditions outside the U.S. were beginning to improve.
5
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
The Investment
Environment (continued)
With interest rates near historically low levels in the U.S.
and overseas, the yields on many government-backed securities also remained low, with some dropping below 0.00%. Over the reporting period, the yields on both German and Japanese 10-year government bonds dipped into negative territory. Meanwhile,
the yield on the British 10-year government note declined to levels approaching 0.50% in August after the announcement of increased accommodative policy measures from the BoE. In the U.S., short-term yields generally increased after the Fed’s
rate hike in December, and then leveled off as the reporting period continued. Longer-term U.S. yields, which are highly influenced by inflation and growth expectations, generally fell in the first half of 2016 amid subdued inflation and weak global
economic growth. As inflation rose slightly and growth expectations improved, the yields on longer-term Treasuries generally trended upwards in the last months of the reporting period.
Index figures assume dividends and distributions were
reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Past performance is not an
indication of future results.
For index definitions,
please see the Glossary.
Nothing in this report represents
a recommendation of a security by the investment adviser.
Management views may have changed since the report date.
6
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Portfolio
Management
 |
Zifan Tang, Ph.D., CFA, Managing Director, Senior Portfolio Manager, leads the portfolio management team and has overall responsibility for all aspects of the management of the funds. She was appointed portfolio manager of the funds in February 2012. Prior to joining CSIM in 2012, Ms. Tang was a product manager at Thomson Reuters and, from 1997 to 2009, worked as a portfolio manager at Barclays Global Investors, which was subsequently acquired by BlackRock. |
7
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack All Equity Portfolio
Performance and Fund
Facts as of 10/31/16
The Schwab MarketTrack All Equity Portfolio (the portfolio) seeks high capital growth through an all-stock portfolio. To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation is 100% in stock investments,
with certain percentages for different segments of the stock market. For the 12-month reporting period ended October 31, 2016, the portfolio remained close to the target allocations of 45% in U.S. large-cap, 30% in international, and 25% in U.S.
small-cap stocks. The portfolio invests mainly in other Schwab Funds, including index funds, which seek to track the total returns of various market indices. For more information concerning the portfolio’s investment objective, strategies, and
risks, please see the portfolio’s prospectus.
Market
Highlights. Over the 12-month reporting period, emerging market and U.S. equities performed well, while many developed international equities lagged behind. At its December 2015 meeting, the Federal
Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit)
caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the portfolio returned 3.99%. The portfolio’s internally calculated comparative index, the All Equity Composite Index (the composite index), returned 4.49%.
Positioning and
Strategies. Over the reporting period, the portfolio’s asset allocations were broadly in line with those of the composite index.
The portfolio’s international equity allocation was the
largest detractor from the portfolio’s total return. The Schwab International Index Fund, which returned -2.6%, dragged on total return. The Schwab Fundamental Emerging Markets Large Company Index Fund, which returned 21.6%, contributed to
absolute return, but underperformed the Russell RAFI Emerging Markets Large Company Index1, its comparative index, which returned 22.5%, detracting from
relative performance. The portfolio’s positions in the Schwab Fundamental International Large Company Index Fund and the Schwab Fundamental International Small Company Index Fund contributed to both the total return and the relative
performance of the portfolio.
The portfolio’s U.S.
equity exposure provided the greatest contribution to total return, particularly among its large-cap positions. The Schwab S&P 500 Index Fund returned 4.4% for the reporting period and was the portfolio’s top contributor, largely due to
this fund’s large position within the portfolio. On a relative basis, the Schwab S&P 500 Index Fund underperformed its comparative index, the S&P 500® Index, which returned 4.5%. On a relative basis, the Schwab Small-Cap Index Fund, which returned 4.2%, outperformed its comparative index, the Russell
2000 Index, which returned 4.1%.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
8
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack All Equity Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets1,2
Management views and portfolio holdings may have changed
since the report date.
Small-company stocks are subject to
greater volatility than many other asset classes.
International investments are subject to additional risks such
as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
| 2 | The holdings listed exclude any temporary liquidity investments. |
9
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack All Equity Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Portfolio and Inception Date | 1 Year | 5 Years | 10 Years |
| Portfolio: Schwab MarketTrack All Equity Portfolio (5/19/98) | 3.99% | 10.17% | 4.81% |
| All Equity Composite Index | 4.49% | 10.72% | 5.18% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Allocation—85%+ Equity | 1.59% | 9.16% | 4.30% |
| Fund Expense Ratio3: 0.62% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.21%. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
10
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Growth Portfolio
Performance and Fund
Facts as of 10/31/16
The Schwab MarketTrack Growth Portfolio (the portfolio) seeks high capital growth with less volatility than an all-stock portfolio. To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation includes stock,
bond, and cash investments. For the 12-month reporting period ended October 31, 2016, the portfolio remained close to the target allocations of 80% equity, 15% fixed income, and 5% cash and cash equivalents. The portfolio invests mainly in other
Schwab Funds, including index funds, which seek to track the total returns of various market indices. For more information concerning the portfolio’s investment objective, strategies, and risks, please see the portfolio’s
prospectus.
Market Highlights. Over the 12-month reporting period, emerging market and U.S. equities performed well, while many developed international equities lagged behind. At its December 2015 meeting, the Federal Reserve (Fed) raised
short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in
volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the portfolio returned 3.88%. The portfolio’s internally calculated comparative index, the Growth Composite Index (the composite index), returned 4.42%.
Positioning and
Strategies. Over the reporting period, the portfolio’s asset allocations were broadly in line with those of the composite index.
The portfolio’s international equity allocation was the
largest detractor from the portfolio’s total return. The Schwab International Index Fund, which returned -2.6%, dragged on total return. The Schwab Fundamental Emerging Markets Large Company Index Fund, which returned 21.6%, contributed to
absolute return, but underperformed the Russell RAFI Emerging Markets Large Company Index1, its comparative index, which returned 22.5%, detracting from
relative performance. The portfolio’s positions in the Schwab Fundamental International Large Company Index Fund and the Schwab Fundamental International Small Company Index Fund contributed to both the total return and relative performance of
the portfolio.
The portfolio’s U.S. equity
exposure provided the greatest contribution to total return, particularly among its large-cap positions. The Schwab S&P 500 Index Fund returned 4.4% for the reporting period and was the portfolio’s top contributor, largely due to this
fund’s large position within the portfolio. On a relative basis, the Schwab S&P 500 Index Fund underperformed its comparative index, the S&P
500® Index, which returned 4.5%. On a relative basis, the Schwab Small-Cap Index Fund, which returned 4.2%, outperformed its comparative index, the
Russell 2000 Index, which returned 4.1%.
The
portfolio’s fixed-income allocation generated a positive return that contributed to the portfolio’s total return, with the Schwab Total Bond Market Fund returning 3.9%. On a relative basis, however, the Schwab Total Bond Market Fund
underperformed the composite index’s U.S. fixed-income allocation component, the Bloomberg Barclays U.S. Aggregate Bond Index, which returned 4.4%.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
11
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Growth Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets1,2
Management views and portfolio holdings may have changed
since the report date.
Small-company stocks are subject to
greater volatility than many other asset classes.
International investments are subject to additional risks such
as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
| 2 | The holdings listed exclude any temporary liquidity investments. |
12
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Growth Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Portfolio and Inception Date | 1 Year | 5 Years | 10 Years |
| Portfolio: Schwab MarketTrack Growth Portfolio (11/20/95) | 3.88% | 8.87% | 4.80% |
| Growth Composite Index | 4.42% | 9.38% | 5.32% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Fund Category: Morningstar Allocation—70% to 85% Equity | 2.43% | 7.91% | 4.32% |
| Fund Expense Ratio3: 0.62% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.21%. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
13
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Balanced Portfolio
Performance and Fund
Facts as of 10/31/16
The Schwab MarketTrack Balanced Portfolio (the portfolio) seeks both capital growth and income. To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation includes bond, stock, and cash investments. For the
12-month reporting period ended October 31, 2016, the portfolio remained close to the target allocations of 60% equity, 35% fixed income, and 5% cash and cash equivalents. The portfolio invests mainly in other Schwab Funds, including index funds,
which seek to track the total returns of various market indices. For more information concerning the portfolio’s investment objective, strategies, and risks, please see the portfolio’s prospectus.
Market
Highlights. Over the 12-month reporting period, emerging market and U.S. equities performed well, while many developed international equities lagged behind. At its December 2015 meeting, the Federal
Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit)
caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the portfolio returned 3.92%. The portfolio’s internally calculated comparative index, the Balanced Composite Index (the composite index), returned 4.44%.
Positioning and
Strategies. Over the reporting period, the portfolio’s asset allocations were broadly in line with those of the composite index.
The portfolio’s international equity allocation was the
largest detractor from the portfolio’s total return. The Schwab International Index Fund, which returned -2.6%, dragged on total return. The Schwab Fundamental Emerging Markets Large Company Index Fund, which returned 21.6%, underperformed the
Russell RAFI Emerging Markets Large Company Index1, its comparative index, which returned 22.5%, detracting from relative performance. The Schwab
International Index Fund, which returned -2.6%, dragged on total return. The portfolio’s positions in the Schwab Fundamental International Large Company Index Fund and the Schwab Fundamental International Small Company Index Fund contributed
to both total return and relative performance of the portfolio.
The portfolio’s U.S. equity exposure provided the
greatest contribution to total return due to the large weight of this allocation, particularly among its large-cap positions. However, the Schwab S&P 500 Index Fund, which returned 4.4%, underperformed its comparative index, the S&P 500® Index, which returned 4.5%. On a relative basis, the Schwab Small-Cap Index Fund, which returned 4.2%, outperformed its comparative index, the Russell
2000 Index, which returned 4.1%.
The portfolio’s
fixed-income allocation generated a positive return that contributed to the portfolio’s total return, with the Schwab Total Bond Market Fund returning 3.9%, the portfolio’s top contributor and largest positon. On a relative basis,
however, the Schwab Total Bond Market Fund underperformed the composite index’s U.S. fixed-income allocation component, the Bloomberg Barclays U.S. Aggregate Bond Index, which returned 4.4%.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
14
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Balanced Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets1,2
Management views and portfolio holdings may have changed
since the report date.
Small-company stocks are subject to
greater volatility than many other asset classes.
International investments are subject to additional risks such
as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
| 2 | The holdings listed exclude any temporary liquidity investments. |
15
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Balanced Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Portfolio and Inception Date | 1 Year | 5 Years | 10 Years |
| Portfolio: Schwab MarketTrack Balanced Portfolio (11/20/95) | 3.92% | 7.23% | 4.43% |
| Balanced Composite Index | 4.44% | 7.78% | 5.27% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.64% |
| Fund Category: Morningstar Allocation—50% to 70% Equity | 2.75% | 7.36% | 4.76% |
| Fund Expense Ratio3: 0.64% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.23%. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
16
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Conservative Portfolio
Performance and Fund
Facts as of 10/31/16
The Schwab MarketTrack Conservative Portfolio (the portfolio) seeks income and more growth potential than an all-bond portfolio. To pursue its goal, the portfolio maintains a defined asset allocation. The portfolio’s target allocation includes bond, stock,
and cash investments. For the 12-month reporting period ended October 31, 2016, the portfolio remained close to the target allocations of 55% fixed income, 40% equity, and 5% cash and cash equivalents. The portfolio invests mainly in other Schwab
Funds, including index funds, which seek to track the total returns of various market indices. For more information concerning the portfolio’s investment objective, strategies, and risks, please see the portfolio’s
prospectus.
Market Highlights. Over the 12-month reporting period, emerging market and U.S. equities performed well, while many developed international equities lagged behind. At its December 2015 meeting, the Federal Reserve (Fed) raised
short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in
volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the portfolio returned 3.68%. The portfolio’s internally calculated comparative index, the Conservative Composite Index (the composite index), returned 4.40%.
Positioning and
Strategies. Over the reporting period, the portfolio’s asset allocations were broadly in line with those of the composite index.
The portfolio’s international equity allocation was the
largest detractor from the portfolio’s total return. The Schwab International Index Fund, which returned -2.6%, dragged on total return. The greatest contribution came from the Schwab Fundamental Emerging Markets Large Company Index Fund,
which returned 21.6%. However, the Schwab Fundamental Emerging Markets Large Company Index Fund underperformed the Russell RAFI Emerging Markets Large Cap
Index1, its comparative index, which returned 22.5%, detracting from relative performance. The portfolio’s positions in the Schwab Fundamental
International Large Company Index Fund and the Schwab Fundamental International Small Company Index Fund contributed to both total return and relative performance of the portfolio.
The portfolio’s fixed-income allocation provided the
greatest contribution to total return, due to its large position within the portfolio. The Schwab Total Bond Market Fund returned 3.9%, though on a relative basis, underperformed the composite index’s U.S. fixed-income allocation component,
the Bloomberg Barclays U.S. Aggregate Bond Index, which returned 4.4%.
The portfolio’s U.S. equity exposure positively
contributed to total return, particularly among its large-cap positions. On a relative basis, the Schwab S&P 500 Index Fund, which returned 4.4%, underperformed its comparative index, the S& P 500® Index, which returned 4.5%. The Schwab Small-Cap Index Fund, which returned 4.2%, outperformed its comparative index, the Russell 2000 Index, which
returned 4.1%.
| 1 | Effective December 1, 2016, the name of the index was changed by the index provider. No other changes have occurred. |
17
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Conservative Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets1,2
Management views and portfolio holdings may have changed
since the report date.
Small-company stocks are subject to
greater volatility than many other asset classes.
International investments are subject to additional risks such
as currency fluctuation, geopolitical risk and the potential for illiquid markets.
| 1 | This list is not a recommendation of any security by the investment adviser. |
| 2 | The holdings listed exclude any temporary liquidity investments. |
18
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Conservative Portfolio
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Portfolio and Inception Date | 1 Year | 5 Years | 10 Years |
| Portfolio: Schwab MarketTrack Conservative Portfolio (11/20/95) | 3.68% | 5.49% | 3.93% |
| Conservative Composite Index | 4.40% | 6.13% | 5.11% |
| S&P 500® Index | 4.51% | 13.57% | 6.70% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.64% |
| Fund Category: Morningstar Allocation—30% to 50% Equity | 3.53% | 5.35% | 4.21% |
| Fund Expense Ratio3: 0.66% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on portfolio distributions or the redemption of portfolio shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the portfolio invests. The annualized weighted average expense ratio of the underlying funds was 0.24%. Reflects the total annual fund operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
19
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Schwab MarketTrack All Equity Portfolio | ||||
| Actual Return | 0.41% | $1,000.00 | $1,039.20 | $2.10 |
| Hypothetical 5% Return | 0.41% | $1,000.00 | $1,023.04 | $2.08 |
| Schwab MarketTrack Growth Portfolio | ||||
| Actual Return | 0.40% | $1,000.00 | $1,033.20 | $2.04 |
| Hypothetical 5% Return | 0.40% | $1,000.00 | $1,023.09 | $2.03 |
| Schwab MarketTrack Balanced Portfolio | ||||
| Actual Return | 0.40% | $1,000.00 | $1,027.80 | $2.04 |
| Hypothetical 5% Return | 0.40% | $1,000.00 | $1,023.09 | $2.03 |
| Schwab MarketTrack Conservative Portfolio | ||||
| Actual Return | 0.43% | $1,000.00 | $1,021.80 | $2.19 |
| Hypothetical 5% Return | 0.43% | $1,000.00 | $1,022.94 | $2.19 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12-month period. The expenses incurred by the underlying funds in which the portfolios invest are not included in this ratio. This ratio does not include certain non-routine expenses, such as proxy expenses. |
| 2 | Expenses for each portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year. |
20
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack All Equity Portfolio
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $17.00 | $17.17 | $15.99 | $12.79 | $11.52 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.27 1 | 0.29 1 | 0.21 | 0.27 | 0.25 | |
| Net realized and unrealized gains (losses) | 0.31 | (0.23) | 1.24 | 3.27 | 1.02 | |
| Total from investment operations | 0.58 | 0.06 | 1.45 | 3.54 | 1.27 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.53) | (0.23) | (0.27) | (0.34) | — | |
| Distributions from net realized gains | (1.15) | — | — | — | — | |
| Total distributions | (1.68) | (0.23) | (0.27) | (0.34) | — | |
| Net asset value at end of period | $15.90 | $17.00 | $17.17 | $15.99 | $12.79 | |
| Total return | 3.99% | 0.36% | 9.12% | 28.37% | 11.02% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.41% | 0.42% 3 | 0.50% | 0.50% | 0.50% | |
| Gross operating expenses2 | 0.42% | 0.43% 3 | 0.51% | 0.52% | 0.54% | |
| Net investment income (loss) | 1.73% | 1.67% | 1.24% | 1.84% | 1.93% | |
| Portfolio turnover rate | 6% | 42% 4 | 9% | 6% | 6% | |
| Net assets, end of period (x 1,000,000) | $553 | $578 | $621 | $586 | $475 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Effective December 1, 2014, the management fee was reduced.
The ratio presented for the period ended 10/31/15 is a blended ratio.
4
The portfolio turnover ratio increased due to the addition
of Schwab Fundamental Index Funds to the portfolio during the period.
21
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack All Equity Portfolio
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $550,784,157 | $— | $— | $550,784,157 | |
| Short-Term Investment1 | — | 2,593,776 | — | 2,593,776 | |
| Total | $550,784,157 | $2,593,776 | $— | $553,377,933 |
| 1 | As categorized in Portfolio Holdings. |
The fund's
policy is to recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
22
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack All Equity Portfolio
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $403,364,414) | $550,784,157 | |
| Investments in unaffiliated issuers, at value (cost $2,593,776) | + | 2,593,776 |
| Total investments, at value (cost $405,958,190) | 553,377,933 | |
| Receivables: | ||
| Fund shares sold | 168,981 | |
| Interest | 11 | |
| Prepaid expenses | + | 12,041 |
| Total assets | 553,558,966 | |
| Liabilities | ||
| Payables: | ||
| Investment adviser and administrator fees | 67,245 | |
| Shareholder service fees | 115,715 | |
| Fund shares redeemed | 241,614 | |
| Accrued expenses | + | 73,839 |
| Total liabilities | 498,413 | |
| Net Assets | ||
| Total assets | 553,558,966 | |
| Total liabilities | – | 498,413 |
| Net assets | $553,060,553 | |
| Net Assets by Source | ||
| Capital received from investors | 398,246,118 | |
| Net investment income not yet distributed | 3,775,232 | |
| Net realized capital gains | 3,619,460 | |
| Net unrealized capital appreciation | 147,419,743 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $553,060,553 | 34,789,262 | $15.90 | ||
23
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack All Equity Portfolio
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $11,782,741 | |
| Interest | + | 2,797 |
| Total investment income | 11,785,538 | |
| Expenses | ||
| Investment adviser and administrator fees | 712,967 | |
| Shareholder service fees | 1,327,923 | |
| Shareholder reports | 96,664 | |
| Professional fees | 32,316 | |
| Registration fees | 31,610 | |
| Transfer agent fees | 23,909 | |
| Portfolio accounting fees | 20,550 | |
| Proxy fees | 19,368 | |
| Independent trustees' fees | 11,220 | |
| Custodian fees | 8,780 | |
| Other expenses | + | 11,522 |
| Total expenses | 2,296,829 | |
| Expense reduction by CSIM and its affiliates | – | 23,909 |
| Net expenses | – | 2,272,920 |
| Net investment income | 9,512,618 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 10,828,658 | |
| Net realized gains on sales of affiliated underlying funds | + | 5,258,638 |
| Net realized gains | 16,087,296 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | + | (5,044,678) |
| Net realized and unrealized gains | 11,042,618 | |
| Increase in net assets resulting from operations | $20,555,236 | |
24
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack All Equity Portfolio
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $9,512,618 | $10,111,116 | ||
| Net realized gains | 16,087,296 | 72,260,737 | ||
| Net change in unrealized appreciation (depreciation) | + | (5,044,678) | (79,060,989) | |
| Increase in net assets from operations | 20,555,236 | 3,310,864 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (17,824,381) | (8,349,307) | ||
| Distributions from net realized gains | + | (38,823,520) | — | |
| Total distributions | ($56,647,901) | ($8,349,307) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 2,683,457 | $41,168,105 | 3,446,540 | $58,886,736 | ||||
| Shares reinvested | 3,463,150 | 52,155,040 | 449,055 | 7,719,249 | ||||
| Shares redeemed | + | (5,333,614) | (81,715,079) | (6,085,680) | (104,963,000) | |||
| Net transactions in fund shares | 812,993 | $11,608,066 | (2,190,085) | ($38,357,015) | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 33,976,269 | $577,545,152 | 36,166,354 | $620,940,610 | ||||
| Total increase or decrease | + | 812,993 | (24,484,599) | (2,190,085) | (43,395,458) | |||
| End of period | 34,789,262 | $553,060,553 | 33,976,269 | $577,545,152 | ||||
| Net investment income not yet distributed | $3,775,232 | $10,705,994 | ||||||
25
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Growth Portfolio
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $22.68 | $23.20 | $21.67 | $18.08 | $16.85 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.32 1 | 0.34 1 | 0.27 | 0.34 | 0.30 | |
| Net realized and unrealized gains (losses) | 0.41 | (0.12) | 1.57 | 3.60 | 1.35 | |
| Total from investment operations | 0.73 | 0.22 | 1.84 | 3.94 | 1.65 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.39) | (0.35) | (0.31) | (0.35) | (0.42) | |
| Distributions from net realized gains | (2.48) | (0.39) | — | — | — | |
| Total distributions | (2.87) | (0.74) | (0.31) | (0.35) | (0.42) | |
| Net asset value at end of period | $20.54 | $22.68 | $23.20 | $21.67 | $18.08 | |
| Total return | 3.88% | 0.95% | 8.55% | 22.14% | 10.03% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.41% | 0.42% 3 | 0.50% | 0.50% | 0.50% | |
| Gross operating expenses2 | 0.41% | 0.42% 3 | 0.51% | 0.52% | 0.53% | |
| Net investment income (loss) | 1.61% | 1.50% | 1.20% | 1.71% | 1.78% | |
| Portfolio turnover rate | 12% | 36% 4 | 7% | 9% | 9% | |
| Net assets, end of period (x 1,000,000) | $707 | $716 | $734 | $680 | $566 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Effective December 1, 2014, the management fee was reduced.
The ratio presented for the period ended 10/31/15 is a blended ratio.
4
The portfolio turnover ratio increased due to the addition
of Schwab Fundamental Index Funds to the portfolio during the period.
26
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Growth Portfolio
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $695,272,520 | $— | $— | $695,272,520 | |
| Short-Term Investments1 | — | 11,811,466 | — | 11,811,466 | |
| Total | $695,272,520 | $11,811,466 | $— | $707,083,986 |
| 1 | As categorized in Portfolio Holdings. |
The fund's
policy is to recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
27
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Growth Portfolio
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $481,190,629) | $695,272,520 | |
| Investments in unaffiliated issuers, at value (cost $11,811,466) | + | 11,811,466 |
| Total investments, at value (cost $493,002,095) | 707,083,986 | |
| Receivables: | ||
| Fund shares sold | 304,724 | |
| Dividends | 187,963 | |
| Interest | 49 | |
| Prepaid expenses | + | 17,874 |
| Total assets | 707,594,596 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 183,226 | |
| Investment adviser and administrator fees | 78,651 | |
| Shareholder service fees | 148,592 | |
| Fund shares redeemed | 280,444 | |
| Accrued expenses | + | 84,086 |
| Total liabilities | 774,999 | |
| Net Assets | ||
| Total assets | 707,594,596 | |
| Total liabilities | – | 774,999 |
| Net assets | $706,819,597 | |
| Net Assets by Source | ||
| Capital received from investors | 481,874,031 | |
| Distributions in excess of net investment income | (99,779) | |
| Net realized capital gains | 10,963,454 | |
| Net unrealized capital appreciation | 214,081,891 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $706,819,597 | 34,414,635 | $20.54 | ||
28
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Growth Portfolio
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $14,066,183 | |
| Interest | + | 16,461 |
| Total investment income | 14,082,644 | |
| Expenses | ||
| Investment adviser and administrator fees | 909,253 | |
| Shareholder service fees | 1,705,003 | |
| Shareholder reports | 95,831 | |
| Professional fees | 33,863 | |
| Registration fees | 32,645 | |
| Transfer agent fees | 24,083 | |
| Portfolio accounting fees | 22,688 | |
| Proxy fees | 18,839 | |
| Independent trustees' fees | 12,118 | |
| Custodian fees | 10,462 | |
| Interest expense | 17 | |
| Other expenses | + | 13,648 |
| Total expenses | 2,878,450 | |
| Expense reduction by CSIM and its affiliates | – | 24,083 |
| Net expenses | – | 2,854,367 |
| Net investment income | 11,228,277 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 11,331,486 | |
| Net realized gains on sales of affiliated underlying funds | + | 4,257,598 |
| Net realized gains | 15,589,084 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | + | 67,526 |
| Net realized and unrealized gains | 15,656,610 | |
| Increase in net assets resulting from operations | $26,884,887 | |
29
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Growth Portfolio
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $11,228,277 | $11,047,675 | ||
| Net realized gains | 15,589,084 | 80,068,911 | ||
| Net change in unrealized appreciation (depreciation) | + | 67,526 | (84,004,658) | |
| Increase in net assets from operations | 26,884,887 | 7,111,928 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (12,295,465) | (11,176,663) | ||
| Distributions from net realized gains | + | (78,132,750) | (12,409,011) | |
| Total distributions | ($90,428,215) | ($23,585,674) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 3,143,226 | $62,988,887 | 3,249,257 | $74,702,105 | ||||
| Shares reinvested | 4,371,390 | 85,329,538 | 977,376 | 22,303,738 | ||||
| Shares redeemed | + | (4,668,623) | (93,835,305) | (4,282,237) | (98,343,607) | |||
| Net transactions in fund shares | 2,845,993 | $54,483,120 | (55,604) | ($1,337,764) | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 31,568,642 | $715,879,805 | 31,624,246 | $733,691,315 | ||||
| Total increase or decrease | + | 2,845,993 | (9,060,208) | (55,604) | (17,811,510) | |||
| End of period | 34,414,635 | $706,819,597 | 31,568,642 | $715,879,805 | ||||
| Distributions in excess of net investment income | ($99,779) | ($522,853) | ||||||
30
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Balanced Portfolio
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $19.07 | $19.50 | $18.55 | $16.33 | $15.41 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.27 1 | 0.29 1 | 0.26 | 0.31 | 0.29 | |
| Net realized and unrealized gains (losses) | 0.35 | (0.08) | 1.08 | 2.23 | 1.01 | |
| Total from investment operations | 0.62 | 0.21 | 1.34 | 2.54 | 1.30 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.33) | (0.30) | (0.27) | (0.32) | (0.38) | |
| Distributions from net realized gains | (2.01) | (0.34) | (0.12) | — | — | |
| Total distributions | (2.34) | (0.64) | (0.39) | (0.32) | (0.38) | |
| Net asset value at end of period | $17.35 | $19.07 | $19.50 | $18.55 | $16.33 | |
| Total return | 3.92% | 1.10% | 7.28% | 15.82% | 8.61% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.41% | 0.42% 3 | 0.50% | 0.50% | 0.50% | |
| Gross operating expenses2 | 0.41% | 0.42% 3 | 0.51% | 0.52% | 0.53% | |
| Net investment income (loss) | 1.60% | 1.51% | 1.30% | 1.75% | 1.86% | |
| Portfolio turnover rate | 15% | 36% 4 | 16% | 12% | 12% | |
| Net assets, end of period (x 1,000,000) | $516 | $512 | $522 | $481 | $425 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Effective December 1, 2014, the management fee was reduced.
The ratio presented for the period ended 10/31/15 is a blended ratio.
4
The portfolio turnover ratio increased due to the addition
of Schwab Fundamental Index Funds to the portfolio during the period.
31
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Balanced Portfolio
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $503,540,531 | $— | $— | $503,540,531 | |
| Short-Term Investments1 | — | 12,132,454 | — | 12,132,454 | |
| Total | $503,540,531 | $12,132,454 | $— | $515,672,985 |
| 1 | As categorized in Portfolio Holdings. |
32
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Balanced Portfolio
Portfolio Holdings as of October 31, 2016 (continued)
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
33
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Balanced Portfolio
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $378,568,727) | $503,540,531 | |
| Investments in unaffiliated issuers, at value (cost $12,132,454) | + | 12,132,454 |
| Total investments, at value (cost $390,701,181) | 515,672,985 | |
| Receivables: | ||
| Fund shares sold | 459,041 | |
| Dividends | 347,229 | |
| Interest | 51 | |
| Prepaid expenses | + | 16,623 |
| Total assets | 516,495,929 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 310,357 | |
| Investment adviser and administrator fees | 62,788 | |
| Shareholder service fees | 108,387 | |
| Fund shares redeemed | 111,966 | |
| Accrued expenses | + | 53,179 |
| Total liabilities | 646,677 | |
| Net Assets | ||
| Total assets | 516,495,929 | |
| Total liabilities | – | 646,677 |
| Net assets | $515,849,252 | |
| Net Assets by Source | ||
| Capital received from investors | 390,168,459 | |
| Net investment income not yet distributed | 1,612,306 | |
| Net realized capital losses | (903,317) | |
| Net unrealized capital appreciation | 124,971,804 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $515,849,252 | 29,733,042 | $17.35 | ||
34
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Balanced Portfolio
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $10,170,068 | |
| Interest | + | 15,056 |
| Total investment income | 10,185,124 | |
| Expenses | ||
| Investment adviser and administrator fees | 659,056 | |
| Shareholder service fees | 1,237,798 | |
| Shareholder reports | 52,795 | |
| Professional fees | 31,614 | |
| Registration fees | 31,364 | |
| Portfolio accounting fees | 20,190 | |
| Transfer agent fees | 18,815 | |
| Independent trustees' fees | 10,963 | |
| Proxy fees | 10,152 | |
| Custodian fees | 8,732 | |
| Other expenses | + | 8,066 |
| Total expenses | 2,089,545 | |
| Expense reduction by CSIM and its affiliates | – | 18,815 |
| Net expenses | – | 2,070,730 |
| Net investment income | 8,114,394 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 6,023,574 | |
| Net realized gains on sales of affiliated underlying funds | + | 1,591,034 |
| Net realized gains | 7,614,608 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | + | 3,868,814 |
| Net realized and unrealized gains | 11,483,422 | |
| Increase in net assets resulting from operations | $19,597,816 | |
35
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Balanced Portfolio
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $8,114,394 | $7,889,972 | ||
| Net realized gains | 7,614,608 | 53,380,503 | ||
| Net change in unrealized appreciation (depreciation) | + | 3,868,814 | (55,491,706) | |
| Increase in net assets from operations | 19,597,816 | 5,778,769 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (8,833,869) | (7,938,877) | ||
| Distributions from net realized gains | + | (53,151,015) | (8,928,300) | |
| Total distributions | ($61,984,884) | ($16,867,177) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 5,422,348 | $90,844,158 | 5,459,344 | $104,614,248 | ||||
| Shares reinvested | 3,496,216 | 57,722,533 | 823,113 | 15,729,696 | ||||
| Shares redeemed | + | (6,040,389) | (102,580,180) | (6,192,938) | (118,872,279) | |||
| Net transactions in fund shares | 2,878,175 | $45,986,511 | 89,519 | $1,471,665 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 26,854,867 | $512,249,809 | 26,765,348 | $521,866,552 | ||||
| Total increase or decrease | + | 2,878,175 | 3,599,443 | 89,519 | (9,616,743) | |||
| End of period | 29,733,042 | $515,849,252 | 26,854,867 | $512,249,809 | ||||
| Net investment income not yet distributed | $1,612,306 | $1,540,404 | ||||||
36
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Conservative Portfolio
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $15.94 | $16.00 | $15.34 | $14.23 | $13.59 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.24 1 | 0.25 1 | 0.23 | 0.26 | 0.26 | |
| Net realized and unrealized gains (losses) | 0.30 | (0.05) | 0.67 | 1.10 | 0.69 | |
| Total from investment operations | 0.54 | 0.20 | 0.90 | 1.36 | 0.95 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.27) | (0.26) | (0.24) | (0.25) | (0.31) | |
| Distributions from net realized gains | (0.90) | — | — | — | — | |
| Total distributions | (1.17) | (0.26) | (0.24) | (0.25) | (0.31) | |
| Net asset value at end of period | $15.31 | $15.94 | $16.00 | $15.34 | $14.23 | |
| Total return | 3.68% | 1.23% | 5.95% | 9.71% | 7.07% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.43% | 0.43% 3 | 0.50% | 0.50% | 0.50% | |
| Gross operating expenses2 | 0.44% | 0.44% 3 | 0.54% | 0.55% | 0.55% | |
| Net investment income (loss) | 1.61% | 1.54% | 1.43% | 1.78% | 1.96% | |
| Portfolio turnover rate | 10% | 24% 4 | 9% | 15% | 19% | |
| Net assets, end of period (x 1,000,000) | $238 | $228 | $223 | $203 | $189 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Effective December 1, 2014, the management fee was reduced.
The ratio presented for the period ended 10/31/15 is a blended ratio.
4
The portfolio turnover ratio increased due to the addition
of Schwab Fundamental Index Funds to the portfolio during the period.
37
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Conservative Portfolio
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
The following is a summary of the inputs used to
value the fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $232,013,084 | $— | $— | $232,013,084 | |
| Short-Term Investments1 | — | 6,085,567 | — | 6,085,567 | |
| Total | $232,013,084 | $6,085,567 | $— | $238,098,651 |
| 1 | As categorized in Portfolio Holdings. |
38
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Conservative Portfolio
Portfolio Holdings as of October 31, 2016 (continued)
The fund's policy is to recognize transfers between Level 1,
Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
39
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Conservative Portfolio
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $190,182,396) | $232,013,084 | |
| Investments in unaffiliated issuers, at value (cost $6,085,567) | + | 6,085,567 |
| Total investments, at value (cost $196,267,963) | 238,098,651 | |
| Receivables: | ||
| Dividends | 250,290 | |
| Fund shares sold | 96,140 | |
| Interest | 25 | |
| Prepaid expenses | + | 14,170 |
| Total assets | 238,459,276 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 224,572 | |
| Investment adviser and administrator fees | 33,108 | |
| Shareholder service fees | 50,045 | |
| Fund shares redeemed | 128,425 | |
| Accrued expenses | + | 33,974 |
| Total liabilities | 470,124 | |
| Net Assets | ||
| Total assets | 238,459,276 | |
| Total liabilities | – | 470,124 |
| Net assets | $237,989,152 | |
| Net Assets by Source | ||
| Capital received from investors | 200,948,078 | |
| Net investment income not yet distributed | 193,139 | |
| Net realized capital losses | (4,982,753) | |
| Net unrealized capital appreciation | 41,830,688 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $237,989,152 | 15,542,364 | $15.31 | ||
40
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Conservative Portfolio
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $4,661,072 | |
| Interest | + | 7,983 |
| Total investment income | 4,669,055 | |
| Expenses | ||
| Investment adviser and administrator fees | 297,871 | |
| Shareholder service fees | 563,768 | |
| Shareholder reports | 28,524 | |
| Professional fees | 28,453 | |
| Registration fees | 26,352 | |
| Portfolio accounting fees | 16,514 | |
| Transfer agent fees | 14,675 | |
| Independent trustees' fees | 9,306 | |
| Custodian fees | 5,065 | |
| Proxy fees | 4,048 | |
| Other expenses | + | 3,583 |
| Total expenses | 998,159 | |
| Expense reduction by CSIM and its affiliates | – | 14,675 |
| Net expenses | – | 983,484 |
| Net investment income | 3,685,571 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 1,810,448 | |
| Net realized gains on sales of affiliated underlying funds | + | 310,262 |
| Net realized gains | 2,120,710 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | + | 2,559,754 |
| Net realized and unrealized gains | 4,680,464 | |
| Increase in net assets resulting from operations | $8,366,035 | |
41
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Conservative Portfolio
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $3,685,571 | $3,508,549 | ||
| Net realized gains | 2,120,710 | 14,576,050 | ||
| Net change in unrealized appreciation (depreciation) | + | 2,559,754 | (15,531,464) | |
| Increase in net assets from operations | 8,366,035 | 2,553,135 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (3,884,346) | (3,590,423) | ||
| Distributions from net realized gains | + | (12,777,507) | — | |
| Total distributions | ($16,661,853) | ($3,590,423) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 3,067,103 | $46,365,503 | 2,432,532 | $39,115,068 | ||||
| Shares reinvested | 1,032,463 | 15,174,842 | 207,359 | 3,310,268 | ||||
| Shares redeemed | + | (2,836,646) | (42,848,228) | (2,319,449) | (37,207,806) | |||
| Net transactions in fund shares | 1,262,920 | $18,692,117 | 320,442 | $5,217,530 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 14,279,444 | $227,592,853 | 13,959,002 | $223,412,611 | ||||
| Total increase | + | 1,262,920 | 10,396,299 | 320,442 | 4,180,242 | |||
| End of period | 15,542,364 | $237,989,152 | 14,279,444 | $227,592,853 | ||||
| Net investment income not yet distributed | $193,139 | $154,755 | ||||||
42
Schwab MarketTrack Portfolios | Annual Report
See financial notes
Schwab MarketTrack Portfolios
Financial Notes
1. Business Structure of the Funds:
Schwab
MarketTrack All Equity Portfolio, Schwab MarketTrack Growth Portfolio, Schwab MarketTrack Balanced Portfolio, and Schwab MarketTrack Conservative Portfolio (the funds) are each a series of Schwab Capital Trust (the trust), a no-load, open-end
management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended (the 1940 Act). The list below shows all the funds in the trust as of the end of the
period, including the funds discussed in this report, which are highlighted:
| SCHWAB CAPITAL TRUST (ORGANIZED MAY 7, 1993) | |
| Schwab MarketTrack All Equity Portfolio | Schwab Target 2045 Fund |
| Schwab MarketTrack Growth Portfolio | Schwab Target 2050 Fund |
| Schwab MarketTrack Balanced Portfolio | Schwab Target 2055 Fund |
| Schwab MarketTrack Conservative Portfolio | Schwab Target 2060 Fund |
| Schwab ® S&P 500 Index Fund | Schwab Fundamental US Large Company Index Fund |
| Schwab Small-Cap Index Fund® | Schwab Fundamental US Small Company Index Fund |
| Schwab Total Stock Market Index Fund® | Schwab Fundamental International Large Company Index Fund |
| Schwab International Index Fund® | Schwab Fundamental International Small Company Index Fund |
| Laudus Small-Cap MarketMasters Fund™ | Schwab Fundamental Emerging Markets Large Company Index Fund |
| Laudus International MarketMasters Fund™ | Schwab Fundamental Global Real Estate Index Fund |
| Schwab Balanced Fund™ | Schwab Target 2010 Index Fund |
| Schwab Core Equity Fund™ | Schwab Target 2015 Index Fund |
| Schwab Dividend Equity Fund™ | Schwab Target 2020 Index Fund |
| Schwab Large-Cap Growth Fund™ | Schwab Target 2025 Index Fund |
| Schwab Small-Cap Equity Fund™ | Schwab Target 2030 Index Fund |
| Schwab Hedged Equity Fund™ | Schwab Target 2035 Index Fund |
| Schwab Health Care Fund™ | Schwab Target 2040 Index Fund |
| Schwab ® International Core Equity Fund | Schwab Target 2045 Index Fund |
| Schwab Target 2010 Fund | Schwab Target 2050 Index Fund |
| Schwab Target 2015 Fund | Schwab Target 2055 Index Fund |
| Schwab Target 2020 Fund | Schwab Target 2060 Index Fund |
| Schwab Target 2025 Fund | Schwab ® Monthly Income Fund - Moderate Payout |
| Schwab Target 2030 Fund | Schwab ® Monthly Income Fund - Enhanced Payout |
| Schwab Target 2035 Fund | Schwab ® Monthly Income Fund - Maximum Payout |
| Schwab Target 2040 Fund | |
The Schwab MarketTrack Portfolios are primarily “funds of
funds.” Each of the funds seeks to achieve its investment objective by investing mainly in a combination of other Schwab Funds (underlying funds) in accordance with its target portfolio allocation. The funds may also invest directly in equity
or fixed-income securities, other mutual funds, exchange-traded funds (ETFs) and cash equivalents, including money market securities to achieve their investment objectives.
Each fund in this report offers one share class. Shares are
bought and sold (subject to a redemption fee, see financial note 8) at closing net asset value per share (NAV), which is the price for all outstanding shares of a fund. Each share has a par value of 1/1,000 of a cent, and the funds' Board of
Trustees (the Board) may authorize the issuance of as many shares as necessary.
Each fund maintains its own account for purposes of holding
assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the funds use in their preparation of financial statements. The funds follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The financial statements of the funds should be read in
conjunction with the underlying funds' financial statements. For more information about the underlying funds' operations and policies, please refer to those funds' semiannual and annual reports, which are filed and available on the U.S. Securities
and Exchange Commission's (SEC) website at www.sec.gov or at the SEC's Public Reference Room in Washington D.C.
43
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Financial Notes (continued)
2. Significant Accounting
Policies (continued):
(a) Security
Valuation:
Under procedures approved by the Board,
the investment adviser has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect fair market
value. Among other things, these procedures allow the funds to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
The funds value the securities in their portfolios every
business day. The funds use the following policies to value various types of securities:
• Underlying funds: Mutual funds are valued at their respective NAVs.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable.
For example, a fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is
closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of factors, including unobservable market inputs when
arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market multiples, book values, transactional back-testing,
disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a
fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the funds pursuant to the valuation procedures.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
In accordance with the authoritative guidance on fair value
measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority
to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3
measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation. If the funds determine that either the
volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and
management judgment will be required to estimate fair value.
The three levels of the fair value hierarchy are as
follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities. Investments in mutual funds are valued daily at their NAVs, which are classified as Level
1 prices, without consideration to the classification level of the specific investments held by an underlying fund.
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations.
•
Level 3—significant unobservable inputs (including the funds' own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial
44
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
ratios or cash flows. Level 3 prices may
also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may significantly
impact the resulting fair value and therefore the funds' results of operations.
The inputs or methodology used for valuing securities are
not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the funds' investments
as of October 31, 2016 are disclosed in the Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Cash Management Transactions: The funds may subscribe to the Brown Brothers Harriman & Co. (BBH) Cash Management Service Sweep (CMS Sweep). The BBH CMS Sweep is an investment product that automatically sweeps the funds’ cash balances into
overnight offshore time deposits with either the BBH Grand Cayman branch or a branch of a pre-approved commercial bank. This fully automated program allows the funds to earn interest on cash balances. Excess cash invested with deposit institutions
domiciled outside of the U.S., as with any offshore deposit, may be subject to sovereign actions in the jurisdiction of the deposit institution including, but not limited to, freeze, seizure or diminution. The funds bear the risk associated with the
repayment of principal and payment of interest on such instruments by the institution with which the deposit is ultimately placed. Balances in the CMS Sweep are accounted for on a cost basis, which approximates market value.
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date. Any
distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
(e) Expenses:
Expenses that are specific to a fund are charged directly
to the fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets. Each fund bears its share of the allocable expenses of the underlying funds in which it
invests. Such expenses are reflected in the net asset values of the underlying funds.
(f) Distributions to Shareholders:
The funds make distributions from net investment income and
net realized capital gains, if any, once a year, except for the Schwab MarketTrack Conservative Portfolio, which makes distributions from net investment income quarterly.
(g) Accounting Estimates:
The accounting policies described in this report conform to
GAAP. 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 and these differences may be material.
(h) Federal Income Taxes:
The funds intend to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the funds distribute substantially all of their net investment income and net realized 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.
45
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
(i)
Indemnification:
Under the funds’
organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their
vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect
the risk of loss attributable to these arrangements to be remote.
3. Risk Factors:
Investing in the funds may involve
certain risks, as discussed in the funds' prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Asset Allocation Risk. The
funds are subject to asset allocation risk, which is the risk that the selection of the underlying funds and the allocation of a fund's assets among the various asset classes and market segments will cause the fund to underperform other funds with a
similar investment objective.
Conflicts of Interest
Risk. The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds may create a conflict of interest because the fees paid to it by
some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under management or to support
new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be aligned with those of the fund or vice versa. However, the investment adviser is a fiduciary to the
fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk. Stock and bond
markets rise and fall daily. As with any investment whose performance is tied to these markets, the value of an investment in the funds will fluctuate, which means that an investor could lose money.
Underlying Fund Investment Risk. The value of your investment in the funds is based primarily on the prices of the underlying funds that the fund purchases. In turn, the price of each underlying fund is based on the value of its securities. The funds
are subject to the performance and expenses of the underlying funds in which they invest. Before investing in the funds, investors should assess the risks associated with the underlying funds in which the funds may invest and the types of
investments made by those underlying funds. These risks include any combination of the risks described below, although a fund's exposure to a particular risk will be proportionate to the fund's overall asset allocation and underlying fund
allocation.
•
Investment Risk. The funds may experience losses with respect to their investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.
•
Investment Style Risk. Some underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Each underlying fund follows these stocks during
upturns as well as downturns. Because of their indexing strategy, the underlying funds do not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of an underlying fund's expenses, the underlying
fund's performance is normally below that of the index. A significant percentage of the index may be composed of securities in a single industry or sector of the economy. If the underlying fund is focused in an industry or sector, it may present
more risks than if it were broadly diversified over numerous industries and sectors of the economy.
•
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition,
the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.
•
Tracking Error Risk. Each underlying index fund seeks to track the performance of its benchmark indices, although it may not be successful in doing so. The divergence between the performance of a fund and
its benchmark index, positive or negative, is called “tracking error.” Tracking error can be caused by many factors and it may be significant.
•
Large-Cap Risk. Many of the risks of the underlying funds are associated with their investment in the large-cap segments of the stock market. Large-cap stocks tend to go in and out of favor based on market
and economic conditions. During a period when large-cap stocks fall behind other types of investments — bonds or mid- or small-cap stocks, for instance — an underlying fund's performance also will lag those investments.
46
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Financial Notes (continued)
3. Risk
Factors (continued):
•
Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks, and their prices may move sharply, especially during market upturns and downturns. Small-cap companies may
be more vulnerable to adverse business or economic events than larger, more established companies. During a period when small-cap stocks fall behind other types of investments—bonds or large-cap stocks, for instance—an underlying fund's small-cap holdings could reduce performance.
•
Money Market Risk. The funds may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or have a share price
that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market
fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of
money market fund is designed to offer capital appreciation.
•
Concentration Risk. To the extent that an underlying fund's or the index's portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, country or
asset class, the underlying fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to adverse economic, market, political, or regulatory occurrences affecting
that market, industry, group of industries, sector, country or asset class.
•
Foreign Investment Risk. An underlying fund's investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers.
These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of
economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. To the extent that an underlying fund
invests a significant portion of its assets in any one country, the underlying fund will be subject to a greater risk of loss or volatility than if the underlying fund always maintained wide geographic diversity among the countries in which it
invests.
•
Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market
countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be
more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with an underlying fund's investments in emerging market countries and, at times, it may be difficult to value such
investments.
•
Derivatives Risk. An underlying fund's use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other
traditional investments. An underlying fund's use of derivatives could reduce the underlying fund's performance, increase volatility, and could cause the fund to lose more than the initial amount invested. In addition, investments in derivatives may
involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for hedging rather
than to enhance the underlying fund's returns or as a substitute for a position or security.
•
ETF Risk. When an underlying fund invests in an ETF, it will bear a proportionate share of the ETF's expenses. In addition, lack of liquidity in the market for an ETF's shares can result in its value being
more volatile than the underlying portfolio of securities.
•
Credit Risk. An underlying fund may be subject to the risk that a decline in the credit quality of a portfolio investment could cause the underlying fund to lose money or underperform. An underlying fund
could lose money if the issuer or guarantor of a portfolio investment fails to make timely principal or interest payments or otherwise honor its obligations.
•
Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss.
•
Securities Lending Risk. An underlying fund may lend its portfolio securities to brokers, dealers, and other financial institutions. Securities lending involves the risk of loss of rights in the collateral
or delay in recovery of the collateral if the borrower fails to return the security loaned or becomes insolvent.
•
Interest Rate Risk. An underlying fund’s investments in fixed income securities are subject to the risk that interest rates rise and fall over time. As with any investment whose yield reflects
current interest rates, the underlying fund’s yield will change over time. During periods when interest rates are low, an underlying fund’s yield (and total return) also may be low. Changes in
47
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Schwab MarketTrack Portfolios
Financial Notes (continued)
3. Risk
Factors (continued):
interest
rates also may affect an underlying fund's share price: a rise in interest rates could cause the fund's share price to fall. The longer the underlying fund’s duration, the more sensitive to interest rate movements its share price is likely to
be. A change in a central bank's monetary policy or improving economic conditions, among other things, may result in an increase in interest rates.
•
Sampling Index Tracking Risk. To the extent an underlying fund uses a sampling method, the underlying fund will not fully replicate its comparative index and may hold securities not included in the index.
As a result, the underlying fund will be subject to the risk that the investment adviser’s investment management strategy, the implementation of which is subject to a number of constraints, may not produce the intended results. If the
underlying fund utilizes a sampling approach, it may not track the return of the index as well as it would if the underlying fund purchased all of the securities in the index.
•
Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the
underlying fund's performance and may increase the likelihood of capital gain distributions.
Direct Investment Risk. A
fund may invest directly in individual securities as well as other mutual funds, ETFs and cash equivalents, including money market securities. A fund's direct investment in these securities is subject to the same or similar risks as an underlying
fund's investment in the same security.
Please
refer to the funds’ prospectus for a more complete description of the principal risks of investing in the funds.
4. Affiliates and Affiliated Transactions:
Charles
Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund's investment adviser and administrator pursuant to an Investment Advisory and Administration
Agreement between CSIM and the trust.
For its advisory
and administrative services to the funds, CSIM is entitled to receive an annual fee of 0.13%, payable monthly, based on a percentage of each fund's average daily net assets.
The Board has adopted a Shareholder Servicing Plan (the Plan)
on behalf of the funds. The Plan enables each fund to bear expenses relating to the provision by financial intermediaries, including Charles Schwab & Co., Inc. (a broker-dealer affiliate of CSIM, Schwab) (together, service providers), of certain
account maintenance, customer liaison and shareholder services to the current shareholders of the funds.
Pursuant to the Plan, each fund’s shares are subject to
an annual shareholder servicing fee of up to 0.25%. The shareholder servicing fee paid to a particular service provider is made pursuant to its written agreement with Schwab, as distributor of the funds (or, in the case of payments made to Schwab
acting as a service provider, pursuant to Schwab’s written agreement with the funds). Payments under the Plan are made as described above without regard to whether the fee is more or less than the service provider’s actual cost of
providing the services, and if more, such excess may be retained as profit by the service provider.
Although these agreements specify certain fees for these
services, CSIM and its affiliates have made an additional agreement with the funds, for so long as CSIM serves as the investment adviser to the funds, which may only be amended or terminated with the approval of the Board, to limit the total annual
fund operating expenses charged, excluding interest, taxes and certain non-routine expenses (expense limitation). The expense limitation as a percentage of average daily net assets is as follows:
| Schwab
MarketTrack All Equity Portfolio |
Schwab
MarketTrack Growth Portfolio |
Schwab
MarketTrack Balanced Portfolio |
Schwab
MarketTrack Conservative Portfolio |
| 0.50% | 0.50% | 0.50% | 0.50% |
The agreement to limit the funds'
total expenses charged is limited to each fund's direct operating expenses and, therefore, does not apply to underlying fund fees and expenses, which are indirect expenses incurred by a fund through its investments in the underlying funds.
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
The funds
may engage in certain transactions involving related parties. Pursuant to an exemptive order issued by the SEC, the funds may invest in other related funds. As of October 31, 2016, each Schwab MarketTrack Portfolio's ownership percentages of other
related funds' shares are:
| Underlying Funds | Schwab
MarketTrack All Equity Portfolio |
Schwab
MarketTrack Growth Portfolio |
Schwab
MarketTrack Balanced Portfolio |
Schwab
MarketTrack Conservative Portfolio |
| Schwab Fundamental Emerging Markets Large Company Index Fund | 8.4% | 7.4% | 4.0% | 1.2% |
| Schwab Fundamental International Large Company Index Fund | 3.5% | 2.9% | 1.6% | 0.5% |
| Schwab Fundamental International Small Company Index Fund | 5.9% | 5.0% | 2.7% | 0.8% |
| Schwab International Index Fund | 2.6% | 2.3% | 1.2% | 0.4% |
| Schwab Fundamental US Large Company Index Fund | 1.6% | 1.9% | 1.0% | 0.3% |
| Schwab S&P 500 Index Fund | 0.8% | 0.9% | 0.5% | 0.1% |
| Schwab Fundamental US Small Company Index Fund | 3.1% | 3.1% | 1.7% | 0.5% |
| Schwab Small-Cap Index Fund | 3.6% | 3.7% | 2.0% | 0.6% |
| Schwab Total Bond Market Fund | —% | 7.7% | 13.0% | 9.5% |
| Schwab Variable Share Price Money Fund, Ultra Shares | —% | 5.4% | 3.3% | 1.3% |
Below is a summary of the funds'
transactions with their affiliated underlying funds during the period ended October 31, 2016:
Schwab MarketTrack All Equity Portfolio:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Schwab Fundamental Emerging Markets Large Company Index Fund | 3,907,265 | 421,656 | (721,822) | 3,607,099 | $28,351,795 | ($418,205) | $766,381 | ||
| Schwab Fundamental International Large Company Index Fund | 4,235,560 | 238,554 | (239,099) | 4,235,015 | 33,710,716 | (117,560) | 951,296 | ||
| Schwab Fundamental International Small Company Index Fund | 2,571,858 | 83,283 | (305,902) | 2,349,239 | 28,026,415 | 80,648 | 582,392 | ||
| Schwab Fundamental US Large Company Index Fund | 5,149,167 | 378,853 | (572,168) | 4,955,852 | 74,932,482 | (307,680) | 4,099,365 | ||
| Schwab Fundamental US Small Company Index Fund | 3,391,816 | 333,961 | (429,305) | 3,296,472 | 41,832,234 | (240,685) | 2,465,229 | ||
| Schwab International Index Fund | 4,318,720 | 226,478 | (177,716) | 4,367,482 | 76,518,293 | (79,988) | 2,061,017 | ||
| Schwab S&P 500 Index Fund | 5,562,139 | 176,240 | (541,635) | 5,196,744 | 173,467,312 | 4,630,810 | 5,496,919 | ||
| Schwab Small-Cap Index Fund | 3,810,827 | 404,358 | (545,462) | 3,669,723 | 93,944,910 | 1,711,298 | 6,188,800 | ||
| Total | $550,784,157 | $5,258,638 | $22,611,399 |
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Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab MarketTrack Growth
Portfolio:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Schwab Fundamental Emerging Markets Large Company Index Fund | 3,155,206 | 299,968 | (307,564) | 3,147,610 | $24,740,214 | ($175,922) | $621,774 | ||
| Schwab Fundamental International Large Company Index Fund | 3,543,745 | 175,366 | (165,860) | 3,553,251 | 28,283,882 | (43,552) | 784,231 | ||
| Schwab Fundamental International Small Company Index Fund | 2,129,293 | 45,112 | (191,245) | 1,983,160 | 23,659,102 | 140,419 | 486,756 | ||
| Schwab Fundamental US Large Company Index Fund | 5,666,998 | 363,570 | (408,413) | 5,622,155 | 85,006,983 | (89,439) | 4,513,197 | ||
| Schwab Fundamental US Small Company Index Fund | 3,358,509 | 388,042 | (405,146) | 3,341,405 | 42,402,430 | (49,657) | 2,445,941 | ||
| Schwab International Index Fund | 3,668,131 | 215,056 | (129,339) | 3,753,848 | 65,767,408 | (23,048) | 1,747,204 | ||
| Schwab S&P 500 Index Fund | 6,100,571 | 237,687 | (394,025) | 5,944,233 | 198,418,501 | 3,313,546 | 6,112,162 | ||
| Schwab Small-Cap Index Fund | 3,838,509 | 491,398 | (529,824) | 3,800,083 | 97,282,118 | 1,199,621 | 6,292,382 | ||
| Schwab Total Bond Market Fund | 11,289,832 | 939,383 | (1,184,734) | 11,044,481 | 106,579,240 | (14,370) | 2,321,656 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | 11,056,954 | 12,011,437 | (23,068,391) | — | — | — | 12,618 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 23,123,393 | — | 23,123,393 | 23,132,642 | — | 59,748 | ||
| Total | $695,272,520 | $4,257,598 | $25,397,669 |
Schwab MarketTrack Balanced
Portfolio:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Schwab Fundamental Emerging Markets Large Company Index Fund | 1,614,627 | 274,950 | (195,059) | 1,694,518 | $13,318,915 | ($215,901) | $314,451 | ||
| Schwab Fundamental International Large Company Index Fund | 1,903,457 | 261,633 | (193,428) | 1,971,662 | 15,694,431 | (89,729) | 416,675 | ||
| Schwab Fundamental International Small Company Index Fund | 1,140,007 | 161,964 | (210,992) | 1,090,979 | 13,015,383 | 20,214 | 257,776 | ||
| Schwab Fundamental US Large Company Index Fund | 3,037,893 | 443,135 | (417,037) | 3,063,991 | 46,327,539 | (208,075) | 2,393,420 | ||
| Schwab Fundamental US Small Company Index Fund | 1,801,386 | 410,136 | (379,780) | 1,831,742 | 23,244,802 | (282,160) | 1,295,495 | ||
| Schwab International Index Fund | 1,978,586 | 248,452 | (158,857) | 2,068,181 | 36,234,523 | 37,234 | 928,789 | ||
| Schwab S&P 500 Index Fund | 3,278,113 | 393,496 | (425,893) | 3,245,716 | 108,342,004 | 1,622,950 | 3,242,801 | ||
| Schwab Small-Cap Index Fund | 2,062,479 | 384,768 | (384,490) | 2,062,757 | 52,806,574 | 642,332 | 3,356,202 | ||
| Schwab Total Bond Market Fund | 18,903,171 | 2,005,620 | (2,207,066) | 18,701,725 | 180,471,649 | 64,169 | 3,943,521 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | 8,038,114 | 6,007,476 | (14,045,590) | — | — | — | 8,133 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 14,079,080 | — | 14,079,080 | 14,084,711 | — | 36,379 | ||
| Total | $503,540,531 | $1,591,034 | $16,193,642 |
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Schwab MarketTrack Portfolios
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab MarketTrack
Conservative Portfolio:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Schwab Fundamental Emerging Markets Large Company Index Fund | 432,696 | 91,495 | (14,519) | 509,672 | $4,006,020 | ($13,632) | $84,608 | ||
| Schwab Fundamental International Large Company Index Fund | 554,331 | 60,475 | (21,667) | 593,139 | 4,721,390 | (7,038) | 123,446 | ||
| Schwab Fundamental International Small Company Index Fund | 337,593 | 29,173 | (30,361) | 336,405 | 4,013,308 | 11,636 | 76,981 | ||
| Schwab Fundamental US Large Company Index Fund | 899,135 | 113,600 | (71,946) | 940,789 | 14,224,732 | (12,807) | 715,071 | ||
| Schwab Fundamental US Small Company Index Fund | 532,697 | 104,838 | (59,785) | 577,750 | 7,331,652 | (12,999) | 387,536 | ||
| Schwab International Index Fund | 597,598 | 96,188 | (65,119) | 628,667 | 11,014,241 | 7,236 | 278,700 | ||
| Schwab S&P 500 Index Fund | 974,586 | 118,129 | (91,143) | 1,001,572 | 33,432,470 | 303,358 | 969,836 | ||
| Schwab Small-Cap Index Fund | 612,939 | 116,933 | (92,783) | 637,089 | 16,309,473 | 84,365 | 1,015,649 | ||
| Schwab Total Bond Market Fund | 13,196,228 | 1,276,445 | (850,703) | 13,621,970 | 131,452,009 | (49,857) | 2,802,167 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | 3,489,431 | 2,003,060 | (5,492,491) | — | — | — | 3,300 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 5,505,587 | — | 5,505,587 | 5,507,789 | — | 14,226 | ||
| Total | $232,013,084 | $310,262 | $6,471,520 |
| * | Distributions received include distributions from net investment income and capital gains, if any, from the underlying funds. |
Pursuant to an exemptive order issued by the SEC, the funds may
enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency purposes and the interest rate to be charged will be the
average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating funds/portfolios. The interfund lending facility
is subject to the oversight and periodic review by the Board. The funds had no interfund borrowing or lending activity during the period.
5. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trust was in compliance with these limitations
throughout the report period. The trust did not pay any of these interested persons for their services as trustees, but it did pay non-interested persons (independent trustees), as noted on each fund’s Statement of Operations. For information
regarding the trustees, please refer to the Trustees and Officers table at the end of this report.
6. Borrowing from Banks:
During the period, the funds
were participants with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit Facility, in
addition to the interest charged on any borrowings by a fund, each fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, the Credit Facility was amended to run for
a new 364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
The funds also have access to custodian overdraft facilities. A
fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate above the current Federal Funds
Rate.
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Schwab MarketTrack Portfolios
Financial Notes (continued)
7.
Purchases and Sales/Maturities of Investment Securities:
For the period ended October 31, 2016, purchases and
sales/maturities of securities (excluding short-term obligations) were as follows:
| Purchases of Securities | Sales/Maturities of Securities | |
| Schwab MarketTrack All Equity Portfolio | $33,311,399 | $57,457,000 |
| Schwab MarketTrack Growth Portfolio | 79,614,063 | 79,798,390 |
| Schwab MarketTrack Balanced Portfolio | 80,031,575 | 76,635,590 |
| Schwab MarketTrack Conservative Portfolio | 31,792,889 | 22,362,491 |
8. Redemption Fee:
The funds charge a 2.00%
redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods
were as follows:
| Current
Period (11/1/15-10/31/16) |
Prior
Period (11/1/14-10/31/15) | |
| Schwab MarketTrack All Equity Portfolio | $5,050 | $10,890 |
| Schwab MarketTrack Growth Portfolio | 8,705 | 5,446 |
| Schwab MarketTrack Balanced Portfolio | 11,924 | 13,097 |
| Schwab MarketTrack Conservative Portfolio | 2,739 | 1,921 |
9. Federal Income Taxes:
As of October 31, 2016, the
components of distributable earnings on a tax-basis were as follows:
| Schwab
MarketTrack All Equity Portfolio |
Schwab
MarketTrack Growth Portfolio |
Schwab
MarketTrack Balanced Portfolio |
Schwab
MarketTrack Conservative Portfolio | ||||
| Undistributed ordinary income | $4,368,657 | $1,405,401 | $2,886,999 | $441,632 | |||
| Undistributed long-term capital gains | 14,459,368 | 12,834,189 | 6,103,181 | 1,625,492 | |||
| Unrealized appreciation on investments | 135,986,410 | 210,805,755 | 116,690,613 | 34,973,950 | |||
| Net unrealized appreciation (depreciation) | $135,986,410 | $210,805,755 | $116,690,613 | $34,973,950 |
The primary difference between
book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of October 31, 2016, the funds had no capital loss carryforwards.
Qualified late-year losses are certain capital and ordinary
losses which occur during the portion of a fund's taxable year subsequent to October 31. A fund may elect to treat any portion of qualified late-year losses as arising during the first day of the next taxable year. For the year ended October 31,
2016, the funds had late-year ordinary losses deferred and capital loss carryforwards utilized as follows:
| Schwab
MarketTrack All Equity Portfolio |
Schwab
MarketTrack Growth Portfolio |
Schwab
MarketTrack Balanced Portfolio |
Schwab
MarketTrack Conservative Portfolio | |
| Late-year ordinary losses deferred | $— | $99,779 | $— | $— |
| Capital loss carryforwards utilized | — | — | — | — |
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Financial Notes (continued)
9. Federal Income
Taxes (continued):
The tax-basis components of distributions
paid during the current and prior fiscal years were as follows:
| Schwab
MarketTrack All Equity Portfolio |
Schwab
MarketTrack Growth Portfolio |
Schwab
MarketTrack Balanced Portfolio |
Schwab
MarketTrack Conservative Portfolio | |
| Current period distributions | ||||
| Ordinary income | $17,824,381 | $12,295,465 | $9,353,819 | $3,884,346 |
| Long-term capital gains | 38,823,520 | 78,132,750 | 52,631,065 | 12,777,507 |
| Prior period distributions | ||||
| Ordinary income | $8,349,307 | $11,176,663 | $9,693,210 | $3,590,423 |
| Long-term capital gains | — | 12,409,011 | 7,173,967 | — |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements.
Permanent book and tax basis differences may result in
reclassifications between components of net assets as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2016, the funds made the following reclassifications:
| Schwab
MarketTrack All Equity Portfolio |
Schwab
MarketTrack Growth Portfolio |
Schwab
MarketTrack Balanced Portfolio |
Schwab
MarketTrack Conservative Portfolio | |
| Capital shares | $— | $— | $— | $— |
| Undistributed net investment income | 1,381,001 | 1,490,262 | 791,377 | 237,159 |
| Net realized capital gains (losses) | (1,381,001) | (1,490,262) | (791,377) | (237,159) |
As of October 31, 2016, management
has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) as applicable to the funds, and has determined that no provision for income tax is
required in the funds’ financial statements. The funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended October 31, 2016, the funds did
not incur any interest or penalties.
10. Recent Regulatory Development:
In October 2016,
the SEC adopted new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require
standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact
that the adoption of the amendments to Regulation S-X will have on the funds' financial statements and related disclosures.
11. Subsequent Events:
Management has determined there
are no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Report of
Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
Schwab MarketTrack All Equity Portfolio
Schwab MarketTrack Growth Portfolio
Schwab MarketTrack Balanced Portfolio
Schwab MarketTrack Conservative Portfolio
In our opinion, the accompanying statements of assets and
liabilities, including the portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Schwab MarketTrack All Equity
Portfolio, Schwab MarketTrack Growth Portfolio, Schwab MarketTrack Balanced Portfolio, and Schwab MarketTrack Conservative Portfolio (four of the portfolios constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at
October 31, 2016, 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 the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which
included confirmation of securities and investments in the underlying funds at October 31, 2016 by correspondence with the custodian and transfer agent of the underlying funds, respectively, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2016
San Francisco, California
December 16, 2016
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Other Federal Tax
Information (unaudited)
For corporate shareholders, the following percentage of the
funds' dividend distributions paid during the fiscal year ended October 31, 2016, qualify for the corporate dividends received deduction:
| Percentage | |
| Schwab MarketTrack All Equity Portfolio | 57.14 |
| Schwab MarketTrack Growth Portfolio | 52.65 |
| Schwab MarketTrack Balanced Portfolio | 37.73 |
| Schwab MarketTrack Conservative Portfolio | 27.47 |
For the fiscal year ended October
31, 2016, the funds designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under 1(h)(ii) of the Internal Revenue Code. Shareholders will be notified in January 2017 via IRS form 1099
of the amounts for use in preparing their 2016 income tax return.
| Schwab MarketTrack All Equity Portfolio | $17,382,899 |
| Schwab MarketTrack Growth Portfolio | 9,696,327 |
| Schwab MarketTrack Balanced Portfolio | 5,351,853 |
| Schwab MarketTrack Conservative Portfolio | 1,592,589 |
Under Section 852 (b)(3)(C) of the
Internal Revenue Code, certain funds hereby designate the following amounts as long-term capital gain dividends for the fiscal year ended October 31, 2016:
| Schwab MarketTrack All Equity Portfolio | $38,823,520 |
| Schwab MarketTrack Growth Portfolio | 78,132,750 |
| Schwab MarketTrack Balanced Portfolio | 52,631,065 |
| Schwab MarketTrack Conservative Portfolio | 12,777,507 |
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Investment Advisory
Agreement Approval
56
Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic
Trust and Laudus Trust. The Fund Complex includes 108 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the funds’ Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 108 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 108 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 108 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 108 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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Schwab MarketTrack Portfolios
| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 108 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 108 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 108 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 108 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 108 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
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| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); and Director, Schwab Holdings, Inc. (May 2008 – present). | 108 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 108 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer, Schwab Holdings, Inc. (May 2007 – present). | 108 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
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Schwab MarketTrack Portfolios
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
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Schwab MarketTrack Portfolios
Glossary
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Schwab MarketTrack Portfolios
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Schwab MarketTrack Portfolios | Annual Report
Schwab MarketTrack Portfolios
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Schwab MarketTrack Portfolios | Annual Report
Notes
Notes
Notes
Schwab MarketTrack Portfolios
Our straightforward
approach sets us apart.
As one of the nation’s largest asset managers, our
goal is to provide investors with a diverse selection of foundational products that aim to deliver consistent performance at a competitive cost. The list below shows all currently available Schwab Funds.
An investor should consider a fund’s investment
objectives, risks, charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-877-824-5615 for a prospectus and brochure for any Schwab Fund.
Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Schwab Funds’ website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s
website at www.sec.gov, or by contacting Schwab Funds at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s
website at www.sec.gov.
| 1 | You could lose money by investing in a money market fund. All Schwab Money Funds with the exception of Schwab Variable Share Price Money Fund seek to preserve the value of your investment at $1.00 per share, but cannot guarantee they will do so. Effective October 14, 2016, all Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab Retirement Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury Obligations Money Fund and Schwab Government Money Market Portfolio may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The money market fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. |
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MFR13813-19
00186668
00186668
Table of Contents
Annual
Report | October 31, 2016
Schwab Target Funds
Schwab Target 2010 Fund
Schwab Target 2015 Fund
Schwab Target 2020 Fund
Schwab Target 2025 Fund
Schwab Target 2030 Fund
Schwab Target 2035 Fund
Schwab Target 2040 Fund
Schwab Target 2045 Fund
Schwab Target 2050 Fund
Schwab Target 2055 Fund
Schwab Target 2060 Fund
This page is intentionally left blank.
Schwab Target Funds
In
This Report
Fund investment adviser: Charles Schwab Investment Management, Inc.
(CSIM).
Distributor: Charles Schwab & Co., Inc. (Schwab).
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Schwab Target Funds | Annual Report
Schwab Target Funds
Performance at a
Glance
The performance data quoted represents past performance. Past performance
does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than
performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com.
| Total Return for the 12 Months Ended October 31, 2016 | |
| Schwab Target 2010 Fund (Ticker Symbol: SWBRX) | 2.68% |
| Target 2010 Composite Index | 3.44% |
| Fund Category: Morningstar Target-Date 2000-2010 | 3.57% |
| Performance Details | pages 9-11 |
| Schwab Target 2015 Fund (Ticker Symbol: SWGRX) | 2.59% |
| Target 2015 Composite Index | 3.45% |
| Fund Category: Morningstar Target-Date 2015 | 3.44% |
| Performance Details | pages 12-14 |
| Schwab Target 2020 Fund (Ticker Symbol: SWCRX) | 2.05% |
| Target 2020 Composite Index | 3.12% |
| Fund Category: Morningstar Target-Date 2020 | 3.30% |
| Performance Details | pages 15-17 |
| Schwab Target 2025 Fund (Ticker Symbol: SWHRX) | 2.01% |
| Target 2025 Composite Index | 3.06% |
| Fund Category: Morningstar Target-Date 2025 | 3.08% |
| Performance Details | pages 18-20 |
| Schwab Target 2030 Fund (Ticker Symbol: SWDRX) | 1.72% |
| Target 2030 Composite Index | 2.98% |
| Fund Category: Morningstar Target-Date 2030 | 3.04% |
| Performance Details | pages 21-23 |
All total returns on this page
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not
annualized. Performance data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be
lower.
The components that make up each of the composite
indexes may vary over time. For index definitions, please see the Glossary.
Fund expenses may have been partially absorbed by CSIM and its
affiliates. Without these reductions, a fund’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
Source for category information: Morningstar, Inc. The
Morningstar Category return represents all active and index mutual funds within the category as of the report date.
2
Schwab Target Funds | Annual Report
Schwab Target Funds
Performance at a
Glance (continued)
| Total Return for the 12 Months Ended October 31, 2016 | |
| Schwab Target 2035 Fund (Ticker Symbol: SWIRX) | 1.63% |
| Target 2035 Composite Index | 2.91% |
| Fund Category: Morningstar Target-Date 2035 | 2.65% |
| Performance Details | pages 24-26 |
| Schwab Target 2040 Fund (Ticker Symbol: SWERX) | 1.38% |
| Target 2040 Composite Index | 2.83% |
| Fund Category: Morningstar Target-Date 2040 | 2.73% |
| Performance Details | pages 27-29 |
| Schwab Target 2045 Fund (Ticker Symbol: SWMRX) | 1.40% |
| Target 2045 Composite Index | 2.79% |
| Fund Category: Morningstar Target-Date 2045 | 2.44% |
| Performance Details | pages 30-32 |
| Schwab Target 2050 Fund (Ticker Symbol: SWNRX) | 1.39% |
| Target 2050 Composite Index | 2.75% |
| Fund Category: Morningstar Target-Date 2050 | 2.74% |
| Performance Details | pages 33-35 |
| Schwab Target 2055 Fund (Ticker Symbol: SWORX) | 1.28% |
| Target 2055 Composite Index | 2.70% |
| Fund Category: Morningstar Target-Date 2055 | 2.39% |
| Performance Details | pages 36-38 |
| Schwab Target 2060 Fund (Ticker Symbol: SWPRX) | -1.70% 1 |
| Target 2060 Composite Index | -2.08% 1 |
| Fund Category: Morningstar Target-Date 2060+ | -1.82% 1 |
| Performance Details | pages 39-41 |
| Minimum Initial Investment2 | $ 100 |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
The components that make up each of the composite indexes may
vary over time. For index definitions, please see the Glossary.
Fund expenses may have been partially absorbed by CSIM and its
affiliates. Without these reductions, a fund’s total return would have been lower. Performance does not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption of fund shares.
Source for category information: Morningstar, Inc. The
Morningstar Category return represents all active and index mutual funds within the category as of the report date.
| 1 | Total returns shown are since the Schwab Target 2060 Fund’s inception date of August 25, 2016. |
| 2 | Please see the funds’ prospectus for further detail and eligibility requirements. |
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Schwab Target Funds | Annual Report
Schwab Target Funds
Asset
Class Performance Comparison % returns during the 12 months ended 10/31/2016
Index figures
assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Past performance is not an indication of future
results.
For index definitions, please see the
Glossary.
Data source: Index provider websites
and CSIM.
Nothing in this report represents a
recommendation of a security by the investment adviser.
Management views and portfolio holdings may have
changed since the report date.
1 The net version of the index reflects reinvested dividends net of withholding taxes, but reflects no
deductions for expenses or other taxes.
4
Schwab Target Funds | Annual Report
Schwab Target Funds
5
Schwab Target Funds | Annual Report
Schwab Target Funds
The Investment
Environment
Over the 12-month reporting period ended October 31, 2016,
global fixed-income investments and emerging market and U.S. equities performed well, while many developed international equities lagged behind. The Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and
then held steady for the remainder of the reporting period. Yields on many global government-backed securities remained historically low, with some in negative territory, while lackluster global economic growth contributed to continued investor
uncertainty. Toward the end of the reporting period, the U.S. presidential election fueled heightened market volatility in both the U.S. and abroad. For the reporting period, the S&P 500® Index, a bellwether for the overall U.S. stock market, returned 4.51%, while the MSCI EAFE Index (Net), a broad measure of developed international
equity performance, returned -3.23%. In fixed-income markets, the Barclays U.S. Aggregate Bond Index returned 4.37% for the reporting period, and the Citigroup Non-U.S. Dollar World Government Bond Index returned 7.34%.
U.S. economic data generally improved over the reporting
period, despite several weak measurements during the 12 months. Corporate earnings were better-than-expected for the second quarter of 2016 but contracted in the third quarter, while U.S. nonfarm payrolls came in near expectations outside of a sharp
drop in May. Consumer confidence measurements were generally below expectations for most of the reporting period, but rebounded in September to reach the highest level since the 2008 recession. However, consumer confidence fell slightly in October
as increasing uncertainty surrounding the U.S. presidential election and the stability of the labor market resulted in more cautious consumers. In addition, U.S. economic growth trended upwards after dipping slightly in the first quarter of 2016,
with the third quarter’s measurement coming in as the fastest growth rate recorded in two years.
Short-term interest rate policy in the U.S. remained a source
of uncertainty and volatility during the reporting period. The Fed raised the federal funds rate in December 2015 to a target range of 0.25% to 0.50%, with the possibility of four additional increases in 2016. Inconsistent U.S. economic data, weak
global growth, and persistently low inflation, however, caused the Fed to leave rates unchanged at each meeting during the reporting period. At its meeting in September, the Fed noted that although the case for a rate increase had strengthened, it
had “…decided, for the time being, to wait for further evidence of continued progress toward its objectives.” Continued low interest rates in the U.S. resulted in cheaper borrowing costs, supporting the overall performance of
emerging markets and U.S. markets during the reporting period. In addition, many emerging market economies were able to absorb the sharp drop in commodities prices and shore up their monetary reserves over the past year, lessening investor fears
about the potentially negative impact of a U.S. interest rate increase. As of the end of the reporting period, markets continued to expect one rate hike by the end of 2016.
6
Schwab Target Funds | Annual Report
Schwab Target Funds
The Investment
Environment (continued)
During the 12-month reporting period, many central banks
outside the U.S. increased accommodative policy measures to help combat stalling economic growth. Both the Bank of Japan and the European Central Bank increased bond purchases and introduced negative interest rates, while the People’s Bank of
China (PBOC) expanded its lending facilities. Following the United Kingdom’s vote in June to leave the European Union (also known as Brexit), the Bank of England (BoE) announced its plan to take additional measures if necessary while markets
adjusted. Less than two months later in early August, the BoE cut its benchmark rate and resumed quantitative easing, and also increased lending to consumers and companies. The Central Bank of Russia also took steps aimed at stabilizing the economy
and inflation, decreasing its key interest rate in mid-September. While some of these measures initially appeared to be less effective than the central banks had hoped, the positive performance of many international equities in the second half of
the reporting period suggested that economic conditions outside the U.S. were beginning to improve.
With interest rates near historically low levels in the U.S.
and overseas, the yields on many government-backed securities also remained low, with some dropping below 0.00%. Over the reporting period, the yields on both German and Japanese 10-year government bonds dipped into negative territory. Meanwhile,
the yield on the British 10-year government note declined to levels approaching 0.50% in August after the announcement of increased accommodative policy measures from the BoE. In the U.S., short-term yields generally increased after the Fed’s
rate hike in December, and then leveled off as the reporting period continued. Longer-term U.S. yields, which are highly influenced by inflation and growth expectations, generally fell in the first half of 2016 amid subdued inflation and weak global
economic growth. As inflation rose slightly and growth expectations improved, the yields on longer-term Treasuries generally trended upwards in the last months of the reporting period.
Index figures assume dividends and distributions were
reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Past performance is not an
indication of future results.
For index definitions,
please see the Glossary.
Nothing in this report represents
a recommendation of a security by the investment adviser.
Management views may have changed since the report date.
7
Schwab Target Funds | Annual Report
Schwab Target Funds
Fund Management
 |
Zifan Tang, Ph.D., CFA, Managing Director, Senior Portfolio Manager, leads the portfolio management team and has overall responsibility for all aspects of the management of the funds. She was appointed portfolio manager of the funds in February 2012. Prior to joining CSIM in 2012, Ms. Tang was a product manager at Thomson Reuters and, from 1997 to 2009, worked as a portfolio manager at Barclays Global Investors, which was subsequently acquired by BlackRock. |
8
Schwab Target Funds | Annual Report
Schwab Target 2010 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2010 Fund
(the 2010 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2010 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2010 Fund’s asset allocation
was approximately 37.6% equity securities, 55.8% fixed income securities, and 6.6% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2010 Fund’s
Portfolio Holdings included in this report.)
Market
Highlights. Over the 12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015
meeting, the Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also
known as Brexit) caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the 2010 Fund returned 2.68%. The 2010 Fund’s internally calculated comparative index, the Target 2010 Composite Index (the composite index), returned 3.44%.
Positioning and Strategies.
The 2010 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2010 Fund’s U.S. fixed-income exposures provided the
greatest contribution to total return, particularly among diversified fixed income. The top contributor to the total return of the 2010 Fund was the Schwab Total Bond Market Fund, the 2010 Fund’s largest position, which returned 3.9%. The
Wells Fargo Core Bond Fund (Class I) also contributed notably. On a relative basis, the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, outperformed one of the composite index’s U.S. fixed-income components, the Bloomberg Barclays
U.S. Aggregate Bond Index, which returned 4.4%. The Schwab Treasury Inflation Protected Securities Index Fund contributed to the 2010 Fund’s total return but detracted slightly from the 2010 Fund’s relative performance.
The 2010 Fund’s U.S. equity allocation also contributed
to the 2010 Fund’s total return. The greatest contribution to total return within this allocation came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the
S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The 2010
Fund’s international equity allocation provided the largest detractor to total return with the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative
index, the MSCI EAFE Index (Net), which returned -3.2%.
The 2010 Fund’s global real estate allocation
contributed modestly to the 2010 Fund’s total return. The Schwab Global Real Estate Fund, which returned 4.1%, outperformed the composite index’s global real estate allocation component, the FTSE EPRA/NAREIT Global Index (Net), which
returned 3.1%.
9
Schwab Target Funds | Annual Report
Schwab Target 2010 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
10
Schwab Target Funds | Annual Report
Schwab Target 2010 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Target 2010 Fund (7/1/05) | 2.68% | 5.59% | 3.48% |
| Target 2010 Composite Index | 3.44% | 5.72% | 4.39% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 6.87% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.64% |
| Fund Category: Morningstar Target-Date 2000-2010 | 3.57% | 5.47% | 3.79% |
| Fund Expense Ratios3: Net 0.48%; Gross 0.62% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.48%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
11
Schwab Target Funds | Annual Report
Schwab Target 2015 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2015 Fund
(the 2015 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2015 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2015 Fund’s asset allocation
was approximately 39.7% equity securities, 54.0% fixed income securities, and 6.3% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2015 Fund’s
Portfolio Holdings included in this report.)
Market
Highlights. Over the 12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015
meeting, the Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also
known as Brexit) caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For the 12-month
reporting period ended October 31, 2016, the 2015 Fund returned 2.59%. The 2015 Fund’s internally calculated comparative index, the Target 2015 Composite Index (the composite index), returned 3.45%.
Positioning and Strategies.
The 2015 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2015 Fund’s U.S. fixed-income exposures provided the
greatest contribution to total return, particularly among diversified fixed income. The top contributor to the total return of the 2015 Fund was the Schwab Total Bond Market Fund, the 2015 Fund’s largest position, which returned 3.9%. The
Wells Fargo Core Bond Fund (Class I) also contributed notably. On a relative basis, the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, outperformed one of the composite index’s U.S. fixed-income allocation components, the Bloomberg
Barclays U.S. Aggregate Bond Index, which returned 4.4%. The Schwab Treasury Inflation Protected Securities Index Fund contributed to the 2015 Fund’s total return but detracted slightly from the 2015 Fund’s relative performance.
The 2015 Fund’s U.S. equity allocation also contributed
to the 2015 Fund’s total return. The greatest contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The 2015 Fund’s
international equity allocation provided the largest detractor to total return with the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the
MSCI EAFE Index (Net), which returned -3.2%.
The 2015
Fund’s global real estate allocation contributed modestly to the 2015 Fund’s total return. The Schwab Global Real Estate Fund, which returned 4.1%, outperformed the composite index’s global real estate allocation component, the
FTSE EPRA/NAREIT Global Index (Net), which returned 3.1%.
12
Schwab Target Funds | Annual Report
Schwab Target 2015 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
13
Schwab Target Funds | Annual Report
Schwab Target 2015 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (March 12, 2008
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Target 2015 Fund (3/12/08) | 2.59% | 6.26% | 4.80% |
| Target 2015 Composite Index | 3.45% | 6.41% | 4.90% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 8.19% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.44% |
| Fund Category: Morningstar Target-Date 2015 | 3.44% | 6.16% | 3.90% |
| Fund Expense Ratios3: Net 0.50%; Gross 0.59% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.50%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
14
Schwab Target Funds | Annual Report
Schwab Target 2020 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2020 Fund
(the 2020 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2020 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2020 Fund’s asset allocation
was approximately 51.9% equity securities, 43.5% fixed income securities, and 4.6% cash and cash equivalents (including money market funds). At its target date, the 2020 Fund’s allocation will be approximately 40.0% equity securities, 54.0%
fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2020 Fund’s Portfolio Holdings included in this report.)
Market
Highlights. Over the 12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its
December 2015 meeting, the Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the
European Union (also known as Brexit) caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the 2020 Fund returned 2.05%. The 2020 Fund’s internally calculated comparative index, the Target 2020 Composite Index (the composite index), returned 3.12%.
Positioning and
Strategies. The 2020 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2020 Fund’s U.S. fixed-income exposures provided the
greatest contribution to total return, particularly among diversified fixed income. The top contributor to the total return of the 2020 Fund was the Schwab Total Bond Market Fund, the 2020 Fund’s largest position, which returned 3.9%. The
Wells Fargo Core Bond Fund (Class I) also contributed notably. On a relative basis, the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, outperformed one of the composite index’s U.S. fixed-income allocation components, the Bloomberg
Barclays U.S. Aggregate Bond Index, which returned 4.4%. The Schwab Treasury Inflation Protected Securities Index Fund contributed to the 2020 Fund’s total return but detracted slightly from the 2020 Fund’s relative performance.
The 2020 Fund’s U.S. equity allocation also contributed
to the 2020 Fund’s total return. The greatest contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The 2020 Fund’s
international equity allocation provided the largest detractor to total return with the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the
MSCI EAFE Index (Net), which returned -3.2%.
The 2020
Fund’s global real estate allocation contributed modestly to the 2020 Fund’s total return. The Schwab Global Real Estate Fund, which returned 4.1%, outperformed the composite index’s global real estate allocation component, the
FTSE EPRA/NAREIT Global Index (Net), which returned 3.1%.
15
Schwab Target Funds | Annual Report
Schwab Target 2020 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
16
Schwab Target Funds | Annual Report
Schwab Target 2020 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Target 2020 Fund (7/1/05) | 2.05% | 7.33% | 4.58% |
| Target 2020 Composite Index | 3.12% | 7.54% | 5.08% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 6.87% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.64% |
| Fund Category: Morningstar Target-Date 2020 | 3.30% | 6.11% | 3.89% |
| Fund Expense Ratios3: Net 0.59%; Gross 0.62% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.59%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
17
Schwab Target Funds | Annual Report
Schwab Target 2025 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2025 Fund
(the 2025 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2025 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2025 Fund’s asset allocation
was approximately 63.2% equity securities, 33.4% fixed income securities, and 3.5% cash and cash equivalents (including money market funds). At its target date, the 2025 Fund’s allocation will be approximately 40.0% equity securities, 54.0%
fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2025 Fund’s Portfolio Holdings included in this report.)
Market
Highlights. Over the 12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its
December 2015 meeting, the Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the
European Union (also known as Brexit) caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the 2025 Fund returned 2.01%. The 2025 Fund’s internally calculated comparative index, the Target 2025 Composite Index (the composite index), returned 3.06%.
Positioning and
Strategies. The 2025 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2025 Fund’s U.S. fixed-income exposures provided the
greatest contribution to total return, particularly among diversified fixed income. The top contributor to the total return of the 2025 Fund was the Schwab Total Bond Market Fund, the 2025 Fund’s largest position, which returned 3.9%. The
Wells Fargo Core Bond Fund (Class I) also contributed notably. On a relative basis, the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, outperformed one of the composite index’s U.S. fixed-income allocation components, the Bloomberg
Barclays U.S. Aggregate Bond Index, which returned 4.4%. The Laudus Mondrian International Government Fixed Income Fund (Institutional Shares) contributed to the 2025 Fund’s total return but detracted slightly from the 2025 Fund’s
relative performance.
The 2025 Fund’s U.S. equity
allocation also contributed to the 2025 Fund’s total return. The greatest contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The 2025 Fund’s
international equity allocation provided the largest detractor to total return with the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the
MSCI EAFE Index (Net), which returned -3.2%.
The 2025
Fund’s global real estate allocation contributed modestly to the 2025 Fund’s total return. The Schwab Global Real Estate Fund, which returned 4.1%, outperformed the composite index’s global real estate allocation component, the
FTSE EPRA/NAREIT Global Index (Net), which returned 3.1%.
18
Schwab Target Funds | Annual Report
Schwab Target 2025 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
19
Schwab Target Funds | Annual Report
Schwab Target 2025 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (March 12, 2008
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Target 2025 Fund (3/12/08) | 2.01% | 8.13% | 6.26% |
| Target 2025 Composite Index | 3.06% | 8.36% | 5.85% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 8.19% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.44% |
| Fund Category: Morningstar Target-Date 2025 | 3.08% | 7.18% | 4.34% |
| Fund Expense Ratios3: Net 0.65%; Gross 0.69% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.65%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
20
Schwab Target Funds | Annual Report
Schwab Target 2030 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2030 Fund
(the 2030 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2030 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2030 Fund’s asset allocation
was approximately 71.6% equity securities, 25.5% fixed income securities, and 2.8% cash and cash equivalents (including money market funds). At its target date, the 2030 Fund’s allocation will be approximately 40.0% equity securities, 54.0%
fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2030 Fund’s Portfolio Holdings included in this report.)
Market
Highlights. Over the 12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its
December 2015 meeting, the Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the
European Union (also known as Brexit) caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For the 12-month
reporting period ended October 31, 2016, the 2030 Fund returned 1.72%. The 2030 Fund’s internally calculated comparative index, the Target 2030 Composite Index (the composite index), returned 2.98%.
Positioning and Strategies.
The 2030 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2030 Fund’s fixed-income exposures were among the
largest contributors to total return, particularly among U.S. diversified fixed income. The top fixed-income contributor to the total return of the 2030 Fund was the Schwab Total Bond Market Fund, which returned 3.9%. The Wells Fargo Core Bond Fund
(Class I) also contributed notably. On a relative basis, the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, outperformed one of the composite index’s U.S. fixed-income allocation components, the Bloomberg Barclays U.S. Aggregate
Bond Index, which returned 4.4%. The Laudus Mondrian International Government Fixed Income Fund (Institutional Shares) contributed to the 2030 Fund’s total return but detracted slightly from the 2030 Fund’s relative performance.
The 2030 Fund’s U.S. equity allocation also positively
contributed to the 2030 Fund’s total return. The greatest contribution to the 2030 Fund’s total return came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund
tracked the S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned
4.5%. The 2030 Fund’s international equity allocation was the largest detractor to total return, with the Schwab International Core Equity Fund returning -2.4% and the Laudus International MarketMasters Fund (Select Shares) returning 0.0%. On
a relative basis, however, both of the 2030 Fund’s international holdings outperformed their comparative index, the MSCI EAFE Index (Net), which returned -3.2% for the reporting period.
The 2030 Fund’s global real estate allocation
contributed modestly to the 2030 Fund’s total return. The Schwab Global Real Estate Fund, which returned 4.1%, outperformed the composite index’s global real estate allocation component, the FTSE EPRA/NAREIT Global Index (Net), which
returned 3.1%.
21
Schwab Target Funds | Annual Report
Schwab Target 2030 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
22
Schwab Target Funds | Annual Report
Schwab Target 2030 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Target 2030 Fund (7/1/05) | 1.72% | 8.69% | 5.26% |
| Target 2030 Composite Index | 2.98% | 8.99% | 5.51% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 6.87% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.64% |
| Fund Category: Morningstar Target-Date 2030 | 3.04% | 7.36% | 4.00% |
| Fund Expense Ratios3: Net 0.70%; Gross 0.73% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.70%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
23
Schwab Target Funds | Annual Report
Schwab Target 2035 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2035 Fund
(the 2035 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2035 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2035 Fund’s asset allocation
was approximately 78.7% equity securities, 18.9% fixed income securities, and 2.4% cash and cash equivalents (including money market funds). At its target date, the 2035 Fund’s allocation will be approximately 40.0% equity securities, 54.0%
fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2035 Fund’s Portfolio Holdings included in this report.)
Market Highlights. Over the
12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015 meeting, the Federal Reserve (Fed) raised short-term
interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in volatility. Toward
the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the 2035 Fund returned 1.63%. The 2035 Fund’s internally calculated comparative index, the Target 2035 Composite Index (the composite index), returned 2.91%.
Positioning and Strategies.
The 2035 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2035 Fund’s U.S. equity exposures provided the
greatest contribution to total return, particularly among U.S. large caps. The largest positive contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the
S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The
Schwab Small-Cap Equity Fund contributed to the 2035 Fund’s total return but detracted from the 2035 Fund’s relative performance. The 2035 Fund’s international equity allocation provided the largest detractor to total return with
the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the MSCI EAFE Index (Net), which returned -3.2%.
The 2035 Fund’s U.S. fixed-income allocation contributed
modestly to total return, particularly among diversified fixed income. The largest positive contribution came from the Schwab Total Bond Market Fund, which returned 3.9%. However, the Schwab Total Bond Market Fund underperformed the Bloomberg
Barclays U.S. Aggregate Bond Index, one of the composite index’s U.S. fixed-income allocation components, which returned 4.4%, detracting from relative performance. The 2035 Fund’s position in the Wells Fargo Core Bond Fund (Class I),
which returned 4.5%, also contributed to total return.
24
Schwab Target Funds | Annual Report
Schwab Target 2035 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
25
Schwab Target Funds | Annual Report
Schwab Target 2035 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (March 12, 2008
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | Since Inception |
| Fund: Schwab Target 2035 Fund (3/12/08) | 1.63% | 9.26% | 6.68% |
| Target 2035 Composite Index | 2.91% | 9.57% | 6.29% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 8.19% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.44% |
| Fund Category: Morningstar Target-Date 2035 | 2.65% | 8.16% | 4.70% |
| Fund Expense Ratios3: Net 0.74%; Gross 0.79% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.74%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
26
Schwab Target Funds | Annual Report
Schwab Target 2040 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2040 Fund
(the 2040 Fund) se seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus
Funds. The 2040 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2040 Fund’s asset
allocation was approximately 85.4% equity securities, 12.4% fixed income securities, and 2.2% cash and cash equivalents (including money market funds). At its target date, the 2040 Fund’s allocation will be approximately 40.0% equity
securities, 54.0% fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2040 Fund’s Portfolio Holdings included in this
report.)
Market Highlights. Over the 12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015 meeting, the
Federal Reserve (Fed) raised short-term interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as
Brexit) caused a spike in volatility. Toward the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the 2040 Fund returned 1.38%. The 2040 Fund’s internally calculated comparative index, the Target 2040 Composite Index (the composite index), returned 2.83%.
Positioning and
Strategies. The 2040 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2040 Fund’s U.S. equity exposures provided the
greatest contribution to total return, particularly among U.S. large caps. The largest positive contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the
S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The
Schwab Small-Cap Equity Fund contributed to the 2040 Fund’s total return but detracted from the 2040 Fund’s relative performance. The 2040 Fund’s international equity allocation provided the largest detractor to total return with
the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the MSCI EAFE Index (Net), which returned -3.2%.
The 2040 Fund’s U.S. fixed-income allocation contributed
modestly to total return, particularly among diversified fixed income. The Schwab Total Bond Market Fund, which returned 3.9%, underperformed the Bloomberg Barclays U.S. Aggregate Bond Index, one of the composite index’s U.S. fixed-income
allocation components, which returned 4.4%, detracting from relative performance. The 2040 Fund’s position in the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, also contributed to total return.
27
Schwab Target Funds | Annual Report
Schwab Target 2040 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
28
Schwab Target Funds | Annual Report
Schwab Target 2040 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (October 31, 2006
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 5 Years | 10 Years |
| Fund: Schwab Target 2040 Fund (7/1/05) | 1.38% | 9.66% | 5.61% |
| Target 2040 Composite Index | 2.83% | 9.96% | 5.74% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 13.29% | 6.87% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 2.90% | 4.64% |
| Fund Category: Morningstar Target-Date 2040 | 2.73% | 8.06% | 4.09% |
| Fund Expense Ratios3: Net 0.77%; Gross 0.80% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.77%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
29
Schwab Target Funds | Annual Report
Schwab Target 2045 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2045 Fund
(the 2045 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2045 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2045 Fund’s asset allocation
was approximately 89.4% equity securities, 8.5% fixed income securities, and 2.1% cash and cash equivalents (including money market funds). At its target date, the 2045 Fund’s allocation will be approximately 40.0% equity securities, 54.0%
fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2045 Fund’s Portfolio Holdings included in this report.)
Market Highlights. Over the
12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015 meeting, the Federal Reserve (Fed) raised short-term
interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in volatility. Toward
the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For the 12-month
reporting period ended October 31, 2016, the 2045 Fund returned 1.40%. The 2045 Fund’s internally calculated comparative index, the Target 2045 Composite Index (the composite index), returned 2.79%.
Positioning and
Strategies. The 2045 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2045 Fund’s U.S. equity exposures provided the
greatest contribution to total return, particularly among U.S. large caps. The largest positive contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the
S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The
Schwab Small-Cap Equity Fund contributed to the 2045 Fund’s total return but detracted from the 2045 Fund’s relative performance. The 2045 Fund’s international equity allocation provided the largest detractor to total return with
the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the MSCI EAFE Index (Net), which returned -3.2%.
The 2045 Fund’s U.S. fixed-income allocation contributed
modestly to total return, particularly among diversified fixed income. The Schwab Total Bond Market Fund, which returned 3.9%, underperformed the Bloomberg Barclays U.S. Aggregate Bond Index, one the composite index’s U.S. fixed-income
allocation components, which returned 4.4%, detracting from relative performance. The 2045 Fund’s position in the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, also contributed to total return.
30
Schwab Target Funds | Annual Report
Schwab Target 2045 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
31
Schwab Target Funds | Annual Report
Schwab Target 2045 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (January 23, 2013
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 3 Years | Since Inception |
| Fund: Schwab Target 2045 Fund (1/23/13) | 1.40% | 4.61% | 7.96% |
| Target 2045 Composite Index | 2.79% | 5.26% | 8.47% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 8.07% | 11.71% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 3.48% | 2.51% |
| Fund Category: Morningstar Target-Date 2045 | 2.44% | 3.87% | 6.66% |
| Fund Expense Ratios3: Net 0.79%; Gross 0.99% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.79%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
32
Schwab Target Funds | Annual Report
Schwab Target 2050 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2050 Fund
(the 2050 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2050 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2050 Fund’s asset allocation
was approximately 92.0% equity securities, 6.0% fixed income securities, and 2.0% cash and cash equivalents (including money market funds). At its target date, the 2050 Fund’s allocation will be approximately 40.0% equity securities, 54.0%
fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2050 Fund’s Portfolio Holdings included in this report.)
Market Highlights. Over the
12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015 meeting, the Federal Reserve (Fed) raised short-term
interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in volatility. Toward
the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For
the 12-month reporting period ended October 31, 2016, the 2050 Fund returned 1.39%. The 2050 Fund’s internally calculated comparative index, the Target 2050 Composite Index (the composite index), returned 2.75%.
Positioning and
Strategies. The 2050 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2050 Fund’s U.S. equity exposures provided the
greatest contribution to total return, particularly among U.S. large caps. The largest positive contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the
S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The
Schwab Small-Cap Equity Fund contributed to the 2050 Fund’s total return but detracted from the 2050 Fund’s relative performance. The 2050 Fund’s international equity allocation provided the largest detractor to total return with
the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the MSCI EAFE Index (Net), which returned -3.2%.
The 2050 Fund’s U.S. fixed-income allocation contributed
modestly to total return, particularly among diversified fixed income. The Schwab Total Bond Market Fund, which returned 3.9%, underperformed the Bloomberg Barclays U.S. Aggregate Bond Index, one of the composite index’s U.S. fixed-income
allocation components, which returned 4.4%, detracting from relative performance. The 2050 Fund’s position in the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, also contributed to total return.
33
Schwab Target Funds | Annual Report
Schwab Target 2050 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
34
Schwab Target Funds | Annual Report
Schwab Target 2050 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (January 23, 2013
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 3 Years | Since Inception |
| Fund: Schwab Target 2050 Fund (1/23/13) | 1.39% | 4.68% | 8.16% |
| Target 2050 Composite Index | 2.75% | 5.30% | 8.62% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 8.07% | 11.71% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 3.48% | 2.51% |
| Fund Category: Morningstar Target-Date 2050 | 2.74% | 3.91% | 6.54% |
| Fund Expense Ratios3: Net 0.81%; Gross 1.06% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.81%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
35
Schwab Target Funds | Annual Report
Schwab Target 2055 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2055 Fund
(the 2055 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2055 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser; as of the last annual adjustment at the end of January 2016, the 2055 Fund’s asset allocation
was approximately 94.5% equity securities, 3.5% fixed income securities, and 2.0% cash and cash equivalents (including money market funds). At its target date, the 2055 Fund’s allocation will be approximately 40.0% equity securities, 54.0%
fixed income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2055 Fund’s Portfolio Holdings included in this report.)
Market Highlights. Over the
12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015 meeting, the Federal Reserve (Fed) raised short-term
interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in volatility. Toward
the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. For the 12-month
reporting period ended October 31, 2016, the 2055 Fund returned 1.28%. The 2055 Fund’s internally calculated comparative index, the Target 2055 Composite Index (the composite index), returned 2.70%.
Positioning and
Strategies. The 2055 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2055 Fund’s U.S. equity exposures provided the
greatest contribution to total return, particularly among U.S. large caps. The largest positive contribution came from the Schwab S&P 500 Index Fund, which returned 4.4%. However, the performance of the Schwab S&P 500 Index Fund tracked the
S&P 500® Index, one of the composite index’s U.S. equity allocation components and its designated benchmark, which returned 4.5%. The
Schwab Small-Cap Equity Fund contributed to the 2055 Fund’s total return but detracted from the 2055 Fund’s relative performance. The 2055 Fund’s international equity allocation provided the largest detractor to total return with
the Schwab International Core Equity Fund returning -2.4%. On a relative basis, the Schwab International Core Equity Fund outperformed its comparative index, the MSCI EAFE Index (Net), which returned -3.2%.
The 2055 Fund’s U.S. fixed-income allocation contributed
modestly to total return, particularly among diversified fixed income. The Schwab Total Bond Market Fund, which returned 3.9%, underperformed the Bloomberg Barclays U.S. Aggregate Bond Index, one of the composite index’s U.S. fixed-income
allocation components, which returned 4.4%, detracting from relative performance. The 2055 Fund’s position in the Wells Fargo Core Bond Fund (Class I), which returned 4.5%, also contributed to total return.
36
Schwab Target Funds | Annual Report
Schwab Target 2055 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
37
Schwab Target Funds | Annual Report
Schwab Target 2055 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (January 23, 2013
– October 31, 2016)1
Average Annual Total Returns1,2
| Fund and Inception Date | 1 Year | 3 Years | Since Inception |
| Fund: Schwab Target 2055 Fund (1/23/13) | 1.28% | 4.66% | 8.19% |
| Target 2055 Composite Index | 2.70% | 5.30% | 8.70% |
| Dow Jones U.S. Total Stock Market IndexSM | 4.21% | 8.07% | 11.71% |
| Bloomberg Barclays U.S. Aggregate Bond Index | 4.37% | 3.48% | 2.51% |
| Fund Category: Morningstar Target-Date 2055 | 2.39% | 4.02% | 7.02% |
| Fund Expense Ratios3: Net 0.82%; Gross 1.26% | |||
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.82%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
38
Schwab Target Funds | Annual Report
Schwab Target 2060 Fund
Performance and Fund
Facts as of 10/31/16
The Schwab Target 2060 Fund
(the 2060 Fund) seeks to provide capital appreciation and income consistent with its current asset allocation, and seeks to achieve its investment objective by investing primarily in a combination of other affiliated Schwab Funds and Laudus Funds.
The 2060 Fund may also invest in unaffiliated third-party mutual funds. The target asset allocation is adjusted annually by the investment adviser. At the 2060 Fund’s inception, August 25, 2016, the asset allocation was anticipated to be
approximately 95.0% equity securities, 3.0% fixed income securities, and 2.0% cash and cash equivalents (including money market funds). At its target date, the 2060 Fund’s allocation will be approximately 40.0% equity securities, 54.0% fixed
income securities, and 6.0% cash and cash equivalents (including money market funds). (For portfolio allocations as of the end of this reporting period, please see the 2060 Fund’s Portfolio Holdings included in this report.)
Market Highlights. Over the
12-month reporting period, global fixed-income investments and emerging market and U.S. equities performed well, while many developed international stocks lagged behind. At its December 2015 meeting, the Federal Reserve (Fed) raised short-term
interest rates for the first time in almost a decade, and then held steady for the remainder of the reporting period. The United Kingdom’s decision in June to leave the European Union (also known as Brexit) caused a spike in volatility. Toward
the end of the reporting period, the U.S. presidential election also fueled heightened market volatility in both the U.S. and abroad.
Performance. The 2060 Fund
returned -1.70% for the reporting period of fund inception, August 25, 2016 to October 31, 2016. The 2060 Fund’s internally calculated comparative index, the Target 2060 Composite Index (the composite index), returned -2.08% for the same
period.
Positioning and Strategies. The 2060 Fund’s asset allocations were broadly in line with those of the composite index over the reporting period.
The 2060 Fund’s U.S. equity allocation detracted from
total return, particularly among large caps. The only positive contribution came from the Dodge & Cox Stock Fund. On a relative basis, the Dodge & Cox Stock Fund outperformed the S& P 500® Index, the composite index’s U.S. equity allocation component. However, the remaining four holdings in the 2060 Fund’s U.S. large-cap
allocation, the Schwab Core Equity Fund, the Schwab S&P 500 Index Fund, the Schwab Dividend Equity Fund, and the Laudus U.S. Large Cap Growth Fund, all detracted from total return.
The 2060 Fund’s international equity exposure generally
detracted from total return, although the two holdings in the 2060 Fund contributed positively to relative performance. The Schwab International Core Equity Fund generated a negative return but outperformed its comparative index, the MSCI EAFE Index
(Net). The Laudus International MarketMasters Fund (Select Shares) also posted a negative return for the abbreviated reporting period, but outperformed its comparative index, the MSCI EAFE Index (Net).
The 2060 Fund’s fixed-income exposures generally
detracted from total return, although two of the underlying funds provided positive contributions to total return and outperformed their respective composite indexes. The Metropolitan West Total Return Bond Fund (Class I) outperformed the Bloomberg
Barclays U.S. Aggregate Bond Index, the composite index’s U.S. fixed-income allocation component, enhancing relative performance. The Natixis Loomis Sayles Investment Grade Fund (Class Y) also outperformed its composite index, the Bloomberg
Barclays U.S. Government/Credit Index, contributing to performance relative to the index.
39
Schwab Target Funds | Annual Report
Schwab Target 2060 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
Top Holdings % of Net Assets2,3
Management views and portfolio holdings may have changed
since the report date.
The Laudus U.S. Large Cap Growth
Fund is part of Laudus Trust and distributed by ALPS Distributors, Inc. The Laudus MarketMasters Funds are part of Schwab Capital Trust and distributed by Charles Schwab & Co., Inc.
| 1 | The fund intends to invest in a combination of the underlying funds; however, the fund may also invest directly in equity and fixed income securities, exchange-traded funds, and cash equivalents, including money market securities. |
| 2 | This list is not a recommendation of any security by the investment adviser. |
| 3 | The holdings listed exclude any temporary liquidity investments. |
40
Schwab Target Funds | Annual Report
Schwab Target 2060 Fund
Performance and Fund
Facts as of 10/31/16 (continued)
The performance data quoted represents past performance. Past
performance does not guarantee future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher
than performance data quoted. To obtain performance information current to the most recent month end, please visit
www.csimfunds.com.
Performance of Hypothetical $10,000 Investment (August 25, 2016
– October 31, 2016)1
Total Returns1,2
| Fund and Inception Date | Since Inception |
| Fund: Schwab Target 2060 Fund (8/25/16) | -1.70% |
| Target 2060 Composite Index | -2.08% |
| Dow Jones U.S. Total Stock Market IndexSM | -2.10% |
| Bloomberg Barclays U.S. Aggregate Bond Index | -0.86% |
| Fund Category: Morningstar Target-Date 2060+ | -1.82% |
| Fund Expense Ratios3: Net 0.82%; Gross 1.92% | |
All total returns on this page assume dividends and
distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indexes are unmanaged and cannot be invested in directly. Performance results less than one year are not annualized. Performance
data quoted does not reflect the non-recurring redemption fee of 2% that may be charged if shares are sold or exchanged within 30 days of the purchase date. If these fees were reflected, the performance data quoted would be lower.
For index definitions, please see the Glossary.
| 1 | Fund expenses may have been partially absorbed by CSIM and its affiliates. Without these reductions, the fund’s returns would have been lower. These returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. |
| 2 | Source for category information: Morningstar, Inc. The Morningstar Category return represents all active and index mutual funds within the category as of the report date. |
| 3 | As stated in the prospectus. Includes expenses of the underlying funds in which the fund invests. The annualized weighted average expense ratio of the underlying funds was 0.82%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as the investment adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
41
Schwab Target Funds | Annual Report
Schwab Target Funds
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Schwab Target 2010 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,022.00 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2015 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,021.80 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2020 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,025.20 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2025 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,028.30 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2030 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,029.80 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2035 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,032.10 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2040 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,033.50 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2045 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,034.50 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2050 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,035.10 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| Schwab Target 2055 Fund | ||||
| Actual Return | 0.00% | $1,000.00 | $1,036.00 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
42
Schwab Target Funds | Annual Report
Schwab Target Funds
Fund Expenses (Unaudited) (continued)
| Expense
Ratio (Annualized)1 |
Beginning
Account Value at 5/1/16 |
Ending
Account Value (Net of Expenses) at 10/31/16 |
Expenses
Paid During Period 5/1/16-10/31/162 | |
| Schwab Target 2060 Fund3,4 | ||||
| Actual Return | 0.00% | $1,000.00 | $ 983.00 | $0.00 |
| Hypothetical 5% Return | 0.00% | $1,000.00 | $1,025.10 | $0.00 |
| 1 | Based on the most recent six-month expense ratio; may differ from the expense ratio provided in the Financial Highlights which covers a 12-month period. The expenses incurred by the underlying funds in which the funds invest are not included in this ratio. This ratio does not include certain non-routine expenses, such as proxy expenses. |
| 2 | Expenses for each fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by the 366 days of the fiscal year. |
| 3 | The expense ratio provided for the fund is for the period from 8/25/16 (commencement of operations) through 10/31/16. See financial note 4. |
| 4 | Actual expenses for the fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 68 days of the period from commencement of operations on 8/25/16 through 10/31/16, and divided by 366 days of the fiscal year. Hypothetical expenses for the fund are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days of the period, and divided by 366 days of the fiscal year. |
43
Schwab Target Funds | Annual Report
Schwab Target 2010 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $12.42 | $12.42 | $11.91 | $11.10 | $10.56 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.20 1 | 0.17 1 | 0.19 | 0.21 | 0.22 | |
| Net realized and unrealized gains (losses) | 0.12 | 0.08 | 0.52 | 0.85 | 0.57 | |
| Total from investment operations | 0.32 | 0.25 | 0.71 | 1.06 | 0.79 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.22) | (0.25) | (0.20) | (0.25) | (0.25) | |
| Net asset value at end of period | $12.52 | $12.42 | $12.42 | $11.91 | $11.10 | |
| Total return | 2.68% | 2.03% | 6.08% | 9.74% | 7.63% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.00% 3 | 0.00% 3 | — | — | — | |
| Gross operating expenses2 | 0.14% | 0.14% | 0.17% | 0.18% | 0.18% | |
| Net investment income (loss) | 1.60% | 1.40% | 1.53% | 1.77% | 1.95% | |
| Portfolio turnover rate | 14% | 33% | 29% | 26% | 13% | |
| Net assets, end of period (x 1,000,000) | $59 | $65 | $64 | $61 | $60 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
44
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2010 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
45
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2010 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $58,029,087 | $— | $— | $58,029,087 | |
| Short-Term Investments1 | — | 1,246,698 | — | 1,246,698 | |
| Total | $58,029,087 | $1,246,698 | $— | $59,275,785 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
46
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2010 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $41,765,807) | $46,865,087 | |
| Investments in unaffiliated issuers, at value (cost $11,717,833) | + | 12,410,698 |
| Total investments, at value (cost $53,483,640) | 59,275,785 | |
| Receivables: | ||
| Investments sold | 325,000 | |
| Dividends | 45,965 | |
| Fund shares sold | 26,673 | |
| Prepaid expenses | + | 8,062 |
| Total assets | 59,681,485 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 41,888 | |
| Fund shares redeemed | 145,388 | |
| Accrued expenses | + | 24,007 |
| Total liabilities | 211,283 | |
| Net Assets | ||
| Total assets | 59,681,485 | |
| Total liabilities | – | 211,283 |
| Net assets | $59,470,202 | |
| Net Assets by Source | ||
| Capital received from investors | 61,118,015 | |
| Net investment income not yet distributed | 567,443 | |
| Net realized capital losses | (8,007,401) | |
| Net unrealized capital appreciation | 5,792,145 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $59,470,202 | 4,750,368 | $12.52 | ||
47
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2010 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $773,724 | |
| Dividends received from unaffiliated underlying funds | 202,553 | |
| Interest | + | 1,943 |
| Total investment income | 978,220 | |
| Expenses | ||
| Professional fees | 26,390 | |
| Registration fees | 19,599 | |
| Transfer agent fees | 12,192 | |
| Independent trustees' fees | 8,308 | |
| Shareholder reports | 8,280 | |
| Portfolio accounting fees | 5,436 | |
| Custodian fees | 3,257 | |
| Proxy fees | 1,463 | |
| Other expenses | + | 1,659 |
| Total expenses | 86,584 | |
| Expense reduction by CSIM | – | 85,121 |
| Net expenses | – | 1,463 |
| Net investment income | 976,757 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 1,415,921 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 155,483 | |
| Net realized gains on sales of affiliated underlying funds | 650,072 | |
| Net realized losses on sales of unaffiliated underlying funds | + | (8,818) |
| Net realized gains | 2,212,658 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (1,739,049) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 115,551 |
| Net change in unrealized appreciation (depreciation) | + | (1,623,498) |
| Net realized and unrealized gains | 589,160 | |
| Increase in net assets resulting from operations | $1,565,917 | |
48
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2010 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $976,757 | $916,426 | ||
| Net realized gains | 2,212,658 | 3,164,996 | ||
| Net change in unrealized appreciation (depreciation) | + | (1,623,498) | (2,756,474) | |
| Increase in net assets from operations | 1,565,917 | 1,324,948 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | ($1,128,027) | ($1,277,875) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 719,105 | $8,761,592 | 1,228,160 | $15,228,571 | ||||
| Shares reinvested | 87,514 | 1,059,786 | 97,175 | 1,194,285 | ||||
| Shares redeemed | + | (1,250,841) | (15,300,270) | (1,267,254) | (15,735,627) | |||
| Net transactions in fund shares | (444,222) | ($5,478,892) | 58,081 | $687,229 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 5,194,590 | $64,511,204 | 5,136,509 | $63,776,902 | ||||
| Total increase or decrease | + | (444,222) | (5,041,002) | 58,081 | 734,302 | |||
| End of period | 4,750,368 | $59,470,202 | 5,194,590 | $64,511,204 | ||||
| Net investment income not yet distributed | $567,443 | $518,547 | ||||||
49
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2015 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $12.23 | $12.81 | $12.22 | $11.13 | $10.48 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.18 1 | 0.17 1 | 0.19 | 0.20 | 0.20 | |
| Net realized and unrealized gains (losses) | 0.11 | 0.08 | 0.60 | 1.12 | 0.66 | |
| Total from investment operations | 0.29 | 0.25 | 0.79 | 1.32 | 0.86 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.21) | (0.27) | (0.20) | (0.23) | (0.21) | |
| Distributions from net realized gains | (0.59) | (0.56) | — | — | — | |
| Total distributions | (0.80) | (0.83) | (0.20) | (0.23) | (0.21) | |
| Net asset value at end of period | $11.72 | $12.23 | $12.81 | $12.22 | $11.13 | |
| Total return | 2.59% | 1.99% | 6.56% | 12.06% | 8.41% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.00% 3 | 0.00% 3 | — | — | — | |
| Gross operating expenses2 | 0.08% | 0.09% | 0.11% | 0.14% | 0.19% | |
| Net investment income (loss) | 1.59% | 1.42% | 1.52% | 1.72% | 1.85% | |
| Portfolio turnover rate | 14% | 33% | 32% | 16% | 13% | |
| Net assets, end of period (x 1,000,000) | $104 | $116 | $111 | $94 | $70 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
50
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2015 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
51
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2015 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $101,901,402 | $— | $— | $101,901,402 | |
| Short-Term Investments1 | — | 2,000,886 | — | 2,000,886 | |
| Total | $101,901,402 | $2,000,886 | $— | $103,902,288 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
52
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2015 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $75,780,375) | $82,386,142 | |
| Investments in unaffiliated issuers, at value (cost $20,482,984) | + | 21,516,146 |
| Total investments, at value (cost $96,263,359) | 103,902,288 | |
| Receivables: | ||
| Investments sold | 350,000 | |
| Fund shares sold | 90,370 | |
| Dividends | 76,955 | |
| Prepaid expenses | + | 5,312 |
| Total assets | 104,424,925 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 70,203 | |
| Fund shares redeemed | 151,139 | |
| Accrued expenses | + | 24,360 |
| Total liabilities | 245,702 | |
| Net Assets | ||
| Total assets | 104,424,925 | |
| Total liabilities | – | 245,702 |
| Net assets | $104,179,223 | |
| Net Assets by Source | ||
| Capital received from investors | 92,687,288 | |
| Net investment income not yet distributed | 993,948 | |
| Net realized capital gains | 2,859,058 | |
| Net unrealized capital appreciation | 7,638,929 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $104,179,223 | 8,885,259 | $11.72 | ||
53
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2015 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $1,387,846 | |
| Dividends received from unaffiliated underlying funds | 366,459 | |
| Interest | + | 3,568 |
| Total investment income | 1,757,873 | |
| Expenses | ||
| Professional fees | 26,744 | |
| Registration fees | 20,563 | |
| Transfer agent fees | 13,186 | |
| Shareholder reports | 9,955 | |
| Independent trustees' fees | 8,608 | |
| Portfolio accounting fees | 6,113 | |
| Custodian fees | 3,800 | |
| Proxy fees | 2,257 | |
| Other expenses | + | 2,496 |
| Total expenses | 93,722 | |
| Expense reduction by CSIM | – | 91,465 |
| Net expenses | – | 2,257 |
| Net investment income | 1,755,616 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 2,662,001 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 292,897 | |
| Net realized gains on sales of affiliated underlying funds | 679,140 | |
| Net realized gains on sales of unaffiliated underlying funds | + | 1,385 |
| Net realized gains | 3,635,423 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (2,671,773) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 196,744 |
| Net change in unrealized appreciation (depreciation) | + | (2,475,029) |
| Net realized and unrealized gains | 1,160,394 | |
| Increase in net assets resulting from operations | $2,916,010 | |
54
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2015 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $1,755,616 | $1,623,736 | ||
| Net realized gains | 3,635,423 | 6,088,949 | ||
| Net change in unrealized appreciation (depreciation) | + | (2,475,029) | (5,522,303) | |
| Increase in net assets from operations | 2,916,010 | 2,190,382 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (1,912,081) | (2,377,309) | ||
| Distributions from net realized gains | + | (5,504,533) | (4,869,324) | |
| Total distributions | ($7,416,614) | ($7,246,633) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 1,773,195 | $20,460,018 | 3,086,913 | $37,992,475 | ||||
| Shares reinvested | 607,968 | 6,894,365 | 564,457 | 6,841,214 | ||||
| Shares redeemed | + | (2,943,054) | (34,207,784) | (2,879,374) | (35,347,201) | |||
| Net transactions in fund shares | (561,891) | ($6,853,401) | 771,996 | $9,486,488 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 9,447,150 | $115,533,228 | 8,675,154 | $111,102,991 | ||||
| Total increase or decrease | + | (561,891) | (11,354,005) | 771,996 | 4,430,237 | |||
| End of period | 8,885,259 | $104,179,223 | 9,447,150 | $115,533,228 | ||||
| Net investment income not yet distributed | $993,948 | $775,782 | ||||||
55
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2020 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $14.33 | $14.32 | $13.52 | $11.94 | $11.13 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.22 1 | 0.20 1 | 0.21 | 0.22 | 0.22 | |
| Net realized and unrealized gains (losses) | 0.06 | 0.12 | 0.82 | 1.62 | 0.82 | |
| Total from investment operations | 0.28 | 0.32 | 1.03 | 1.84 | 1.04 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.27) | (0.31) | (0.23) | (0.26) | (0.23) | |
| Distributions from net realized gains | (0.50) | — | — | — | — | |
| Total distributions | (0.77) | (0.31) | (0.23) | (0.26) | (0.23) | |
| Net asset value at end of period | $13.84 | $14.33 | $14.32 | $13.52 | $11.94 | |
| Total return | 2.05% | 2.25% | 7.71% | 15.72% | 9.52% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.00% 3 | 0.00% 3 | — | — | — | |
| Gross operating expenses2 | 0.03% | 0.03% | 0.04% | 0.05% | 0.06% | |
| Net investment income (loss) | 1.59% | 1.42% | 1.48% | 1.71% | 1.89% | |
| Portfolio turnover rate | 9% | 25% | 26% | 14% | 13% | |
| Net assets, end of period (x 1,000,000) | $530 | $536 | $499 | $415 | $306 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
56
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2020 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
57
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2020 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $518,350,155 | $— | $— | $518,350,155 | |
| Short-Term Investments1 | — | 11,560,666 | — | 11,560,666 | |
| Total | $518,350,155 | $11,560,666 | $— | $529,910,821 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
58
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2020 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $375,117,517) | $417,582,316 | |
| Investments in unaffiliated issuers, at value (cost $106,138,475) | + | 112,328,505 |
| Total investments, at value (cost $481,255,992) | 529,910,821 | |
| Receivables: | ||
| Fund shares sold | 360,594 | |
| Dividends | 318,631 | |
| Due from investment adviser | 5,488 | |
| Interest | 48 | |
| Prepaid expenses | + | 15,325 |
| Total assets | 530,610,907 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 292,987 | |
| Fund shares redeemed | 326,580 | |
| Accrued expenses | + | 41,372 |
| Total liabilities | 660,939 | |
| Net Assets | ||
| Total assets | 530,610,907 | |
| Total liabilities | – | 660,939 |
| Net assets | $529,949,968 | |
| Net Assets by Source | ||
| Capital received from investors | 459,619,529 | |
| Net investment income not yet distributed | 4,225,519 | |
| Net realized capital gains | 17,450,091 | |
| Net unrealized capital appreciation | 48,654,829 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $529,949,968 | 38,281,719 | $13.84 | ||
59
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2020 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $6,644,196 | |
| Dividends received from unaffiliated underlying funds | 1,784,509 | |
| Interest | + | 16,920 |
| Total investment income | 8,445,625 | |
| Expenses | ||
| Registration fees | 34,095 | |
| Shareholder reports | 31,174 | |
| Professional fees | 29,636 | |
| Portfolio accounting fees | 20,687 | |
| Transfer agent fees | 18,657 | |
| Independent trustees' fees | 11,116 | |
| Custodian fees | 8,630 | |
| Proxy fees | 7,795 | |
| Other expenses | + | 8,183 |
| Total expenses | 169,973 | |
| Expense reduction by CSIM | – | 162,178 |
| Net expenses | – | 7,795 |
| Net investment income | 8,437,830 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 16,728,385 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 1,665,672 | |
| Net realized gains on sales of affiliated underlying funds | 3,463,252 | |
| Net realized losses on sales of unaffiliated underlying funds | + | (293,824) |
| Net realized gains | 21,563,485 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (19,572,741) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 840,985 |
| Net change in unrealized appreciation (depreciation) | + | (18,731,756) |
| Net realized and unrealized gains | 2,831,729 | |
| Increase in net assets resulting from operations | $11,269,559 | |
60
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2020 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $8,437,830 | $7,462,227 | ||
| Net realized gains | 21,563,485 | 32,071,909 | ||
| Net change in unrealized appreciation (depreciation) | + | (18,731,756) | (28,543,673) | |
| Increase in net assets from operations | 11,269,559 | 10,990,463 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (10,024,736) | (10,865,751) | ||
| Distributions from net realized gains | + | (18,650,147) | — | |
| Total distributions | ($28,674,883) | ($10,865,751) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 6,250,271 | $84,821,765 | 8,456,975 | $121,244,776 | ||||
| Shares reinvested | 2,041,707 | 27,481,364 | 734,526 | 10,422,917 | ||||
| Shares redeemed | + | (7,444,384) | (101,328,110) | (6,613,737) | (94,577,536) | |||
| Net transactions in fund shares | 847,594 | $10,975,019 | 2,577,764 | $37,090,157 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 37,434,125 | $536,380,273 | 34,856,361 | $499,165,404 | ||||
| Total increase or decrease | + | 847,594 | (6,430,305) | 2,577,764 | 37,214,869 | |||
| End of period | 38,281,719 | $529,949,968 | 37,434,125 | $536,380,273 | ||||
| Net investment income not yet distributed | $4,225,519 | $3,585,956 | ||||||
61
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2025 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $14.11 | $14.54 | $13.63 | $11.73 | $10.84 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.20 1 | 0.19 1 | 0.21 | 0.21 | 0.19 | |
| Net realized and unrealized gains (losses) | 0.06 | 0.15 | 0.93 | 1.93 | 0.89 | |
| Total from investment operations | 0.26 | 0.34 | 1.14 | 2.14 | 1.08 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.26) | (0.32) | (0.23) | (0.24) | (0.19) | |
| Distributions from net realized gains | (0.66) | (0.45) | — | — | — | |
| Total distributions | (0.92) | (0.77) | (0.23) | (0.24) | (0.19) | |
| Net asset value at end of period | $13.45 | $14.11 | $14.54 | $13.63 | $11.73 | |
| Total return | 2.01% | 2.36% | 8.44% | 18.54% | 10.14% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.00% 3 | 0.00% 3 | — | — | 0.00% 3 | |
| Gross operating expenses2 | 0.04% | 0.04% | 0.06% | 0.08% | 0.10% | |
| Net investment income (loss) | 1.53% | 1.37% | 1.39% | 1.57% | 1.73% | |
| Portfolio turnover rate | 5% | 21% | 27% | 10% | 13% | |
| Net assets, end of period (x 1,000,000) | $443 | $409 | $344 | $251 | $141 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
62
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2025 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
63
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2025 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $433,462,801 | $— | $— | $433,462,801 | |
| Short-Term Investments1 | — | 9,972,034 | — | 9,972,034 | |
| Total | $433,462,801 | $9,972,034 | $— | $443,434,835 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
64
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2025 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $335,526,566) | $353,582,443 | |
| Investments in unaffiliated issuers, at value (cost $85,361,765) | + | 89,852,392 |
| Total investments, at value (cost $420,888,331) | 443,434,835 | |
| Receivables: | ||
| Fund shares sold | 348,142 | |
| Dividends | 203,151 | |
| Due from investment adviser | 5,076 | |
| Interest | 42 | |
| Prepaid expenses | + | 12,389 |
| Total assets | 444,003,635 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 187,524 | |
| Fund shares redeemed | 598,964 | |
| Accrued expenses | + | 40,207 |
| Total liabilities | 826,695 | |
| Net Assets | ||
| Total assets | 444,003,635 | |
| Total liabilities | – | 826,695 |
| Net assets | $443,176,940 | |
| Net Assets by Source | ||
| Capital received from investors | 403,726,485 | |
| Net investment income not yet distributed | 2,939,375 | |
| Net realized capital gains | 13,964,576 | |
| Net unrealized capital appreciation | 22,546,504 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $443,176,940 | 32,960,335 | $13.45 | ||
65
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2025 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $5,153,048 | |
| Dividends received from unaffiliated underlying funds | 1,358,600 | |
| Interest | + | 12,338 |
| Total investment income | 6,523,986 | |
| Expenses | ||
| Registration fees | 37,048 | |
| Professional fees | 28,767 | |
| Shareholder reports | 26,763 | |
| Portfolio accounting fees | 19,280 | |
| Transfer agent fees | 18,613 | |
| Independent trustees' fees | 10,473 | |
| Custodian fees | 7,442 | |
| Proxy fees | 6,526 | |
| Other expenses | + | 6,660 |
| Total expenses | 161,572 | |
| Expense reduction by CSIM | – | 155,046 |
| Net expenses | – | 6,526 |
| Net investment income | 6,517,460 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 15,095,428 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 1,382,989 | |
| Net realized gains on sales of affiliated underlying funds | 628,824 | |
| Net realized losses on sales of unaffiliated underlying funds | + | (14,537) |
| Net realized gains | 17,092,704 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (14,514,745) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 532,044 |
| Net change in unrealized appreciation (depreciation) | + | (13,982,701) |
| Net realized and unrealized gains | 3,110,003 | |
| Increase in net assets resulting from operations | $9,627,463 | |
66
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2025 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $6,517,460 | $5,277,755 | ||
| Net realized gains | 17,092,704 | 21,852,024 | ||
| Net change in unrealized appreciation (depreciation) | + | (13,982,701) | (18,943,147) | |
| Increase in net assets from operations | 9,627,463 | 8,186,632 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (7,697,743) | (7,880,064) | ||
| Distributions from net realized gains | + | (19,307,598) | (10,940,164) | |
| Total distributions | ($27,005,341) | ($18,820,228) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 7,097,645 | $93,244,573 | 9,179,948 | $130,416,395 | ||||
| Shares reinvested | 2,002,536 | 26,213,202 | 1,313,209 | 18,358,656 | ||||
| Shares redeemed | + | (5,154,240) | (68,264,079) | (5,145,739) | (73,004,027) | |||
| Net transactions in fund shares | 3,945,941 | $51,193,696 | 5,347,418 | $75,771,024 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 29,014,394 | $409,361,122 | 23,666,976 | $344,223,694 | ||||
| Total increase | + | 3,945,941 | 33,815,818 | 5,347,418 | 65,137,428 | |||
| End of period | 32,960,335 | $443,176,940 | 29,014,394 | $409,361,122 | ||||
| Net investment income not yet distributed | $2,939,375 | $2,183,520 | ||||||
67
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2030 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $15.59 | $15.77 | $14.70 | $12.42 | $11.43 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.22 1 | 0.21 1 | 0.22 | 0.22 | 0.19 | |
| Net realized and unrealized gains (losses) | 0.01 | 0.17 | 1.10 | 2.31 | 0.99 | |
| Total from investment operations | 0.23 | 0.38 | 1.32 | 2.53 | 1.18 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.30) | (0.36) | (0.25) | (0.25) | (0.19) | |
| Distributions from net realized gains | (1.01) | (0.20) | — | — | — | |
| Total distributions | (1.31) | (0.56) | (0.25) | (0.25) | (0.19) | |
| Net asset value at end of period | $14.51 | $15.59 | $15.77 | $14.70 | $12.42 | |
| Total return | 1.72% | 2.44% | 9.11% | 20.73% | 10.52% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.00% 3 | 0.00% 3 | — | — | — | |
| Gross operating expenses2 | 0.03% | 0.03% | 0.03% | 0.04% | 0.05% | |
| Net investment income (loss) | 1.51% | 1.36% | 1.38% | 1.59% | 1.62% | |
| Portfolio turnover rate | 5% | 19% | 26% | 10% | 12% | |
| Net assets, end of period (x 1,000,000) | $814 | $789 | $727 | $621 | $444 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
68
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2030 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
69
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2030 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $797,827,926 | $— | $— | $797,827,926 | |
| Short-Term Investments1 | — | 16,090,621 | — | 16,090,621 | |
| Total | $797,827,926 | $16,090,621 | $— | $813,918,547 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
70
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2030 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $579,369,514) | $663,321,809 | |
| Investments in unaffiliated issuers, at value (cost $139,456,767) | + | 150,596,738 |
| Total investments, at value (cost $718,826,281) | 813,918,547 | |
| Receivables: | ||
| Fund shares sold | 794,373 | |
| Dividends | 279,581 | |
| Due from investment adviser | 9,661 | |
| Interest | 67 | |
| Prepaid expenses | + | 16,347 |
| Total assets | 815,018,576 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 259,073 | |
| Fund shares redeemed | 463,212 | |
| Accrued expenses | + | 55,571 |
| Total liabilities | 777,856 | |
| Net Assets | ||
| Total assets | 815,018,576 | |
| Total liabilities | – | 777,856 |
| Net assets | $814,240,720 | |
| Net Assets by Source | ||
| Capital received from investors | 685,845,933 | |
| Net investment income not yet distributed | 4,651,679 | |
| Net realized capital gains | 28,650,842 | |
| Net unrealized capital appreciation | 95,092,266 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $814,240,720 | 56,107,502 | $14.51 | ||
71
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2030 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $9,746,606 | |
| Dividends received from unaffiliated underlying funds | 2,298,623 | |
| Interest | + | 21,324 |
| Total investment income | 12,066,553 | |
| Expenses | ||
| Shareholder reports | 47,117 | |
| Registration fees | 41,846 | |
| Professional fees | 31,348 | |
| Portfolio accounting fees | 24,109 | |
| Transfer agent fees | 20,558 | |
| Independent trustees' fees | 12,673 | |
| Custodian fees | 12,377 | |
| Proxy fees | 11,864 | |
| Other expenses | + | 11,940 |
| Total expenses | 213,832 | |
| Expense reduction by CSIM | – | 201,968 |
| Net expenses | – | 11,864 |
| Net investment income | 12,054,689 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 32,482,355 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 2,710,054 | |
| Net realized gains on sales of affiliated underlying funds | 1,752,883 | |
| Net realized losses on sales of unaffiliated underlying funds | + | (126,163) |
| Net realized gains | 36,819,129 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (34,208,765) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 529,840 |
| Net change in unrealized appreciation (depreciation) | + | (33,678,925) |
| Net realized and unrealized gains | 3,140,204 | |
| Increase in net assets resulting from operations | $15,194,893 | |
72
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2030 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $12,054,689 | $10,410,471 | ||
| Net realized gains | 36,819,129 | 57,648,422 | ||
| Net change in unrealized appreciation (depreciation) | + | (33,678,925) | (50,365,678) | |
| Increase in net assets from operations | 15,194,893 | 17,693,215 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (15,460,516) | (16,692,788) | ||
| Distributions from net realized gains | + | (51,660,998) | (9,243,382) | |
| Total distributions | ($67,121,514) | ($25,936,170) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 8,588,483 | $122,183,243 | 10,291,955 | $160,976,354 | ||||
| Shares reinvested | 4,601,025 | 65,104,505 | 1,631,332 | 25,204,083 | ||||
| Shares redeemed | + | (7,687,009) | (109,898,546) | (7,433,036) | (116,539,103) | |||
| Net transactions in fund shares | 5,502,499 | $77,389,202 | 4,490,251 | $69,641,334 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 50,605,003 | $788,778,139 | 46,114,752 | $727,379,760 | ||||
| Total increase | + | 5,502,499 | 25,462,581 | 4,490,251 | 61,398,379 | |||
| End of period | 56,107,502 | $814,240,720 | 50,605,003 | $788,778,139 | ||||
| Net investment income not yet distributed | $4,651,679 | $3,992,950 | ||||||
73
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2035 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $14.70 | $15.23 | $14.12 | $11.69 | $10.70 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.20 1 | 0.19 1 | 0.20 | 0.20 | 0.16 | |
| Net realized and unrealized gains (losses) | 0.01 | 0.17 | 1.15 | 2.45 | 0.99 | |
| Total from investment operations | 0.21 | 0.36 | 1.35 | 2.65 | 1.15 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.28) | (0.35) | (0.24) | (0.22) | (0.16) | |
| Distributions from net realized gains | (0.81) | (0.54) | — | — | — | |
| Total distributions | (1.09) | (0.89) | (0.24) | (0.22) | (0.16) | |
| Net asset value at end of period | $13.82 | $14.70 | $15.23 | $14.12 | $11.69 | |
| Total return | 1.63% | 2.43% | 9.62% | 23.02% | 10.89% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses2 | 0.00% 3 | 0.00% 3 | — | — | — | |
| Gross operating expenses2 | 0.04% | 0.05% | 0.07% | 0.09% | 0.13% | |
| Net investment income (loss) | 1.46% | 1.28% | 1.28% | 1.42% | 1.45% | |
| Portfolio turnover rate | 3% | 14% | 24% | 5% | 11% | |
| Net assets, end of period (x 1,000,000) | $361 | $337 | $282 | $204 | $111 | |
1
Calculated based on the average shares outstanding during
the period.
2
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
3
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
74
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2035 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
75
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2035 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $352,618,496 | $— | $— | $352,618,496 | |
| Short-Term Investments1 | — | 8,190,161 | — | 8,190,161 | |
| Total | $352,618,496 | $8,190,161 | $— | $360,808,657 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
76
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2035 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $285,063,794) | $300,088,117 | |
| Investments in unaffiliated issuers, at value (cost $56,421,254) | + | 60,720,540 |
| Total investments, at value (cost $341,485,048) | 360,808,657 | |
| Receivables: | ||
| Fund shares sold | 255,457 | |
| Dividends | 87,991 | |
| Due from investment adviser | 3,464 | |
| Interest | 34 | |
| Prepaid expenses | + | 8,842 |
| Total assets | 361,164,445 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 81,740 | |
| Fund shares redeemed | 171,688 | |
| Accrued expenses | + | 39,654 |
| Total liabilities | 293,082 | |
| Net Assets | ||
| Total assets | 361,164,445 | |
| Total liabilities | – | 293,082 |
| Net assets | $360,871,363 | |
| Net Assets by Source | ||
| Capital received from investors | 326,364,712 | |
| Net investment income not yet distributed | 1,734,750 | |
| Net realized capital gains | 13,448,292 | |
| Net unrealized capital appreciation | 19,323,609 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $360,871,363 | 26,115,948 | $13.82 | ||
77
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2035 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $4,215,396 | |
| Dividends received from unaffiliated underlying funds | 863,310 | |
| Interest | + | 9,049 |
| Total investment income | 5,087,755 | |
| Expenses | ||
| Registration fees | 31,000 | |
| Professional fees | 28,252 | |
| Shareholder reports | 26,173 | |
| Transfer agent fees | 18,973 | |
| Portfolio accounting fees | 18,200 | |
| Independent trustees' fees | 10,006 | |
| Proxy fees | 6,552 | |
| Custodian fees | 5,749 | |
| Other expenses | + | 5,686 |
| Total expenses | 150,591 | |
| Expense reduction by CSIM | – | 144,039 |
| Net expenses | – | 6,552 |
| Net investment income | 5,081,203 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 15,078,302 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 1,149,908 | |
| Net realized losses on sales of affiliated underlying funds | (17,312) | |
| Net realized gains on sales of unaffiliated underlying funds | + | 18,869 |
| Net realized gains | 16,229,767 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (14,564,906) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 146,670 |
| Net change in unrealized appreciation (depreciation) | + | (14,418,236) |
| Net realized and unrealized gains | 1,811,531 | |
| Increase in net assets resulting from operations | $6,892,734 | |
78
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2035 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $5,081,203 | $4,021,662 | ||
| Net realized gains | 16,229,767 | 21,580,438 | ||
| Net change in unrealized appreciation (depreciation) | + | (14,418,236) | (19,013,610) | |
| Increase in net assets from operations | 6,892,734 | 6,588,490 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (6,503,748) | (6,621,678) | ||
| Distributions from net realized gains | + | (18,968,293) | (10,314,099) | |
| Total distributions | ($25,472,041) | ($16,935,777) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 5,272,101 | $71,143,858 | 6,655,837 | $98,662,330 | ||||
| Shares reinvested | 1,840,004 | 24,821,651 | 1,133,588 | 16,527,714 | ||||
| Shares redeemed | + | (3,924,580) | (53,511,419) | (3,359,991) | (49,645,929) | |||
| Net transactions in fund shares | 3,187,525 | $42,454,090 | 4,429,434 | $65,544,115 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 22,928,423 | $336,996,580 | 18,498,989 | $281,799,752 | ||||
| Total increase | + | 3,187,525 | 23,874,783 | 4,429,434 | 55,196,828 | |||
| End of period | 26,115,948 | $360,871,363 | 22,928,423 | $336,996,580 | ||||
| Net investment income not yet distributed | $1,734,750 | $1,315,291 | ||||||
79
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2040 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
11/1/12–
10/31/13 |
11/1/11–
10/31/12 |
||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $16.42 | $16.77 | $15.49 | $12.67 | $11.55 | |
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.22 1 | 0.21 1 | 0.21 | 0.22 | 0.17 | |
| Net realized and unrealized gains (losses) | (0.03) 2 | 0.20 | 1.33 | 2.84 | 1.12 | |
| Total from investment operations | 0.19 | 0.41 | 1.54 | 3.06 | 1.29 | |
| Less distributions: | ||||||
| Distributions from net investment income | (0.32) | (0.39) | (0.26) | (0.24) | (0.17) | |
| Distributions from net realized gains | (1.17) | (0.37) | — | — | — | |
| Total distributions | (1.49) | (0.76) | (0.26) | (0.24) | (0.17) | |
| Net asset value at end of period | $15.12 | $16.42 | $16.77 | $15.49 | $12.67 | |
| Total return | 1.38% | 2.48% | 10.07% | 24.55% | 11.33% | |
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses3 | 0.00% 4 | 0.00% 4 | — | — | — | |
| Gross operating expenses3 | 0.03% | 0.03% | 0.04% | 0.04% | 0.06% | |
| Net investment income (loss) | 1.45% | 1.27% | 1.26% | 1.47% | 1.42% | |
| Portfolio turnover rate | 4% | 13% | 23% | 6% | 12% | |
| Net assets, end of period (x 1,000,000) | $841 | $834 | $768 | $639 | $435 | |
1
Calculated based on the average shares outstanding during
the period.
2
The per share amount does not agree with the change in
aggregate gains and losses in securities during the period because of the timing of fund share transactions in relation to fluctuating market values for the investments.
3
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
4
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
80
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2040 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
81
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2040 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $823,111,472 | $— | $— | $823,111,472 | |
| Short-Term Investments1 | — | 18,264,950 | — | 18,264,950 | |
| Total | $823,111,472 | $18,264,950 | $— | $841,376,422 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
82
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2040 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $636,042,018) | $720,103,022 | |
| Investments in unaffiliated issuers, at value (cost $107,552,192) | + | 121,273,400 |
| Total investments, at value (cost $743,594,210) | 841,376,422 | |
| Receivables: | ||
| Fund shares sold | 504,421 | |
| Dividends | 128,989 | |
| Due from investment adviser | 10,110 | |
| Interest | 76 | |
| Prepaid expenses | + | 16,018 |
| Total assets | 842,036,036 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 120,192 | |
| Fund shares redeemed | 366,138 | |
| Accrued expenses | + | 68,668 |
| Total liabilities | 554,998 | |
| Net Assets | ||
| Total assets | 842,036,036 | |
| Total liabilities | – | 554,998 |
| Net assets | $841,481,038 | |
| Net Assets by Source | ||
| Capital received from investors | 703,214,432 | |
| Net investment income not yet distributed | 3,342,015 | |
| Net realized capital gains | 37,142,379 | |
| Net unrealized capital appreciation | 97,782,212 | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $841,481,038 | 55,659,649 | $15.12 | ||
83
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2040 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $10,350,809 | |
| Dividends received from unaffiliated underlying funds | 1,658,505 | |
| Interest | + | 21,421 |
| Total investment income | 12,030,735 | |
| Expenses | ||
| Shareholder reports | 71,171 | |
| Registration fees | 38,930 | |
| Professional fees | 31,585 | |
| Transfer agent fees | 26,161 | |
| Portfolio accounting fees | 24,482 | |
| Proxy fees | 19,332 | |
| Independent trustees' fees | 12,857 | |
| Custodian fees | 12,087 | |
| Other expenses | + | 12,626 |
| Total expenses | 249,231 | |
| Expense reduction by CSIM | – | 229,899 |
| Net expenses | – | 19,332 |
| Net investment income | 12,011,403 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 40,136,707 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 2,714,346 | |
| Net realized gains on sales of affiliated underlying funds | 3,555,228 | |
| Net realized losses on sales of unaffiliated underlying funds | + | (17,328) |
| Net realized gains | 46,388,953 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (45,623,794) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | (357,976) |
| Net change in unrealized appreciation (depreciation) | + | (45,981,770) |
| Net realized and unrealized gains | 407,183 | |
| Increase in net assets resulting from operations | $12,418,586 | |
84
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2040 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $12,011,403 | $10,276,097 | ||
| Net realized gains | 46,388,953 | 67,481,325 | ||
| Net change in unrealized appreciation (depreciation) | + | (45,981,770) | (58,765,404) | |
| Increase in net assets from operations | 12,418,586 | 18,992,018 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (16,331,843) | (18,123,716) | ||
| Distributions from net realized gains | + | (60,050,458) | (16,937,962) | |
| Total distributions | ($76,382,301) | ($35,061,678) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 7,586,960 | $112,421,088 | 9,498,363 | $156,723,911 | ||||
| Shares reinvested | 5,048,206 | 74,662,962 | 2,105,777 | 34,303,111 | ||||
| Shares redeemed | + | (7,812,359) | (116,129,400) | (6,579,336) | (108,941,688) | |||
| Net transactions in fund shares | 4,822,807 | $70,954,650 | 5,024,804 | $82,085,334 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 50,836,842 | $834,490,103 | 45,812,038 | $768,474,429 | ||||
| Total increase | + | 4,822,807 | 6,990,935 | 5,024,804 | 66,015,674 | |||
| End of period | 55,659,649 | $841,481,038 | 50,836,842 | $834,490,103 | ||||
| Net investment income not yet distributed | $3,342,015 | $2,851,945 | ||||||
85
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2045 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
1/23/13
1– 10/31/13 |
|||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $12.51 | $12.67 | $11.66 | $10.00 | ||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.16 2 | 0.14 2 | 0.16 | 0.02 | ||
| Net realized and unrealized gains (losses) | 0.00 3 | 0.15 | 1.03 | 1.64 | ||
| Total from investment operations | 0.16 | 0.29 | 1.19 | 1.66 | ||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.29) | (0.18) | — | ||
| Distributions from net realized gains | (0.44) | (0.16) | — | — | ||
| Total distributions | (0.67) | (0.45) | (0.18) | — | ||
| Net asset value at end of period | $12.00 | $12.51 | $12.67 | $11.66 | ||
| Total return | 1.40% | 2.37% | 10.30% | 16.60% 4 | ||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses5 | 0.00% 6 | 0.00% 6 | — | 0.00% 7,8 | ||
| Gross operating expenses5 | 0.13% | 0.20% | 0.32% | 1.08% 7 | ||
| Net investment income (loss) | 1.34% | 1.09% | 1.03% | 0.46% 7 | ||
| Portfolio turnover rate | 1% | 10% | 23% | 39% 4 | ||
| Net assets, end of period (x 1,000,000) | $82 | $66 | $41 | $18 | ||
1
Commencement of operations.
2
Calculated based on the average shares outstanding during
the period.
3
Per-share amount was less than $0.005.
4
Not annualized.
5
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
6
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
7
Annualized.
8
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if interest expense had not been incurred.
86
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2045 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
87
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2045 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $80,052,089 | $— | $— | $80,052,089 | |
| Short-Term Investments1 | — | 1,744,199 | — | 1,744,199 | |
| Total | $80,052,089 | $1,744,199 | $— | $81,796,288 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
88
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2045 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $73,665,751) | $71,284,971 | |
| Investments in unaffiliated issuers, at value (cost $10,258,768) | + | 10,511,317 |
| Total investments, at value (cost $83,924,519) | 81,796,288 | |
| Receivables: | ||
| Fund shares sold | 145,042 | |
| Dividends | 8,537 | |
| Prepaid expenses | + | 5,113 |
| Total assets | 81,954,980 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 7,954 | |
| Fund shares redeemed | 33,906 | |
| Accrued expenses | + | 26,364 |
| Total liabilities | 68,224 | |
| Net Assets | ||
| Total assets | 81,954,980 | |
| Total liabilities | – | 68,224 |
| Net assets | $81,886,756 | |
| Net Assets by Source | ||
| Capital received from investors | 80,947,291 | |
| Net investment income not yet distributed | 264,792 | |
| Net realized capital gains | 2,802,904 | |
| Net unrealized capital depreciation | (2,128,231) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $81,886,756 | 6,821,879 | $12.00 | ||
89
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2045 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $859,202 | |
| Dividends received from unaffiliated underlying funds | 121,891 | |
| Interest | + | 2,085 |
| Total investment income | 983,178 | |
| Expenses | ||
| Professional fees | 26,396 | |
| Registration fees | 19,813 | |
| Shareholder reports | 12,975 | |
| Transfer agent fees | 12,414 | |
| Independent trustees' fees | 8,372 | |
| Portfolio accounting fees | 5,514 | |
| Custodian fees | 4,208 | |
| Proxy fees | 3,166 | |
| Other expenses | + | 1,968 |
| Total expenses | 94,826 | |
| Expense reduction by CSIM | – | 91,660 |
| Net expenses | – | 3,166 |
| Net investment income | 980,012 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 3,357,383 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 212,746 | |
| Net realized losses on sales of affiliated underlying funds | + | (110,630) |
| Net realized gains | 3,459,499 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (2,951,748) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 26,872 |
| Net change in unrealized appreciation (depreciation) | + | (2,924,876) |
| Net realized and unrealized gains | 534,623 | |
| Increase in net assets resulting from operations | $1,514,635 | |
90
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2045 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $980,012 | $596,917 | ||
| Net realized gains | 3,459,499 | 2,629,910 | ||
| Net change in unrealized appreciation (depreciation) | + | (2,924,876) | (2,376,906) | |
| Increase in net assets from operations | 1,514,635 | 849,921 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (1,239,407) | (1,032,882) | ||
| Distributions from net realized gains | + | (2,410,714) | (569,067) | |
| Total distributions | ($3,650,121) | ($1,601,949) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 2,277,183 | $26,554,975 | 2,576,788 | $32,462,188 | ||||
| Shares reinvested | 304,143 | 3,570,641 | 125,756 | 1,561,897 | ||||
| Shares redeemed | + | (1,020,715) | (11,929,960) | (677,473) | (8,446,952) | |||
| Net transactions in fund shares | 1,560,611 | $18,195,656 | 2,025,071 | $25,577,133 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 5,261,268 | $65,826,586 | 3,236,197 | $41,001,481 | ||||
| Total increase | + | 1,560,611 | 16,060,170 | 2,025,071 | 24,825,105 | |||
| End of period | 6,821,879 | $81,886,756 | 5,261,268 | $65,826,586 | ||||
| Net investment income not yet distributed | $264,792 | $124,813 | ||||||
91
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2050 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
1/23/13
1– 10/31/13 |
|||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $12.60 | $12.75 | $11.72 | $10.00 | ||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.15 2 | 0.13 2 | 0.17 | 0.02 | ||
| Net realized and unrealized gains (losses) | 0.01 | 0.18 | 1.04 | 1.70 | ||
| Total from investment operations | 0.16 | 0.31 | 1.21 | 1.72 | ||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.30) | (0.18) | — | ||
| Distributions from net realized gains | (0.45) | (0.16) | — | — | ||
| Total distributions | (0.68) | (0.46) | (0.18) | — | ||
| Net asset value at end of period | $12.08 | $12.60 | $12.75 | $11.72 | ||
| Total return | 1.39% | 2.44% | 10.43% | 17.20% 3 | ||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses4 | 0.01% 5 | 0.00% 6 | — | 0.00% 7,8 | ||
| Gross operating expenses4 | 0.16% | 0.25% | 0.39% | 1.37% 7 | ||
| Net investment income (loss) | 1.31% | 1.05% | 0.99% | 0.40% 7 | ||
| Portfolio turnover rate | 1% | 8% | 23% | 40% 3 | ||
| Net assets, end of period (x 1,000,000) | $68 | $53 | $33 | $14 | ||
1
Commencement of operations.
2
Calculated based on the average shares outstanding during
the period.
3
Not annualized.
4
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
5
The ratio of net operating expenses would have been 0.00%,
if certain non-routine expenses had not been incurred.
6
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
7
Annualized.
8
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if interest expense had not been incurred.
92
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2050 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
93
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2050 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $66,696,460 | $— | $— | $66,696,460 | |
| Short-Term Investments1 | — | 1,609,751 | — | 1,609,751 | |
| Total | $66,696,460 | $1,609,751 | $— | $68,306,211 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
94
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2050 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $62,064,245) | $60,133,630 | |
| Investments in unaffiliated issuers, at value (cost $7,949,124) | + | 8,172,581 |
| Total investments, at value (cost $70,013,369) | 68,306,211 | |
| Receivables: | ||
| Fund shares sold | 105,165 | |
| Dividends | 4,993 | |
| Prepaid expenses | + | 3,714 |
| Total assets | 68,420,083 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 304,647 | |
| Fund shares redeemed | 25,129 | |
| Accrued expenses | + | 26,507 |
| Total liabilities | 356,283 | |
| Net Assets | ||
| Total assets | 68,420,083 | |
| Total liabilities | – | 356,283 |
| Net assets | $68,063,800 | |
| Net Assets by Source | ||
| Capital received from investors | 67,186,635 | |
| Net investment income not yet distributed | 194,591 | |
| Net realized capital gains | 2,389,732 | |
| Net unrealized capital depreciation | (1,707,158) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $68,063,800 | 5,634,909 | $12.08 | ||
95
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2050 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $698,068 | |
| Dividends received from unaffiliated underlying funds | 85,503 | |
| Interest | + | 1,659 |
| Total investment income | 785,230 | |
| Expenses | ||
| Professional fees | 26,315 | |
| Registration fees | 18,246 | |
| Shareholder reports | 13,527 | |
| Transfer agent fees | 12,645 | |
| Independent trustees' fees | 8,291 | |
| Portfolio accounting fees | 5,330 | |
| Custodian fees | 4,260 | |
| Proxy fees | 3,207 | |
| Other expenses | + | 1,845 |
| Total expenses | 93,666 | |
| Expense reduction by CSIM | – | 90,459 |
| Net expenses | – | 3,207 |
| Net investment income | 782,023 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 2,789,648 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 171,625 | |
| Net realized losses on sales of affiliated underlying funds | (78,145) | |
| Net realized losses on sales of unaffiliated underlying funds | + | (312) |
| Net realized gains | 2,882,816 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (2,406,336) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 18,544 |
| Net change in unrealized appreciation (depreciation) | + | (2,387,792) |
| Net realized and unrealized gains | 495,024 | |
| Increase in net assets resulting from operations | $1,277,047 | |
96
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2050 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $782,023 | $468,843 | ||
| Net realized gains | 2,882,816 | 2,221,915 | ||
| Net change in unrealized appreciation (depreciation) | + | (2,387,792) | (1,922,577) | |
| Increase in net assets from operations | 1,277,047 | 768,181 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (1,001,880) | (830,660) | ||
| Distributions from net realized gains | + | (1,983,116) | (451,787) | |
| Total distributions | ($2,984,996) | ($1,282,447) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 1,940,302 | $22,754,852 | 2,053,340 | $26,056,935 | ||||
| Shares reinvested | 245,062 | 2,894,189 | 100,456 | 1,256,702 | ||||
| Shares redeemed | + | (746,622) | (8,754,679) | (583,556) | (7,414,061) | |||
| Net transactions in fund shares | 1,438,742 | $16,894,362 | 1,570,240 | $19,899,576 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 4,196,167 | $52,877,387 | 2,625,927 | $33,492,077 | ||||
| Total increase | + | 1,438,742 | 15,186,413 | 1,570,240 | 19,385,310 | |||
| End of period | 5,634,909 | $68,063,800 | 4,196,167 | $52,877,387 | ||||
| Net investment income not yet distributed | $194,591 | $84,614 | ||||||
97
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2055 Fund
Financial Statements
Financial
Highlights
| 11/1/15–
10/31/16 |
11/1/14–
10/31/15 |
11/1/13–
10/31/14 |
1/23/13
1– 10/31/13 |
|||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $12.63 | $12.79 | $11.74 | $10.00 | ||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.15 2 | 0.13 2 | 0.16 | 0.02 | ||
| Net realized and unrealized gains (losses) | 0.00 3 | 0.17 | 1.07 | 1.72 | ||
| Total from investment operations | 0.15 | 0.30 | 1.23 | 1.74 | ||
| Less distributions: | ||||||
| Distributions from net investment income | (0.23) | (0.30) | (0.18) | — | ||
| Distributions from net realized gains | (0.46) | (0.16) | — | — | ||
| Total distributions | (0.69) | (0.46) | (0.18) | — | ||
| Net asset value at end of period | $12.09 | $12.63 | $12.79 | $11.74 | ||
| Total return | 1.28% | 2.36% | 10.59% | 17.40% 4 | ||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses5 | 0.01% 6 | 0.00% 7 | — | 0.00% 8,9 | ||
| Gross operating expenses5 | 0.27% | 0.44% | 0.68% | 2.78% 9 | ||
| Net investment income (loss) | 1.26% | 1.03% | 0.94% | 0.34% 9 | ||
| Portfolio turnover rate | 1% | 8% | 29% | 12% 4 | ||
| Net assets, end of period (x 1,000,000) | $38 | $29 | $18 | $7 | ||
1
Commencement of operations.
2
Calculated based on the average shares outstanding during
the period.
3
Per-share amount was less than $0.005.
4
Not annualized.
5
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
6
The ratio of net operating expenses would have been 0.00%,
if certain non-routine expenses had not been incurred.
7
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if certain non-routine expenses had not been incurred.
8
Less than 0.005%; the ratio of net operating expenses would
have been 0.00%, if interest expense had not been incurred.
9
Annualized.
98
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2055 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
99
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2055 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $37,505,199 | $— | $— | $37,505,199 | |
| Short-Term Investments1 | — | 720,325 | — | 720,325 | |
| Total | $37,505,199 | $720,325 | $— | $38,225,524 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
100
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2055 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $35,363,209) | $34,266,696 | |
| Investments in unaffiliated issuers, at value (cost $3,826,556) | + | 3,958,828 |
| Total investments, at value (cost $39,189,765) | 38,225,524 | |
| Receivables: | ||
| Fund shares sold | 77,079 | |
| Dividends | 1,600 | |
| Prepaid expenses | + | 2,383 |
| Total assets | 38,306,586 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 1,489 | |
| Fund shares redeemed | 17,594 | |
| Accrued expenses | + | 26,646 |
| Total liabilities | 45,729 | |
| Net Assets | ||
| Total assets | 38,306,586 | |
| Total liabilities | – | 45,729 |
| Net assets | $38,260,857 | |
| Net Assets by Source | ||
| Capital received from investors | 37,795,376 | |
| Net investment income not yet distributed | 96,614 | |
| Net realized capital gains | 1,333,108 | |
| Net unrealized capital depreciation | (964,241) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $38,260,857 | 3,163,843 | $12.09 | ||
101
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2055 Fund
Statement of
Operations
For the period November 1, 2015 through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $381,966 | |
| Dividends received from unaffiliated underlying funds | 38,732 | |
| Interest | + | 914 |
| Total investment income | 421,612 | |
| Expenses | ||
| Professional fees | 26,148 | |
| Registration fees | 16,565 | |
| Shareholder reports | 12,851 | |
| Transfer agent fees | 12,666 | |
| Independent trustees' fees | 8,136 | |
| Portfolio accounting fees | 4,977 | |
| Custodian fees | 4,084 | |
| Proxy fees | 2,777 | |
| Other expenses | + | 1,442 |
| Total expenses | 89,646 | |
| Expense reduction by CSIM | – | 86,869 |
| Net expenses | – | 2,777 |
| Net investment income | 418,835 | |
| Realized and Unrealized Gains (Losses) | ||
| Realized capital gain distributions received from affiliated underlying funds | 1,553,805 | |
| Realized capital gain distributions received from unaffiliated underlying funds | 89,505 | |
| Net realized losses on sales of affiliated underlying funds | + | (33,518) |
| Net realized gains | 1,609,792 | |
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (1,311,021) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 10,596 |
| Net change in unrealized appreciation (depreciation) | + | (1,300,425) |
| Net realized and unrealized gains | 309,367 | |
| Increase in net assets resulting from operations | $728,202 | |
102
Schwab Target Funds | Annual Report
See financial notes
Schwab Target 2055 Fund
Statement of Changes
in Net Assets
For the current and prior report periods
| Operations | ||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||
| Net investment income | $418,835 | $245,160 | ||
| Net realized gains | 1,609,792 | 1,237,485 | ||
| Net change in unrealized appreciation (depreciation) | + | (1,300,425) | (1,070,261) | |
| Increase in net assets from operations | 728,202 | 412,384 | ||
| Distributions to Shareholders | ||||
| Distributions from net investment income | (539,934) | (449,182) | ||
| Distributions from net realized gains | + | (1,092,479) | (247,620) | |
| Total distributions | ($1,632,413) | ($696,802) | ||
| Transactions in Fund Shares | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | VALUE | SHARES | VALUE | |||||
| Shares sold | 1,228,549 | $14,416,250 | 1,224,356 | $15,542,457 | ||||
| Shares reinvested | 134,412 | 1,590,086 | 53,831 | 675,575 | ||||
| Shares redeemed | + | (479,820) | (5,646,620) | (398,490) | (5,048,181) | |||
| Net transactions in fund shares | 883,141 | $10,359,716 | 879,697 | $11,169,851 | ||||
| Shares Outstanding and Net Assets | ||||||||
| 11/1/15-10/31/16 | 11/1/14-10/31/15 | |||||||
| SHARES | NET ASSETS | SHARES | NET ASSETS | |||||
| Beginning of period | 2,280,702 | $28,805,352 | 1,401,005 | $17,919,919 | ||||
| Total increase | + | 883,141 | 9,455,505 | 879,697 | 10,885,433 | |||
| End of period | 3,163,843 | $38,260,857 | 2,280,702 | $28,805,352 | ||||
| Net investment income not yet distributed | $96,614 | $35,305 | ||||||
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See financial notes
Schwab Target 2060 Fund
Financial Statements
Financial
Highlights
| 8/25/16
1– 10/31/16 |
||||||
| Per-Share Data | ||||||
| Net asset value at beginning of period | $10.00 | |||||
| Income (loss) from investment operations: | ||||||
| Net investment income (loss) | 0.01 2 | |||||
| Net realized and unrealized gains (losses) | (0.18) | |||||
| Total from investment operations | (0.17) | |||||
| Net asset value at end of period | $9.83 | |||||
| Total return | (1.70%) 3 | |||||
| Ratios/Supplemental Data | ||||||
| Ratios to average net assets: | ||||||
| Net operating expenses4 | — 5 | |||||
| Gross operating expenses4 | 7.87% 5 | |||||
| Net investment income (loss) | 0.43% 5 | |||||
| Portfolio turnover rate | 0% 3 | |||||
| Net assets, end of period (x 1,000,000) | $1 | |||||
1
Commencement of operations.
2
Calculated based on the average shares outstanding during
the period.
3
Not annualized.
4
The expenses incurred by underlying funds in which the fund
invests are not included in this ratio.
5
Annualized (except for non-recurring professional fees and
shareholder report fees).
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See financial notes
Schwab Target 2060 Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
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See financial notes
Schwab Target 2060 Fund
Portfolio Holdings as of October 31, 2016 (continued)
The following is a summary of the inputs used to value the
fund's investments as of October 31, 2016 (see financial note 2(a) for additional information):
| Description | Quoted
Prices in Active Markets for Identical Assets (Level 1) |
Other
Significant Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total | |
| Other Investment Companies1 | $605,395 | $— | $— | $605,395 | |
| Short-Term Investment1 | — | 15,072 | — | 15,072 | |
| Total | $605,395 | $15,072 | $— | $620,467 |
| 1 | As categorized in Portfolio Holdings. |
The fund's policy is to
recognize transfers between Level 1, Level 2 and Level 3 as of the beginning of the fiscal year. There were no transfers between Level 1, Level 2 and Level 3 for the period ended October 31, 2016.
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Schwab Target 2060 Fund
Statement of Assets
and Liabilities
As of October 31, 2016
| Assets | ||
| Investments in affiliated underlying funds, at value (cost $566,730) | $555,887 | |
| Investments in unaffiliated issuers, at value (cost $64,366) | + | 64,580 |
| Total investments, at value (cost $631,096) | 620,467 | |
| Receivables: | ||
| Fund shares sold | 22,269 | |
| Due from investment adviser | 9,337 | |
| Dividends | 21 | |
| Prepaid expenses | + | 50 |
| Total assets | 652,144 | |
| Liabilities | ||
| Payables: | ||
| Investments bought | 19,721 | |
| Independent trustees' fees | 28 | |
| Accrued expenses | + | 14,697 |
| Total liabilities | 34,446 | |
| Net Assets | ||
| Total assets | 652,144 | |
| Total liabilities | – | 34,446 |
| Net assets | $617,698 | |
| Net Assets by Source | ||
| Capital received from investors | 627,951 | |
| Net investment income not yet distributed | 376 | |
| Net unrealized capital depreciation | (10,629) | |
| Net Asset Value (NAV) | ||||
| Net Assets | ÷ | Shares
Outstanding |
= | NAV |
| $617,698 | 62,839 | $9.83 | ||
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Schwab Target 2060 Fund
Statement of
Operations
For the period August 25, 2016* through October 31, 2016
| Investment Income | ||
| Dividends received from affiliated underlying funds | $280 | |
| Dividends received from unaffiliated underlying funds | 93 | |
| Interest | + | 3 |
| Total investment income | 376 | |
| Expenses | ||
| Professional fees | 13,816 | |
| Shareholder reports | 2,538 | |
| Independent trustees' fees | 1,736 | |
| Portfolio accounting fees | 893 | |
| Custodian fees | 670 | |
| Transfer agent fees | 223 | |
| Registration fees | 203 | |
| Other expenses | + | 101 |
| Total expenses | 20,180 | |
| Expense reduction by CSIM | – | 20,180 |
| Net investment income | 376 | |
| Realized and Unrealized Gains (Losses) | ||
| Net change in unrealized appreciation (depreciation) on affiliated underlying funds | (10,843) | |
| Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 214 |
| Net change in unrealized appreciation (depreciation) | + | (10,629) |
| Net realized and unrealized losses | (10,629) | |
| Decrease in net assets resulting from operations | ($10,253) | |
| * | Commencement of operations. |
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Schwab Target 2060 Fund
Statement of Changes
in Net Assets
For the current period only. Because the fund commenced
operations on August 25, 2016, it has no prior report period
| Operations | ||
| 8/25/16*-10/31/16 | ||
| Net investment income | $376 | |
| Net change in unrealized appreciation (depreciation) | + | (10,629) |
| Decrease in net assets from operations | (10,253) | |
| Transactions in Fund Shares | ||||
| 8/25/16*-10/31/16 | ||||
| SHARES | VALUE | |||
| Shares sold | + | 62,839 | $627,951 | |
| Net transactions in fund shares | 62,839 | $627,951 | ||
| Shares Outstanding and Net Assets | ||||
| 8/25/16*-10/31/16 | ||||
| SHARES | NET ASSETS | |||
| Beginning of period | — | $— | ||
| Total increase | + | 62,839 | 617,698 | |
| End of period | 62,839 | $617,698 | ||
| Net investment income not yet distributed | $376 | |||
| * | Commencement of operations. |
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See financial notes
Schwab Target Funds
Financial Notes
1. Business Structure of the Funds:
Each of the
funds in this report is a series of Schwab Capital Trust (the trust), a no-load, open-end management investment company. The trust is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended
(the 1940 Act). The list below shows all the funds in the trust as of the end of the period, including the funds discussed in this report, which are highlighted:
| SCHWAB CAPITAL TRUST (ORGANIZED MAY 7, 1993) | |
| Schwab Target 2010 Fund | Schwab Small-Cap Equity Fund™ |
| Schwab Target 2015 Fund | Schwab Hedged Equity Fund™ |
| Schwab Target 2020 Fund | Schwab Health Care Fund™ |
| Schwab Target 2025 Fund | Schwab ® International Core Equity Fund |
| Schwab Target 2030 Fund | Schwab Fundamental US Large Company Index Fund |
| Schwab Target 2035 Fund | Schwab Fundamental US Small Company Index Fund |
| Schwab Target 2040 Fund | Schwab Fundamental International Large Company Index Fund |
| Schwab Target 2045 Fund | Schwab Fundamental International Small Company Index Fund |
| Schwab Target 2050 Fund | Schwab Fundamental Emerging Markets Large Company Index Fund |
| Schwab Target 2055 Fund | Schwab Fundamental Global Real Estate Index Fund |
| Schwab Target 2060 Fund | Schwab Target 2010 Index Fund |
| Schwab ® S&P 500 Index Fund | Schwab Target 2015 Index Fund |
| Schwab Small-Cap Index Fund® | Schwab Target 2020 Index Fund |
| Schwab Total Stock Market Index Fund® | Schwab Target 2025 Index Fund |
| Schwab International Index Fund® | Schwab Target 2030 Index Fund |
| Schwab MarketTrack All Equity Portfolio™ | Schwab Target 2035 Index Fund |
| Schwab MarketTrack Growth Portfolio™ | Schwab Target 2040 Index Fund |
| Schwab MarketTrack Balanced Portfolio™ | Schwab Target 2045 Index Fund |
| Schwab MarketTrack Conservative Portfolio™ | Schwab Target 2050 Index Fund |
| Laudus Small-Cap MarketMasters Fund™ | Schwab Target 2055 Index Fund |
| Laudus International MarketMasters Fund™ | Schwab Target 2060 Index Fund |
| Schwab Balanced Fund™ | Schwab ® Monthly Income Fund - Moderate Payout |
| Schwab Core Equity Fund™ | Schwab ® Monthly Income Fund - Enhanced Payout |
| Schwab Dividend Equity Fund™ | Schwab ® Monthly Income Fund - Maximum Payout |
| Schwab Large-Cap Growth Fund™ | |
The Schwab Target Funds are “funds of funds.” Each
of the funds seeks to achieve its investment objective by investing in a combination of other affiliated Schwab and/or Laudus Funds and other unaffiliated, third-party mutual funds, in accordance with its target portfolio allocation. Each fund may
also invest directly in equity and fixed-income securities, exchange-traded funds (ETFs), and cash equivalents, including money market securities.
Each fund in this report offers one share class. Shares are
bought and sold (subject to a redemption fee, see financial note 8) at closing net asset value per share (NAV), which is the price for all outstanding shares of a fund. Each share has a par value of 1/1,000 of a cent, and the funds' Board of
Trustees (the Board) may authorize the issuance of as many shares as necessary.
The Schwab Target 2060 Fund commenced operations on August 25,
2016.
Each fund maintains its own account for purposes of
holding assets and accounting, and is considered a separate entity for tax purposes. Within its account, each fund may also keep certain assets in segregated accounts, as required by securities law.
2. Significant Accounting Policies:
The following is
a summary of the significant accounting policies the funds use in their preparation of financial statements. The funds follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard
Codification Topic 946 Financial Services — Investment Companies. The accounting policies are in conformity with accounting principles generally accepted in the United States of America (GAAP).
The financial statements of the funds should be read in
conjunction with the underlying funds' financial statements. For more information about the underlying funds' operations and policies, please refer to those funds' semiannual and annual reports, which are filed and available on the U.S. Securities
and Exchange Commission's (SEC) website at www.sec.gov or at the SEC's Public Reference Room in Washington D.C.
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Schwab Target Funds
Financial Notes (continued)
2. Significant Accounting
Policies (continued):
(a) Security
Valuation:
Under procedures approved by the Board,
the investment adviser has formed a Pricing Committee to administer the pricing and valuation of portfolio securities and other assets and to ensure that prices used for internal purposes or provided by third parties reasonably reflect fair market
value. Among other things, these procedures allow the funds to utilize independent pricing services, quotations from securities and financial instrument dealers and other market sources to determine fair value.
The funds value the securities in their portfolios every
business day. The funds use the following policies to value various types of securities:
• Underlying funds: Mutual funds are valued at their respective NAVs.
•
Securities for which no quoted value is available: The Board has adopted procedures to fair value each fund’s securities when market prices are not “readily available” or are unreliable.
For example, a fund may fair value a security when it is de-listed or its trading is halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a price; or when a security’s primary trading market is
closed during regular market hours. Each fund makes fair value determinations in good faith in accordance with the fund’s valuation procedures. The Pricing Committee considers a number of factors, including unobservable market inputs when
arriving at fair value. The Pricing Committee may employ techniques such as the review of related or comparable assets or liabilities, related market activities, recent transactions, market multiples, book values, transactional back-testing,
disposition analysis and other relevant information. The Pricing Committee regularly reviews these inputs and assumptions to calibrate the valuations. Due to the subjective and variable nature of fair value pricing, there can be no assurance that a
fund could obtain the fair value assigned to the security upon the sale of such security. The Board convenes on a regular basis to review fair value determinations made by the funds pursuant to the valuation procedures.
•
Short-term securities (60 days or less to maturity): A short-term security may be valued at its amortized cost when it approximates the security's market value.
In accordance with the authoritative guidance on fair value
measurements and disclosures under GAAP, the funds disclose the fair value of their investments in a hierarchy that prioritizes the significant inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority
to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3
measurements). If inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the valuation. If the funds determine that either the
volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and
management judgment will be required to estimate fair value.
The three levels of the fair value hierarchy are as
follows:
•
Level 1—quoted prices in active markets for identical securities—Investments
whose values are based on quoted market prices in active markets, and whose values are therefore classified as Level 1 prices, include active listed equities. Investments in mutual funds are valued daily at their NAVs, which are classified as Level
1 prices, without consideration to the classification level of the specific investments held by an underlying fund.
•
Level 2—other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)—Investments that trade in markets that are not considered to be active, but whose values are based on quoted market prices, dealer quotations or valuations provided by
alternative pricing sources supported by observable inputs are classified as Level 2 prices. These generally include U.S. government and sovereign obligations, most government agency securities, investment-grade corporate bonds, certain mortgage
products, less liquid listed equities, and state, municipal and provincial obligations.
•
Level 3—significant unobservable inputs (including the funds' own assumptions in determining the fair value of
investments)—Investments whose values are classified as Level 3 prices have significant unobservable inputs, as they may trade infrequently or not at all. When
observable prices are not available for these securities, the funds use one or more valuation techniques for which sufficient and reliable data is available. The inputs used by the funds in estimating the value of Level 3 prices may include the
original transaction price, quoted prices for similar securities or assets in active markets, completed or pending third-party transactions in the underlying investment or comparable issuers, and changes in financial
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Schwab Target Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
ratios or cash flows. Level 3 prices may
also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the funds in the absence of market information. Assumptions used by the funds due to the lack of observable inputs may significantly
impact the resulting fair value and therefore the funds' results of operations.
The inputs or methodology used for valuing securities are
not necessarily an indication of the risk associated with investing in those securities.
The levels associated with valuing the funds' investments
as of October 31, 2016 are disclosed in the Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments
(if held):
Cash Management Transactions: The funds may subscribe to the Brown Brothers Harriman & Co. (BBH) Cash Management Service Sweep (CMS Sweep). The BBH CMS Sweep is an investment product that automatically sweeps the funds’ cash balances into
overnight offshore time deposits with either the BBH Grand Cayman branch or a branch of a pre-approved commercial bank. This fully automated program allows the funds to earn interest on cash balances. Excess cash invested with deposit institutions
domiciled outside of the U.S., as with any offshore deposit, may be subject to sovereign actions in the jurisdiction of the deposit institution including, but not limited to, freeze, seizure or diminution. The funds bear the risk associated with the
repayment of principal and payment of interest on such instruments by the institution with which the deposit is ultimately placed. Balances in the CMS Sweep are accounted for on a cost basis, which approximates market value.
(c) Security Transactions:
Security transactions are recorded as of the date the order
to buy or sell the security is executed. Realized gains and losses from security transactions are based on the identified costs of the securities involved.
(d) Investment Income:
Interest income is recorded as it accrues. Dividends and
distributions from portfolio securities and underlying funds are recorded on the date they are effective (the ex-dividend date), although the funds record certain foreign security dividends on the day they learn of the ex-dividend date. Any
distributions from underlying funds are recorded in accordance with the character of the distributions as designated by the underlying funds.
(e) Expenses:
Expenses that are specific to a fund are charged directly
to the fund. Expenses that are common to all funds within the trust generally are allocated among the funds in proportion to their average daily net assets. Each fund bears its share of the allocable expenses of the underlying funds in which it
invests. Such expenses are reflected in the net asset values of the underlying funds.
(f) Distributions to Shareholders:
The funds make distributions from net investment income and
net realized capital gains, if any, once a year.
(g)
Accounting Estimates:
The accounting policies
described in this report conform to GAAP. 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 and these differences may be material.
(h) Federal Income Taxes:
The funds intend to meet federal income and excise tax
requirements for regulated investment companies under subchapter M of the Internal Revenue Code, as amended. Accordingly, the funds distribute substantially all of their net investment income and net realized 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.
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Schwab Target Funds
Financial Notes (continued)
2. Significant
Accounting Policies (continued):
(i)
Indemnification:
Under the funds’
organizational documents, the officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the funds. In addition, in the normal course of business the funds enter into contracts with their
vendors and others that provide general indemnifications. The funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the funds. However, based on experience, the funds expect
the risk of loss attributable to these arrangements to be remote.
3. Risk Factors:
Investing in the funds may involve
certain risks, as discussed in the funds' prospectus, including, but not limited to, those described below. Any of these risks could cause an investor to lose money.
Asset Allocation Risk. The
funds are subject to asset allocation risk, which is the risk that the selection of the underlying funds and the allocation of a fund's assets among the various asset classes and market segments will cause the fund to underperform other funds with a
similar investment objective.
Conflicts of Interest
Risk. The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated mutual funds may create a conflict of interest because the fees paid to it by
some underlying funds are higher than the fees paid by other underlying funds. The investment adviser also may have an incentive to select an affiliated underlying fund for other reasons, including to increase assets under management or to support
new investment strategies. In addition, other conflicts of interest may exist where the best interests of the affiliated underlying fund may not be aligned with those of the fund or vice versa. However, the investment adviser is a fiduciary to the
fund and is legally obligated to act in the fund’s best interests when selecting underlying funds.
Market Risk. Stock and bond
markets rise and fall daily. As with any investment whose performance is tied to these markets, the value of an investment in the funds will fluctuate, which means that an investor could lose money.
Direct Investment Risk. The
funds may invest a portion of their assets directly in equity and fixed income securities, ETFs, and cash equivalents, including money market securities. A fund’s direct investment in these securities is subject to the same or similar risks as
an underlying fund’s investment in the same security.
Underlying Fund Investment Risk. The value of your investment in the funds is based primarily on the prices of the underlying funds that the fund purchases. In turn, the price of each underlying fund is based on the value of its securities. The funds
are subject to the performance and expenses of the underlying funds in which they invest. Before investing in the funds, investors should assess the risks associated with the underlying funds in which the funds may invest and the types of
investments made by those underlying funds. These risks include any combination of the risks described below, although a fund's exposure to a particular risk will be proportionate to the fund's overall asset allocation and underlying fund
allocation.
•
Investment Risk. The funds may experience losses with respect to their investment in an underlying fund. Further, there is no guarantee that an underlying fund will be able to achieve its objective.
•
Management Risk. Generally, the underlying funds are actively managed mutual funds. Any actively managed mutual fund is subject to the risk that its investment adviser (or subadviser(s)) will make poor
security selections. An underlying fund's adviser applies its own investment techniques and risk analyses in making investment decisions for the underlying fund, but there can be no guarantee that they will produce the desired results.
•
Fixed Income Risk. Interest rates rise and fall over time, which will affect an underlying fund's yield and share price. A change in a central bank’s monetary policy or improving economic conditions,
among other things, may result in an increase in interest rates. A rise in interest rates could cause an underlying fund’s shares price to fall. The credit quality of a portfolio investment could also cause an underlying fund's share price to
fall. An underlying fund could lose money if the issuer or guarantor of a portfolio investment or the counterparty to a derivatives contract fails to make timely principal or interest payments or otherwise honor its obligations. Fixed income
securities may be paid off earlier or later than expected. Either situation could cause an underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the fund's yield or share price. Below investment-grade bonds
(junk bonds) involve greater credit risk, are more volatile, involve greater risk of price declines and may be more susceptible to economic downturns than investment-grade securities.
•
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual companies, industries or the securities market as a whole. In addition,
the equity market tends to move in cycles, which may cause stock prices to fall over short or extended periods of time.
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Schwab Target Funds
Financial Notes (continued)
3. Risk
Factors (continued):
•
Large-, Mid- and Small-Cap Risk. Stocks of different market capitalizations tend to go in and out of favor based on market and economic conditions. Historically, small- and mid-cap stocks tend to be more
volatile than large-cap stocks, and small-cap stocks have been riskier than large- and mid-cap stocks. During a period when stocks of a particular market capitalization fall behind other types of
investments—bonds or stocks of another capitalization range, for instance—underlying
fund's large-, mid- or small-cap holdings could reduce performance.
•
Money Market Risk. The funds may invest in underlying money market funds that either seek to maintain a stable $1 net asset value (“stable share price money market funds”) or have a share price
that fluctuates (“variable share price money market funds”). Although an underlying stable share price money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in such a money market
fund. Because the share price of an underlying variable share price money market fund will fluctuate, when the fund sells the shares it owns they may be worth more or less than what the fund originally paid for them. In addition, neither type of
money market fund is designed to offer capital appreciation.
•
ETF Risk. When an underlying fund invests in an ETF, it will bear a proportionate share of the ETF's expenses. In addition, lack of liquidity in the market for an ETF's shares can result in its value being
more volatile than the underlying portfolio of securities.
•
Foreign Investment Risk. An underlying fund's investments in securities of foreign issuers may involve certain risks that are greater than those associated with investments in securities of U.S. issuers.
These include risks of adverse changes in foreign economic, political, regulatory and other conditions; changes in currency exchange rates or exchange control regulations (including limitations on currency movements and exchanges); the imposition of
economic sanctions or other government restrictions; differing accounting, auditing, financial reporting and legal standards and practices; differing securities market structures; and higher transaction costs. These risks may be heightened in
connection with investments in emerging markets.
•
Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil or rapid changes in market or economic conditions than more developed countries. Emerging market
countries often have less uniformity in accounting and reporting requirements and greater risk associated with the custody of securities. In addition, the financial stability of issuers (including governments) in emerging market countries may be
more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility associated with an underlying fund's investments in emerging market countries and, at times, it may be difficult to value such
investments.
•
Derivatives Risk. An underlying fund's use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other
traditional investments. An underlying fund's use of derivatives could reduce the underlying fund's performance, increase volatility and could cause an underlying fund to lose more than the initial amount invested. In addition, investments in
derivatives may involve leverage, which means a small percentage of assets invested in derivatives can have a disproportionately large impact on an underlying fund. However, these risks are less severe when the underlying fund uses derivatives for
hedging rather than to enhance the underlying fund's returns or as a substitute for a position or security.
•
Leverage Risk. Certain underlying fund transactions, such as derivatives, short sales, reverse repurchase agreements, and mortgage dollar rolls, may give rise to a form of leverage and may expose an
underlying fund to greater risk. Leverage tends to magnify the effect of any decrease or increase in the value of an underlying fund's portfolio securities, which means even a small amount of leverage can have a disproportionately large impact on
the underlying fund.
•
Liquidity Risk. An underlying fund may be unable to sell certain securities, such as illiquid securities, readily at a favorable time or price, or an underlying fund may have to sell them at a loss.
•
Portfolio Turnover Risk. Certain of the underlying funds may buy and sell portfolio securities actively. If they do, their portfolio turnover rate and transaction costs will rise, which may lower the
underlying fund's performance and may increase the likelihood of capital gain distributions.
Please refer to the funds’ prospectus for a more
complete description of the principal risks of investing in the funds.
4. Affiliates and Affiliated Transactions:
Charles
Schwab Investment Management, Inc. (CSIM or the investment adviser), a wholly owned subsidiary of The Charles Schwab Corporation, serves as each fund's investment adviser and administrator pursuant to an Investment Advisory and Administration
Agreement between CSIM and the trust.
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Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
The Board
has adopted a Shareholder Servicing Plan (the Plan) on behalf of the funds. The Plan enables each fund to bear expenses relating to the provision by financial intermediaries, including Charles Schwab & Co., Inc. (a broker-dealer affiliate of
CSIM, Schwab) (together, service providers), of certain account maintenance, customer liaison and shareholder services to the current shareholders of the funds. The funds are not subject to any fee under the Plan.
CSIM and its affiliates have agreed with the funds, for so
long as CSIM serves as the investment adviser to the funds, which may only be amended or terminated with the approval of the Board, to limit the total annual fund operating expense charged, excluding interest, taxes and certain non-routine expenses
to 0.00%.
The agreement to limit the funds' total
expenses charged is limited to each fund's direct operating expenses and, therefore, does not apply to underlying fund fees and expenses, which are indirect expenses incurred by a fund through its investments in the underlying funds.
The funds may engage in certain transactions involving
related parties. Pursuant to an exemptive order issued by the SEC, the funds may invest in other related funds. As of October 31, 2016, each Schwab Target Fund's ownership percentages of other related funds' shares are:
| Underlying Funds | Schwab
Target 2010 Fund |
Schwab
Target 2015 Fund |
Schwab
Target 2020 Fund |
Schwab
Target 2025 Fund |
Schwab
Target 2030 Fund |
Schwab
Target 2035 Fund |
Schwab
Target 2040 Fund |
Schwab
Target 2045 Fund |
Schwab
Target 2050 Fund |
Schwab
Target 2055 Fund |
Schwab
Target 2060 Fund |
| Schwab Global Real Estate Fund | 0.5% | 0.9% | 5.6% | 5.6% | 11.8% | 5.6% | 14.6% | 1.4% | 1.2% | 0.7% | 0.0%* |
| Laudus International MarketMasters Fund, Select Shares | 0.2% | 0.4% | 2.6% | 2.7% | 5.7% | 2.8% | 7.0% | 0.7% | 0.6% | 0.4% | 0.0%* |
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | —% | —% | 0.3% | 0.9% | 2.7% | 1.7% | 5.3% | 0.6% | 0.5% | 0.3% | 0.0%* |
| Schwab International Core Equity Fund | 0.3% | 0.5% | 3.5% | 3.5% | 7.3% | 3.6% | 9.0% | 0.9% | 0.8% | 0.5% | 0.0%* |
| Laudus U.S. Large Cap Growth Fund | 0.2% | 0.4% | 2.3% | 2.3% | 4.8% | 2.3% | 5.7% | 0.6% | 0.5% | 0.3% | 0.0%* |
| Schwab Core Equity Fund | 0.2% | 0.4% | 2.3% | 2.3% | 4.7% | 2.2% | 5.6% | 0.6% | 0.5% | 0.3% | 0.0%* |
| Schwab Dividend Equity Fund | 0.1% | 0.2% | 1.4% | 1.4% | 2.8% | 1.4% | 3.3% | 0.3% | 0.3% | 0.2% | 0.0%* |
| Schwab S&P 500 Index Fund | 0.0%* | 0.0%* | 0.2% | 0.2% | 0.4% | 0.2% | 0.4% | 0.0%* | 0.0%* | 0.0%* | 0.0%* |
| Laudus Small-Cap MarketMasters Fund, Select Shares | 0.3% | 0.5% | 4.0% | 4.2% | 9.8% | 5.2% | 14.1% | 1.5% | 1.4% | 0.8% | 0.0%* |
| Schwab Small-Cap Equity Fund | 0.1% | 0.3% | 1.9% | 2.1% | 4.9% | 2.5% | 7.1% | 0.8% | 0.7% | 0.4% | 0.0%* |
| Schwab Treasury Inflation Protected Securities Index Fund | 1.2% | 2.0% | 4.7% | 1.2% | —% | —% | —% | —% | —% | —% | —% |
| Schwab Intermediate-Term Bond Fund | —% | —% | 1.2% | 1.6% | 3.2% | 1.3% | 2.6% | 0.2% | 0.1% | 0.0%* | 0.0%* |
| Schwab Total Bond Market Fund | 1.0% | 1.7% | 7.0% | 4.3% | 5.8% | 1.8% | 2.6% | 0.2% | 0.1% | 0.0%* | 0.0%* |
| Laudus Mondrian International Government Fixed Income Fund | 0.3% | 0.6% | 5.0% | 4.2% | 6.8% | 2.2% | 3.1% | 0.2% | 0.1% | 0.0%* | 0.0%* |
| Schwab Short-Term Bond Market Fund | 1.3% | 2.2% | 7.2% | 3.6% | 3.8% | 0.9% | 0.8% | 0.0%* | 0.0%* | 0.0%* | —% |
| Schwab Variable Share Price Money Fund, Ultra Shares | 0.6% | 1.0% | 2.6% | 1.4% | 1.4% | 0.4% | 0.2% | —% | —% | —% | —% |
| * | Less than 0.05% |
115
Schwab Target Funds | Annual Report
Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Below is a
summary of the funds' transactions with their affiliated underlying funds during the period ended October 31, 2016:
Schwab Target 2010 Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 149,571 | 14,272 | (18,271) | 145,572 | $3,080,313 | $46,377 | $223,795 | ||
| Laudus Mondrian International Government Fixed Income Fund | 41,044 | 856 | (6,250) | 35,650 | 350,437 | 1,486 | 7,761 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 31,799 | 2,031 | (5,786) | 28,044 | 464,123 | 18,235 | 32,808 | ||
| Laudus U.S. Large Cap Growth Fund | 228,536 | 30,318 | (40,746) | 218,108 | 3,659,853 | 56,962 | 240,174 | ||
| Schwab Core Equity Fund | 196,100 | 56,966 | (47,032) | 206,034 | 4,048,568 | 124,714 | 640,950 | ||
| Schwab Dividend Equity Fund | 124,102 | 30,305 | (28,775) | 125,632 | 1,807,842 | 14,642 | 251,375 | ||
| Schwab Global Real Estate Fund | 185,350 | 12,273 | (36,119) | 161,504 | 1,156,371 | 70,463 | 42,507 | ||
| Schwab International Core Equity Fund | 240,100 | 24,342 | (38,398) | 226,044 | 2,079,605 | (24,377) | 44,372 | ||
| Schwab S&P 500 Index Fund | 112,086 | 9,921 | (21,374) | 100,633 | 3,359,139 | 214,150 | 111,391 | ||
| Schwab Short-Term Bond Market Fund | 650,054 | 38,392 | (69,889) | 618,557 | 5,777,319 | 18,821 | 68,411 | ||
| Schwab Small-Cap Equity Fund | 50,734 | 11,692 | (20,761) | 41,665 | 783,711 | 51,374 | 130,426 | ||
| Schwab Total Bond Market Fund | 1,578,072 | 153,585 | (280,344) | 1,451,313 | 14,005,166 | 44,369 | 320,219 | ||
| Schwab Treasury Inflation Protected Securities Index Fund | 366,390 | 17,993 | (47,424) | 336,959 | 3,814,376 | 12,856 | 67,258 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | 2,469,650 | 1,730 | (2,471,380) | — | — | — | 1,796 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 2,477,273 | — | 2,477,273 | 2,478,264 | — | 6,402 | ||
| Total | $46,865,087 | $650,072 | $2,189,645 |
Schwab Target 2015 Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 285,863 | 32,665 | (52,628) | 265,900 | $5,626,449 | $61,509 | $425,775 | ||
| Laudus Mondrian International Government Fixed Income Fund | 86,086 | 1,795 | (11,138) | 76,743 | 754,384 | 5,981 | 16,279 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 59,796 | 4,591 | (15,830) | 48,557 | 803,621 | 48,799 | 61,875 | ||
| Laudus U.S. Large Cap Growth Fund | 429,420 | 58,808 | (83,631) | 404,597 | 6,789,145 | 125,202 | 453,080 | ||
| Schwab Core Equity Fund | 369,878 | 85,917 | (78,495) | 377,300 | 7,413,944 | 8,238 | 1,203,710 | ||
| Schwab Dividend Equity Fund | 230,740 | 50,909 | (45,847) | 235,802 | 3,393,187 | 39,311 | 470,383 | ||
| Schwab Global Real Estate Fund | 345,116 | 35,416 | (70,136) | 310,396 | 2,222,439 | 25,978 | 80,415 | ||
| Schwab International Core Equity Fund | 445,723 | 13,436 | (46,934) | 412,225 | 3,792,473 | (28,436) | 84,003 | ||
| Schwab S&P 500 Index Fund | 210,352 | 15,963 | (41,374) | 184,941 | 6,173,323 | 258,473 | 208,000 | ||
| Schwab Short-Term Bond Market Fund | 1,115,060 | 59,566 | (132,798) | 1,041,828 | 9,730,674 | 2,040 | 118,127 | ||
| Schwab Small-Cap Equity Fund | 94,786 | 22,470 | (37,439) | 79,817 | 1,501,362 | (901) | 243,676 | ||
| Schwab Total Bond Market Fund | 2,715,881 | 131,550 | (407,697) | 2,439,734 | 23,543,432 | 117,435 | 554,819 | ||
| Schwab Treasury Inflation Protected Securities Index Fund | 636,258 | 42,301 | (110,148) | 568,411 | 6,434,411 | 15,511 | 116,308 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | 2,693,264 | 1,502,348 | (4,195,612) | — | — | — | 2,530 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 4,205,616 | — | 4,205,616 | 4,207,298 | — | 10,867 | ||
| Total | $82,386,142 | $679,140 | $4,049,847 |
116
Schwab Target Funds | Annual Report
Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab Target 2020
Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 1,903,619 | 160,383 | (177,489) | 1,886,513 | $39,918,614 | $1,228,187 | $2,896,340 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 203,973 | 17,515 | (73,916) | 147,572 | 1,090,562 | (194,085) | 18,358 | ||
| Laudus Mondrian International Government Fixed Income Fund | 644,158 | 32,335 | (76,754) | 599,739 | 5,895,436 | 12,985 | 125,312 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 404,664 | 26,673 | (61,615) | 369,722 | 6,118,891 | 401,474 | 430,765 | ||
| Laudus U.S. Large Cap Growth Fund | 2,612,903 | 243,898 | (229,555) | 2,627,246 | 44,085,180 | 179,773 | 2,799,849 | ||
| Schwab Core Equity Fund | 2,240,843 | 393,514 | (179,559) | 2,454,798 | 48,236,785 | 571,629 | 7,401,584 | ||
| Schwab Dividend Equity Fund | 1,404,942 | 230,457 | (120,527) | 1,514,872 | 21,799,010 | 125,526 | 2,909,891 | ||
| Schwab Global Real Estate Fund | 2,135,735 | 153,718 | (292,141) | 1,997,312 | 14,300,752 | 146,146 | 500,139 | ||
| Schwab Intermediate-Term Bond Fund | 467,601 | 8,594 | (81,293) | 394,902 | 4,067,489 | (2,985) | 88,922 | ||
| Schwab International Core Equity Fund | 3,003,249 | 171,162 | (240,757) | 2,933,654 | 26,989,615 | (223,282) | 573,322 | ||
| Schwab S&P 500 Index Fund | 1,276,154 | 40,993 | (130,818) | 1,186,329 | 39,599,659 | 1,183,903 | 1,278,579 | ||
| Schwab Short-Term Bond Market Fund | 3,049,891 | 430,530 | (32,224) | 3,448,197 | 32,206,158 | 1,706 | 363,302 | ||
| Schwab Small-Cap Equity Fund | 625,696 | 93,962 | (148,782) | 570,876 | 10,738,184 | (23,159) | 1,608,541 | ||
| Schwab Total Bond Market Fund | 9,568,667 | 664,782 | (228,427) | 10,005,022 | 96,548,458 | 48,630 | 2,110,503 | ||
| Schwab Treasury Inflation Protected Securities Index Fund | 1,142,741 | 195,660 | (18,019) | 1,320,382 | 14,946,730 | 6,804 | 231,694 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | 8,003,597 | 3,006,530 | (11,010,127) | — | — | — | 6,963 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 11,036,379 | — | 11,036,379 | 11,040,793 | — | 28,517 | ||
| Total | $417,582,316 | $3,463,252 | $23,372,581 |
117
Schwab Target Funds | Annual Report
Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab Target 2025
Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 1,733,155 | 281,157 | (76,843) | 1,937,469 | $40,996,836 | $115,589 | $2,658,148 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 462,224 | 69,406 | (53,555) | 478,075 | 3,532,975 | (98,948) | 43,635 | ||
| Laudus Mondrian International Government Fixed Income Fund | 488,782 | 24,648 | — | 513,430 | 5,047,012 | — | 95,107 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 387,230 | 36,694 | (32,430) | 391,494 | 6,479,220 | 92,910 | 415,109 | ||
| Laudus U.S. Large Cap Growth Fund | 2,330,246 | 400,688 | (142,831) | 2,588,103 | 43,428,372 | 67,492 | 2,513,468 | ||
| Schwab Core Equity Fund | 1,987,490 | 520,223 | (74,625) | 2,433,088 | 47,810,186 | 140,740 | 6,582,369 | ||
| Schwab Dividend Equity Fund | 1,261,862 | 290,751 | (54,823) | 1,497,790 | 21,553,194 | 73,708 | 2,607,404 | ||
| Schwab Global Real Estate Fund | 1,954,647 | 191,745 | (167,228) | 1,979,164 | 14,170,816 | 134,112 | 472,899 | ||
| Schwab Intermediate-Term Bond Fund | 507,330 | 72,082 | (49,951) | 529,461 | 5,453,451 | 1,528 | 109,641 | ||
| Schwab International Core Equity Fund | 2,749,043 | 243,587 | (25,463) | 2,967,167 | 27,297,936 | (36,921) | 520,720 | ||
| Schwab S&P 500 Index Fund | 1,136,046 | 104,233 | (55,261) | 1,185,018 | 39,555,899 | 80,167 | 1,151,942 | ||
| Schwab Short-Term Bond Market Fund | 1,379,950 | 339,306 | — | 1,719,256 | 16,057,848 | — | 173,209 | ||
| Schwab Small-Cap Equity Fund | 609,392 | 129,132 | (92,639) | 645,885 | 12,149,101 | 40,968 | 1,566,625 | ||
| Schwab Total Bond Market Fund | 5,479,728 | 779,268 | — | 6,258,996 | 60,399,312 | — | 1,274,278 | ||
| Schwab Treasury Inflation Protected Securities Index Fund | 194,330 | 211,247 | (84,753) | 320,824 | 3,631,723 | 17,479 | 46,087 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | — | 6,001,845 | (6,001,845) | — | — | — | 2,290 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 6,016,155 | — | 6,016,155 | 6,018,562 | — | 15,545 | ||
| Total | $353,582,443 | $628,824 | $20,248,476 |
118
Schwab Target Funds | Annual Report
Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab Target 2030
Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 3,778,181 | 438,452 | (144,658) | 4,071,975 | $86,162,982 | $559,389 | $5,745,046 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 1,489,154 | 94,633 | (112,658) | 1,471,129 | 10,871,640 | (124,862) | 139,368 | ||
| Laudus Mondrian International Government Fixed Income Fund | 780,730 | 38,616 | — | 819,346 | 8,054,170 | — | 151,774 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 891,921 | 58,790 | (38,911) | 911,800 | 15,090,289 | 283,151 | 949,450 | ||
| Laudus U.S. Large Cap Growth Fund | 4,957,004 | 631,657 | (238,505) | 5,350,156 | 89,775,615 | 98,315 | 5,305,099 | ||
| Schwab Core Equity Fund | 4,225,482 | 950,718 | (192,450) | 4,983,750 | 97,930,681 | 193,466 | 13,982,777 | ||
| Schwab Dividend Equity Fund | 2,679,928 | 527,825 | (148,738) | 3,059,015 | 44,019,232 | 209,691 | 5,558,181 | ||
| Schwab Global Real Estate Fund | 4,219,822 | 275,692 | (300,446) | 4,195,068 | 30,036,684 | 231,956 | 991,843 | ||
| Schwab Intermediate-Term Bond Fund | 1,041,224 | 170,069 | (127,209) | 1,084,084 | 11,166,066 | 3,717 | 225,694 | ||
| Schwab International Core Equity Fund | 5,937,402 | 426,222 | (200,303) | 6,163,321 | 56,702,550 | (200,905) | 1,137,880 | ||
| Schwab S&P 500 Index Fund | 2,414,262 | 93,440 | (72,777) | 2,434,925 | 81,277,798 | 321,658 | 2,418,849 | ||
| Schwab Short-Term Bond Market Fund | 1,516,295 | 292,030 | — | 1,808,325 | 16,889,752 | — | 188,739 | ||
| Schwab Small-Cap Equity Fund | 1,418,219 | 240,397 | (162,594) | 1,496,022 | 28,140,182 | 165,990 | 3,676,991 | ||
| Schwab Total Bond Market Fund | 7,706,982 | 817,613 | (111,579) | 8,413,016 | 81,185,606 | 11,317 | 1,739,435 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | — | 6,001,845 | (6,001,845) | — | — | — | 2,290 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 6,016,155 | — | 6,016,155 | 6,018,562 | — | 15,545 | ||
| Total | $663,321,809 | $1,752,883 | $42,228,961 |
119
Schwab Target Funds | Annual Report
Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab Target 2035
Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 1,766,255 | 260,448 | (53,775) | 1,972,928 | $41,747,160 | $13,703 | $2,695,913 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 893,478 | 70,831 | (47,419) | 916,890 | 6,775,816 | (94,684) | 83,842 | ||
| Laudus Mondrian International Government Fixed Income Fund | 249,619 | 37,848 | (19,607) | 267,860 | 2,633,062 | (5,621) | 47,203 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 450,143 | 47,413 | (16,209) | 481,347 | 7,966,291 | 45,326 | 481,821 | ||
| Laudus U.S. Large Cap Growth Fund | 2,272,925 | 385,992 | (103,297) | 2,555,620 | 42,883,309 | (39,193) | 2,439,192 | ||
| Schwab Core Equity Fund | 1,940,254 | 480,780 | (50,640) | 2,370,394 | 46,578,245 | (372) | 6,390,453 | ||
| Schwab Dividend Equity Fund | 1,220,114 | 264,015 | (20,907) | 1,463,222 | 21,055,769 | 33,240 | 2,548,754 | ||
| Schwab Global Real Estate Fund | 1,965,221 | 161,709 | (119,782) | 2,007,148 | 14,371,177 | 102,223 | 471,533 | ||
| Schwab Intermediate-Term Bond Fund | 419,886 | 77,970 | (52,823) | 445,033 | 4,583,842 | 3,216 | 92,574 | ||
| Schwab International Core Equity Fund | 2,780,871 | 291,684 | (58,991) | 3,013,564 | 27,724,789 | (40,447) | 530,318 | ||
| Schwab S&P 500 Index Fund | 1,106,385 | 82,366 | (28,572) | 1,160,179 | 38,726,779 | 52,185 | 1,114,113 | ||
| Schwab Short-Term Bond Market Fund | 331,042 | 105,031 | — | 436,073 | 4,072,917 | — | 45,085 | ||
| Schwab Small-Cap Equity Fund | 707,704 | 122,996 | (58,413) | 772,287 | 14,526,720 | (86,888) | 1,819,364 | ||
| Schwab Total Bond Market Fund | 2,255,249 | 328,958 | — | 2,584,207 | 24,937,601 | — | 529,075 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | — | 1,500,461 | (1,500,461) | — | — | — | 573 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 1,504,039 | — | 1,504,039 | 1,504,640 | — | 3,885 | ||
| Total | $300,088,117 | ($17,312) | $19,293,698 |
120
Schwab Target Funds | Annual Report
Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab Target 2040
Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 4,733,337 | 472,133 | (190,346) | 5,015,124 | $106,120,019 | $1,215,288 | $7,215,468 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 2,872,662 | 178,683 | (206,776) | 2,844,569 | 21,021,364 | (411) | 270,859 | ||
| Laudus Mondrian International Government Fixed Income Fund | 331,487 | 39,591 | — | 371,078 | 3,647,693 | — | 62,684 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 1,299,448 | 85,651 | (73,559) | 1,311,540 | 21,705,993 | 366,033 | 1,383,262 | ||
| Laudus U.S. Large Cap Growth Fund | 5,959,224 | 676,092 | (294,827) | 6,340,489 | 106,393,409 | 133,801 | 6,386,594 | ||
| Schwab Core Equity Fund | 5,092,328 | 1,011,034 | (205,908) | 5,897,454 | 115,884,981 | 217,739 | 16,720,545 | ||
| Schwab Dividend Equity Fund | 3,174,382 | 629,893 | (198,686) | 3,605,589 | 51,884,425 | 185,836 | 6,624,169 | ||
| Schwab Global Real Estate Fund | 5,246,536 | 284,055 | (316,178) | 5,214,413 | 37,335,200 | 421,772 | 1,216,774 | ||
| Schwab Intermediate-Term Bond Fund | 799,428 | 96,571 | — | 895,999 | 9,228,789 | — | 181,980 | ||
| Schwab International Core Equity Fund | 7,451,387 | 497,853 | (372,235) | 7,577,005 | 69,708,448 | (127,730) | 1,418,769 | ||
| Schwab S&P 500 Index Fund | 2,898,817 | 104,346 | (125,988) | 2,877,175 | 96,040,095 | 1,085,434 | 2,915,225 | ||
| Schwab Short-Term Bond Market Fund | 372,113 | 26,075 | — | 398,188 | 3,719,073 | — | 42,626 | ||
| Schwab Small-Cap Equity Fund | 2,043,606 | 302,468 | (181,650) | 2,164,424 | 40,712,818 | 57,466 | 5,276,435 | ||
| Schwab Total Bond Market Fund | 3,354,260 | 344,975 | — | 3,699,235 | 35,697,621 | — | 769,153 | ||
| Schwab Value Advantage Money Fund, Ultra Shares | — | 1,000,308 | (1,000,308) | — | — | — | 382 | ||
| Schwab Variable Share Price Money Fund, Ultra Shares | — | 1,002,693 | — | 1,002,693 | 1,003,094 | — | 2,591 | ||
| Total | $720,103,022 | $3,555,228 | $50,487,516 |
Schwab Target 2045 Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 388,812 | 127,504 | (7,450) | 508,866 | $10,767,602 | ($31,899) | $602,043 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 260,292 | 66,404 | — | 326,696 | 2,414,281 | — | 24,999 | ||
| Laudus Mondrian International Government Fixed Income Fund | 11,852 | 15,823 | — | 27,675 | 272,045 | — | 2,565 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 111,137 | 27,221 | — | 138,358 | 2,289,835 | — | 120,944 | ||
| Laudus U.S. Large Cap Growth Fund | 482,732 | 146,763 | — | 629,495 | 10,562,930 | — | 526,307 | ||
| Schwab Core Equity Fund | 412,499 | 184,604 | (2,828) | 594,275 | 11,677,503 | (6,120) | 1,383,941 | ||
| Schwab Dividend Equity Fund | 257,925 | 105,177 | — | 363,102 | 5,225,044 | — | 561,846 | ||
| Schwab Global Real Estate Fund | 430,025 | 99,783 | (19,747) | 510,061 | 3,652,035 | (7,529) | 110,671 | ||
| Schwab Intermediate-Term Bond Fund | 49,368 | 22,964 | — | 72,332 | 745,019 | — | 12,713 | ||
| Schwab International Core Equity Fund | 611,981 | 179,831 | — | 791,812 | 7,284,677 | — | 120,150 | ||
| Schwab S&P 500 Index Fund | 234,798 | 57,171 | (5,241) | 286,728 | 9,570,973 | (9,450) | 241,793 | ||
| Schwab Short-Term Bond Market Fund | 12,889 | 31,334 | (24,408) | 19,815 | 185,073 | 1,614 | 2,094 | ||
| Schwab Small-Cap Equity Fund | 175,938 | 67,205 | (13,014) | 230,129 | 4,328,721 | (57,246) | 461,477 | ||
| Schwab Total Bond Market Fund | 172,153 | 67,146 | — | 239,299 | 2,309,233 | — | 45,042 | ||
| Total | $71,284,971 | ($110,630) | $4,216,585 |
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Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab Target 2050
Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 321,047 | 118,845 | (2,134) | 437,758 | $9,262,962 | ($8,778) | $502,683 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 230,062 | 73,927 | (12,526) | 291,463 | 2,153,911 | (28,774) | 22,163 | ||
| Laudus Mondrian International Government Fixed Income Fund | 7,172 | 3,439 | — | 10,611 | 104,310 | — | 1,356 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 96,278 | 37,630 | (1,875) | 132,033 | 2,185,140 | (6,467) | 103,839 | ||
| Laudus U.S. Large Cap Growth Fund | 394,480 | 145,008 | (6,434) | 533,054 | 8,944,650 | (17,785) | 431,984 | ||
| Schwab Core Equity Fund | 335,945 | 166,919 | — | 502,864 | 9,881,275 | — | 1,143,125 | ||
| Schwab Dividend Equity Fund | 212,130 | 97,130 | (2,102) | 307,158 | 4,420,009 | (5,339) | 462,108 | ||
| Schwab Global Real Estate Fund | 354,606 | 82,093 | (3,851) | 432,848 | 3,099,188 | (2,465) | 92,116 | ||
| Schwab Intermediate-Term Bond Fund | 25,092 | 21,031 | — | 46,123 | 475,066 | — | 7,678 | ||
| Schwab International Core Equity Fund | 505,203 | 168,913 | — | 674,116 | 6,201,865 | — | 99,901 | ||
| Schwab S&P 500 Index Fund | 191,919 | 51,283 | — | 243,202 | 8,118,083 | — | 197,861 | ||
| Schwab Short-Term Bond Market Fund | 4,748 | 18,090 | (15,051) | 7,787 | 72,726 | 658 | 787 | ||
| Schwab Small-Cap Equity Fund | 149,660 | 56,278 | (1,638) | 204,300 | 3,842,882 | (9,772) | 396,868 | ||
| Schwab Total Bond Market Fund | 85,885 | 64,675 | (8,429) | 142,131 | 1,371,563 | 577 | 25,247 | ||
| Total | $60,133,630 | ($78,145) | $3,487,716 |
Schwab Target 2055 Fund:
| Underlying Funds | Balance
of Shares Held at 10/31/15 |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 11/01/15 to 10/31/16 |
Distributions
Received* 11/01/15 to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | 179,619 | 74,323 | (713) | 253,229 | $5,358,317 | ($3,653) | $280,706 | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | 136,613 | 47,515 | (2,857) | 181,271 | 1,339,593 | (6,256) | 13,116 | ||
| Laudus Mondrian International Government Fixed Income Fund | 2,444 | 5,726 | (2,287) | 5,883 | 57,828 | (1,748) | 462 | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | 55,241 | 20,874 | (1,139) | 74,976 | 1,240,857 | (4,503) | 60,092 | ||
| Laudus U.S. Large Cap Growth Fund | 218,270 | 85,786 | — | 304,056 | 5,102,062 | — | 239,055 | ||
| Schwab Core Equity Fund | 186,781 | 98,457 | — | 285,238 | 5,604,930 | — | 629,948 | ||
| Schwab Dividend Equity Fund | 115,725 | 60,884 | — | 176,609 | 2,541,409 | — | 254,651 | ||
| Schwab Global Real Estate Fund | 198,219 | 67,959 | (10,994) | 255,184 | 1,827,115 | (5,912) | 52,653 | ||
| Schwab Intermediate-Term Bond Fund | 6,509 | 9,551 | — | 16,060 | 165,418 | — | 2,627 | ||
| Schwab International Core Equity Fund | 282,649 | 108,459 | (1,157) | 389,951 | 3,587,551 | (2,002) | 55,318 | ||
| Schwab S&P 500 Index Fund | 106,118 | 33,457 | — | 139,575 | 4,658,999 | — | 109,220 | ||
| Schwab Short-Term Bond Market Fund | — | 753 | — | 753 | 7,033 | — | 41 | ||
| Schwab Small-Cap Equity Fund | 87,547 | 38,427 | (2,087) | 123,887 | 2,330,311 | (9,954) | 229,905 | ||
| Schwab Total Bond Market Fund | 21,076 | 33,962 | (8,896) | 46,142 | 445,273 | 510 | 7,977 | ||
| Total | $34,266,696 | ($33,518) | $1,935,771 |
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Schwab Target Funds
Financial Notes (continued)
4. Affiliates and
Affiliated Transactions (continued):
Schwab Target 2060
Fund:
| Underlying Funds | Balance
of Shares Held at 08/25/16(a) |
Gross
Purchases |
Gross
Sales |
Balance
of Shares Held at 10/31/16 |
Market
Value at 10/31/16 |
Realized
Gains (Losses) 08/25/16(a) to 10/31/16 |
Distributions
Received* 08/25/16(a) to 10/31/16 | ||
| Laudus International MarketMasters Fund, Select Shares | — | 4,200 | — | 4,200 | $88,880 | $— | $— | ||
| Laudus Mondrian Emerging Markets Fund, Institutional Shares | — | 2,913 | — | 2,913 | 21,530 | — | — | ||
| Laudus Mondrian International Government Fixed Income Fund | — | 96 | — | 96 | 943 | — | — | ||
| Laudus Small-Cap MarketMasters Fund, Select Shares | — | 1,289 | — | 1,289 | 21,338 | — | — | ||
| Laudus U.S. Large Cap Growth Fund | — | 4,896 | — | 4,896 | 82,153 | — | — | ||
| Schwab Core Equity Fund | — | 4,674 | — | 4,674 | 91,838 | — | — | ||
| Schwab Dividend Equity Fund | — | 2,545 | — | 2,545 | 36,621 | — | 142 | ||
| Schwab Global Real Estate Fund | — | 4,006 | — | 4,006 | 28,686 | — | 95 | ||
| Schwab Intermediate-Term Bond Fund | — | 97 | — | 97 | 1,000 | — | — | ||
| Schwab International Core Equity Fund | — | 6,116 | — | 6,116 | 56,265 | — | — | ||
| Schwab S&P 500 Index Fund | — | 2,327 | — | 2,327 | 77,689 | — | — | ||
| Schwab Small-Cap Equity Fund | — | 2,023 | — | 2,023 | 38,047 | — | — | ||
| Schwab Total Bond Market Fund | — | 1,129 | — | 1,129 | 10,897 | — | 43 | ||
| Total | $555,887 | $— | $280 |
| * | Distributions received include distributions from net investment income and capital gains, if any, from the underlying funds. |
| (a) | Commencement of operations. |
Pursuant to an exemptive order issued
by the SEC, the funds may enter into interfund borrowing and lending transactions with other funds in the Fund Complex (for definition refer to Trustees and Officers section). All loans are for temporary or emergency purposes and the interest rate
to be charged will be the average of the overnight repurchase agreement rate and the short-term bank loan rate. All loans are subject to numerous conditions designed to ensure fair and equitable treatment of all participating funds/portfolios. The
interfund lending facility is subject to the oversight and periodic review by the Board. The funds had no interfund borrowing or lending activity during the period.
Certain accounts or CSIM affiliates may from time to time own
(beneficially or of record) or control a significant percentage of a fund’s shares. As of October 31, 2016, a CSIM affiliate of the Schwab Target 2060 Fund owned 66% of the fund's outstanding shares. The CSIM affiliated ownership percentage is
related to seed capital invested on the first day of operations to assist the fund in meeting its investment objectives, over time this ownership percentage is expected to decrease.
5. Board of Trustees:
The Board may include people
who are officers and/or directors of CSIM or its affiliates. Federal securities law limits the percentage of such “interested persons” who may serve on a trust’s board, and the trusts were in compliance with these limitations
throughout the report period. The trusts did not pay any of these interested persons for their services as trustees, but they did pay non-interested persons (independent trustees), as noted on each fund’s Statement of Operations. For
information regarding the trustees, please refer to the Trustees and Officers table at the end of this report.
6. Borrowing from Banks:
The funds, except for Schwab
Target 2060 Fund, were participants with other U.S. registered investment companies managed by CSIM in a joint, syndicated, committed $530 million line of credit (the Credit Facility), which matured on October 6, 2016. Under the terms of the Credit
Facility, in addition to the interest charged on any borrowings by a fund, each fund paid a commitment fee of 0.125% per annum on its proportionate share of the unused portion of the Credit Facility. On October 6, 2016, all funds became participants
in an amended Credit Facility to run for a new 364 day period with an increased line of $555 million and a commitment fee of 0.15% per annum. There were no borrowings from the line of credit during the period.
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Schwab Target Funds
Financial Notes (continued)
6. Borrowing from
Banks (continued):
The funds also have access to
custodian overdraft facilities. A fund may have utilized the overdraft facility and incurred an interest expense, which is disclosed on the fund’s Statement of Operations, if any. The interest expense is determined based on a negotiated rate
above the current Federal Funds Rate.
7. Purchases and Sales/Maturities of Investment Securities:
For the period ended October 31, 2016, purchases and
sales/maturities of securities (excluding short-term obligations) were as follows:
| Purchases of Securities | Sales/Maturities of Securities | |
| Schwab Target 2010 Fund | $8,637,802 | $12,408,381 |
| Schwab Target 2015 Fund | 15,181,948 | 22,521,612 |
| Schwab Target 2020 Fund | 60,445,305 | 47,706,127 |
| Schwab Target 2025 Fund | 72,667,202 | 21,636,845 |
| Schwab Target 2030 Fund | 97,883,460 | 35,351,845 |
| Schwab Target 2035 Fund | 49,683,513 | 11,665,461 |
| Schwab Target 2040 Fund | 84,889,436 | 36,370,308 |
| Schwab Target 2045 Fund | 19,646,517 | 999,000 |
| Schwab Target 2050 Fund | 18,001,434 | 594,000 |
| Schwab Target 2055 Fund | 10,943,882 | 299,000 |
| Schwab Target 2060 Fund | 616,024 | — |
8. Redemption Fee:
The funds charge a 2.00%
redemption fee on shares sold or exchanged within 30 days of the original purchase date. Such amounts are netted against redemption proceeds on the Statement of Changes in Net Assets. The redemption fees charged during the current and prior periods
were as follows:
| Current
Period (11/1/15-10/31/16) |
Prior
Period (11/1/14-10/31/15) | |
| Schwab Target 2010 Fund | $1,591 | $197 |
| Schwab Target 2015 Fund | 2,546 | 8,500 |
| Schwab Target 2020 Fund | 5,615 | 11,522 |
| Schwab Target 2025 Fund | 5,667 | 3,821 |
| Schwab Target 2030 Fund | 7,742 | 12,726 |
| Schwab Target 2035 Fund | 3,566 | 5,806 |
| Schwab Target 2040 Fund | 6,637 | 14,122 |
| Schwab Target 2045 Fund | 1,974 | 2,334 |
| Schwab Target 2050 Fund | 1,498 | 1,871 |
| Schwab Target 2055 Fund | 1,252 | 1,743 |
| Schwab Target 2060 Fund* | — | — |
| * | Since commencement of operations 8/25/16. |
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Schwab Target Funds
Financial Notes (continued)
9. Federal
Income Taxes:
As of October 31, 2016, the components of
distributable earnings on a tax-basis were as follows:
| Schwab Target 2010 Fund | Schwab Target 2015 Fund | Schwab Target 2020 Fund | Schwab Target 2025 Fund | Schwab Target 2030 Fund | Schwab Target 2035 Fund | Schwab Target 2040 Fund | |||||||
| Undistributed ordinary income | $563,491 | $1,227,379 | $4,421,264 | $3,574,081 | $5,331,532 | $2,033,251 | $4,297,568 | ||||||
| Undistributed long-term capital gains | — | 2,953,403 | 18,802,004 | 14,574,262 | 32,066,453 | 14,084,150 | 40,494,831 | ||||||
| Unrealized appreciation on investments | 5,353,620 | 7,843,939 | 51,219,954 | 26,170,043 | 99,039,100 | 23,404,491 | 103,428,721 | ||||||
| Unrealized depreciation on investments | (178,028) | (532,786) | (4,112,783) | (4,867,931) | (8,042,298) | (5,015,241) | (9,954,514) | ||||||
| Net unrealized appreciation (depreciation) | $5,175,592 | $7,311,153 | $47,107,171 | $21,302,112 | $90,996,802 | $18,389,250 | $93,474,207 |
| Schwab Target 2045 Fund | Schwab Target 2050 Fund | Schwab Target 2055 Fund | Schwab Target 2060 Fund | ||||
| Undistributed ordinary income | $264,792 | $197,849 | $96,750 | $376 | |||
| Undistributed long-term capital gains | 3,145,750 | 2,629,016 | 1,461,164 | — | |||
| Unrealized appreciation on investments | 1,509,798 | 1,249,659 | 696,649 | 258 | |||
| Unrealized depreciation on investments | (3,980,875) | (3,199,359) | (1,789,082) | (10,887) | |||
| Net unrealized appreciation (depreciation) | ($2,471,077) | ($1,949,700) | ($1,092,433) | ($10,629) |
The primary difference between
book-basis and tax-basis unrealized appreciation or unrealized depreciation of investments is the tax deferral of losses on wash sales.
Capital loss carryforwards may be used to offset future
realized capital gains for federal income tax purposes. As of October 31, 2016, the funds had capital loss carryforwards available to offset future net capital gains before the expiration dates as follows:
| Expiration Date | Schwab
Target 2010 Fund |
Schwab
Target 2015 Fund |
Schwab
Target 2020 Fund |
Schwab
Target 2025 Fund |
Schwab
Target 2030 Fund |
Schwab
Target 2035 Fund |
Schwab
Target 2040 Fund | ||||||
| October 31, 2017 | $7,386,896 | $— | $— | $— | $— | $— | $— | ||||||
| Total | $7,386,896 | $— | $— | $— | $— | $— | $— |
| Expiration Date | Schwab
Target 2045 Fund |
Schwab
Target 2050 Fund |
Schwab
Target 2055 Fund |
Schwab
Target 2060 Fund | |||
| October 31, 2017 | $— | $— | $— | $— | |||
| Total | $— | $— | $— | $— |
For the year ended October 31, 2016,
the funds had capital loss carryforwards utilized as follows:
| Schwab Target 2010 Fund | Schwab Target 2015 Fund | Schwab Target 2020 Fund | Schwab Target 2025 Fund | Schwab Target 2030 Fund | Schwab Target 2035 Fund | Schwab Target 2040 Fund | |
| Capital loss carryforwards utilized | $1,867,233 | $— | $— | $— | $— | $— | $— |
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Schwab Target Funds
Financial Notes (continued)
9. Federal Income
Taxes (continued):
| Schwab Target 2045 Fund | Schwab Target 2050 Fund | Schwab Target 2055 Fund | Schwab Target 2060 Fund | |
| Capital loss carryforwards utilized | $— | $— | $— | $— |
The tax-basis components of
distributions paid during the current and prior fiscal years were as follows:
| Schwab Target 2010 Fund | Schwab Target 2015 Fund | Schwab Target 2020 Fund | Schwab Target 2025 Fund | Schwab Target 2030 Fund | Schwab Target 2035 Fund | Schwab Target 2040 Fund | |
| Current period distributions | |||||||
| Ordinary income | $1,128,027 | $2,365,308 | $10,024,736 | $9,159,638 | $18,416,804 | $7,659,556 | $19,011,206 |
| Long-term capital gains | — | 5,051,306 | 18,650,147 | 17,845,703 | 48,704,710 | 17,812,485 | 57,371,095 |
| Prior period distributions | |||||||
| Ordinary income | $1,277,875 | $2,842,263 | $10,865,751 | $9,644,844 | $16,692,788 | $7,810,087 | $18,123,716 |
| Long-term capital gains | — | 4,404,370 | — | 9,175,384 | 9,243,382 | 9,125,690 | 16,937,962 |
| Schwab Target 2045 Fund | Schwab Target 2050 Fund | Schwab Target 2055 Fund | Schwab Target 2060 Fund | |
| Current period distributions | ||||
| Ordinary income | $1,239,407 | $1,001,880 | $539,934 | $— |
| Long-term capital gains | 2,410,714 | 1,983,116 | 1,092,479 | — |
| Prior period distributions | ||||
| Ordinary income | $1,032,882 | $830,660 | $449,182 | $— |
| Long-term capital gains | 569,067 | 451,787 | 247,620 | — |
Distributions paid to shareholders
are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences reflect the differing character of certain
income items and net realized gains and losses for financial statement and tax purposes, and may result in reclassification among certain capital accounts on the financial statements.
Permanent book and tax basis differences may result in
reclassifications between components of net assets as required. The adjustments will have no impact on net assets or the results of operations. As of October 31, 2016, the funds made the following reclassifications:
| Schwab Target 2010 Fund | Schwab Target 2015 Fund | Schwab Target 2020 Fund | Schwab Target 2025 Fund | Schwab Target 2030 Fund | Schwab Target 2035 Fund | Schwab Target 2040 Fund | |
| Capital shares | $— | $— | $— | $— | $— | $— | $— |
| Undistributed net investment income | 200,166 | 374,631 | 2,226,469 | 1,936,138 | 4,064,556 | 1,842,004 | 4,810,510 |
| Net realized capital gains (losses) | (200,166) | (374,631) | (2,226,469) | (1,936,138) | (4,064,556) | (1,842,004) | (4,810,510) |
| Schwab Target 2045 Fund | Schwab Target 2050 Fund | Schwab Target 2055 Fund | Schwab Target 2060 Fund | |
| Capital shares | $— | $— | $— | $— |
| Undistributed net investment income | 399,374 | 329,834 | 182,408 | — |
| Net realized capital gains (losses) | (399,374) | (329,834) | (182,408) | — |
As of October 31, 2016, management
has reviewed the tax positions for open periods (for federal purposes, three years from the date of filing and for state purposes, four years from the date of filing) as applicable to the funds, and has determined that no provision for income tax is
required in the funds’ financial statements. The funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period ended October 31, 2016, the funds did
not incur any interest or penalties.
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Schwab Target Funds
Financial Notes (continued)
10. Recent
Regulatory Development:
In October 2016, the SEC adopted
new rules and amended existing rules (together, final rules) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced
disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. Management is currently evaluating the impact that the adoption of the
amendments to Regulation S-X will have on the funds' financial statements and related disclosures.
11. Subsequent Events:
Management has determined there
are no subsequent events or transactions through the date the financial statements were issued that would have materially impacted the financial statements as presented.
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Schwab Target Funds
Report of
Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab Target 2010 Fund
Schwab Target 2015 Fund
Schwab Target 2020 Fund
Schwab Target 2025 Fund
Schwab Target 2030 Fund
Schwab Target 2035 Fund
Schwab Target 2040 Fund
Schwab Target 2045 Fund
Schwab Target 2050 Fund
Schwab Target 2055 Fund
Schwab Target 2060 Fund
Schwab Target 2010 Fund
Schwab Target 2015 Fund
Schwab Target 2020 Fund
Schwab Target 2025 Fund
Schwab Target 2030 Fund
Schwab Target 2035 Fund
Schwab Target 2040 Fund
Schwab Target 2045 Fund
Schwab Target 2050 Fund
Schwab Target 2055 Fund
Schwab Target 2060 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 Target 2010 Fund, Schwab
Target 2015 Fund, Schwab Target 2020 Fund, Schwab Target 2025 Fund, Schwab Target 2030 Fund, Schwab Target 2035 Fund, Schwab Target 2040 Fund, Schwab Target 2045 Fund, Schwab Target 2050 Fund, Schwab Target 2055 Fund and Schwab Target 2060 Fund
(eleven of the funds constituting Schwab Capital Trust, hereafter collectively referred to as the “Funds”) at October 31, 2016, the results of each of their operations for the period then ended, and the changes in each of their net
assets and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as
“financial statements”) are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation of securities and investments in the underlying funds at October 31, 2016 by correspondence with the custodian and transfer agent of the underlying funds, respectively,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 16, 2016
San Francisco, California
December 16, 2016
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Schwab Target Funds
Other Federal Tax
Information (unaudited)
For corporate shareholders, the following percentage of the
funds' dividend distributions paid during the fiscal year ended October 31, 2016, qualify for the corporate dividends received deduction:
| Percentage | |
| Schwab Target 2010 Fund | 21.70 |
| Schwab Target 2015 Fund | 19.57 |
| Schwab Target 2020 Fund | 27.33 |
| Schwab Target 2025 Fund | 27.88 |
| Schwab Target 2030 Fund | 31.65 |
| Schwab Target 2035 Fund | 34.37 |
| Schwab Target 2040 Fund | 36.95 |
| Schwab Target 2045 Fund | 42.48 |
| Schwab Target 2050 Fund | 43.61 |
| Schwab Target 2055 Fund | 44.99 |
| Schwab Target 2060 Fund | — |
For the fiscal year ended October
31, 2016, the funds designate the following amounts of the dividend distributions as qualified dividends for the purpose of the maximum rate under section 1(h)(11) of the Internal Revenue Code. Shareholders will be notified in January 2017 via IRS
form 1099 of the amounts for use in preparing their 2016 income tax return.
| Schwab Target 2010 Fund | $334,779 |
| Schwab Target 2015 Fund | 639,161 |
| Schwab Target 2020 Fund | 3,909,413 |
| Schwab Target 2025 Fund | 3,684,174 |
| Schwab Target 2030 Fund | 8,517,724 |
| Schwab Target 2035 Fund | 3,888,222 |
| Schwab Target 2040 Fund | 10,493,403 |
| Schwab Target 2045 Fund | 789,724 |
| Schwab Target 2050 Fund | 657,943 |
| Schwab Target 2055 Fund | 367,124 |
| Schwab Target 2060 Fund | — |
Under Section 852 (b)(3)(C) of the
Internal Revenue Code, certain funds hereby designate the following amounts as long-term capital gain dividends for the fiscal year ended October 31, 2016:
| Schwab Target 2010 Fund | $— |
| Schwab Target 2015 Fund | 5,051,306 |
| Schwab Target 2020 Fund | 18,650,147 |
| Schwab Target 2025 Fund | 17,845,703 |
| Schwab Target 2030 Fund | 48,704,710 |
| Schwab Target 2035 Fund | 17,812,485 |
| Schwab Target 2040 Fund | 57,371,095 |
| Schwab Target 2045 Fund | 2,410,714 |
| Schwab Target 2050 Fund | 1,983,116 |
| Schwab Target 2055 Fund | 1,092,479 |
| Schwab Target 2060 Fund | — |
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Schwab Target Funds
Investment Advisory
Agreement Approval
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Trustees and
Officers
The tables below give information about the trustees and
officers of Schwab Capital Trust, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic
Trust and Laudus Trust. The Fund Complex includes 108 funds.
The address for all trustees and officers is 211 Main Street,
San Francisco, CA 94105. You can find more information about the trustees and officers in the funds’ Statement of Additional Information, which is available free by calling 1-877-824-5615.
| Independent Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Robert
W. Burns 1959 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
Retired/Private Investor (Jan. 2009 – present). Formerly, Managing Director, Pacific Investment Management Company, LLC (PIMCO) and President, PIMCO Funds. | 108 | Director, PS Business Parks, Inc. (2005 – 2012) |
| John
F. Cogan 1947 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Fellow, The Hoover Institution at Stanford University (Oct. 1979 – present); Senior Fellow, Stanford Institute for Economic Policy Research (2000 – present); Professor of Public Policy, Stanford University (1994 – 2015). | 108 | Director, Gilead Sciences, Inc. (2005 – present) |
| Stephen
Timothy Kochis 1946 Trustee (Trustee of Schwab Strategic Trust since 2012; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2016) |
CEO and Owner, Kochis Global (wealth management consulting) (May 2012 – present); Chairman and CEO, Aspiriant, LLC (wealth management) (Jan. 2008 – Apr. 2012). | 108 | None |
| David
L. Mahoney 1954 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Private Investor. | 108 | Director,
Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) |
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Schwab Target Funds
| Independent Trustees (continued) | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Kiran
M. Patel 1948 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2011; Schwab Strategic Trust since 2016) |
Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services firm for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 108 | Director, KLA-Tencor Corporation (2008 – present) |
| Kimberly
S. Patmore 1956 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Consultant, Patmore Management Consulting (management consulting) (2008 – present). | 108 | None |
| Charles
A. Ruffel 1956 Trustee (Trustee of Schwab Strategic Trust since 2009; The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2015) |
Co-Chief Executive Officer, Kudu Investment Management, LLC (financial services) (Jan. 2015 – present); Partner, Kudu Advisors, LLC (financial services) (June 2008 – Jan. 2015); Advisor, Asset International, Inc. (publisher of financial services information) (Aug. 2008 – Jan. 2015). | 108 | None |
| Gerald
B. Smith 1950 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2000; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 108 | Director,
Eaton (2012 – present) Director and Chairman of the Audit Committee, Oneok Partners LP (2003 – 2013) Director, Oneok, Inc. (2009 – 2013) Lead Independent Director, Board of Cooper Industries (2002 – 2012) |
| Joseph
H. Wender 1944 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Laudus Trust since 2010; Schwab Strategic Trust since 2016) |
Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (Feb. 1998 – present). | 108 | Board
Member and Chairman of the Audit Committee, Ionis Pharmaceuticals (1994 – present) Lead Independent Director and Chair of Audit Committee, OUTFRONT Media Inc. (2014 – present) |
135
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Schwab Target Funds
| Interested Trustees | |||
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served1) |
Principal
Occupations During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by the Trustee |
Other Directorships |
| Walter
W. Bettinger II2 1960 Chairman and Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2008; Schwab Strategic Trust since 2009; Laudus Trust since 2010) |
Director, President and Chief Executive Officer, The Charles Schwab Corporation (Oct. 2008 – present); President and Chief Executive Officer (Oct. 2008 – present), Director (May 2008 – present), Charles Schwab & Co., Inc.; Director, Charles Schwab Bank (Apr. 2006 – present); and Director, Schwab Holdings, Inc. (May 2008 – present). | 108 | Director, The Charles Schwab Corporation (2008 – present) |
| Marie
A. Chandoha2 1961 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). | 108 | None |
| Joseph
R. Martinetto2 1962 Trustee (Trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2016) |
Senior Executive Vice President and Chief Financial Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (July 2015 – present); Executive Vice President and Chief Financial Officer of The Charles Schwab Corporation and Charles Schwab & Co., Inc. (May 2007 – July 2015); Director, Charles Schwab & Co., Inc. (May 2007 – present); Director (Apr. 2010 – present) and Chief Executive Officer (July 2013 – Apr. 2015), Charles Schwab Bank; Director, Executive Vice President and Chief Financial Officer, Schwab Holdings, Inc. (May 2007 – present). | 108 | None |
| Officers of the Trust | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| Marie
A. Chandoha 1961 President and Chief Executive Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2010) |
Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; Trustee (Jan. 2016 – present), President, Chief Executive Officer (Dec. 2010 – present), and Chief Investment Officer (Sept. 2010 – Oct. 2011), Schwab Funds, Laudus Funds and Schwab ETFs; Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Jan. 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (Mar. 2007 – Aug. 2010). |
| Mark
Fischer 1970 Treasurer and Chief Financial Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2013) |
Treasurer and Chief Financial Officer, Schwab Funds, Laudus Funds and Schwab ETFs (Jan. 2016 – present); Assistant Treasurer, Schwab Funds and Laudus Funds (Dec. 2013 – Dec. 2015), Schwab ETFs (Nov. 2013 – Dec. 2015); Vice President, Charles Schwab Investment Management, Inc. (Oct. 2013 – present); Executive Director, J.P. Morgan Investor Services (Apr. 2011 – Sept. 2013); Assistant Treasurer, Massachusetts Financial Service Investment Management (May 2005 – Mar. 2011). |
136
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Schwab Target Funds
| Officers of the Trust (continued) | |
| Name,
Year of Birth, and Position(s) with the trust (Terms of office, and length of Time Served3) |
Principal Occupations During the Past Five Years |
| George
Pereira 1964 Senior Vice President and Chief Operating Officer (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust and Schwab Annuity Portfolios since 2004; Laudus Trust since 2006; Schwab Strategic Trust since 2009) |
Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Senior Vice President and Chief Operating Officer (Jan. 2016 – present), Treasurer and Chief Financial Officer, Laudus Funds (June 2006 – Dec. 2015); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – Dec. 2015) and Schwab ETFs (Oct. 2009 – Dec. 2015); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (Apr. 2005 – present). |
| Omar
Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Equities and Multi-Asset Strategies, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Equities, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Head of the Portfolio Management Group and Vice President of Portfolio Management, Financial Engines, Inc. (May 2009 – Apr. 2011); Head of Quantitative Equity, ING Investment Management (July 2004 – Jan. 2009). |
| Brett
Wander 1961 Senior Vice President and Chief Investment Officer – Fixed Income (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (Apr. 2011 – present); Senior Vice President and Chief Investment Officer – Fixed Income, Schwab Funds, Laudus Funds and Schwab ETFs (June 2011 – present); Senior Managing Director, Global Head of Active Fixed-Income Strategies, State Street Global Advisors (Jan. 2008 – Oct. 2010); Director of Alpha Strategies Loomis, Sayles & Company (Apr. 2006 – Jan. 2008). |
| David
Lekich 1964 Chief Legal Officer and Secretary, Schwab Funds and Schwab ETFs Vice President and Assistant Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios, Schwab Strategic Trust and Laudus Trust since 2011) |
Senior Vice President (Sept. 2011 – present), Vice President (Mar. 2004 – Sept. 2011), Charles Schwab & Co., Inc.; Senior Vice President and Chief Counsel (Sept. 2011 – present), Vice President (Jan. 2011 – Sept. 2011), Charles Schwab Investment Management, Inc.; Secretary (Apr. 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (Apr. 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. |
| Catherine
MacGregor 1964 Vice President and Assistant Secretary, Schwab Funds and Schwab ETFs Chief Legal Officer, Vice President and Clerk, Laudus Funds (Officer of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital Trust, Schwab Annuity Portfolios and Laudus Trust since 2005; Schwab Strategic Trust since 2009) |
Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (Mar. 2007 – present), Laudus Funds; Vice President (Nov. 2005 – present) and Assistant Secretary (June 2007 – present), Schwab Funds; Vice President and Assistant Secretary, Schwab ETFs (Oct. 2009 – present). |
| 1 | Each Trustee shall hold office until the election and qualification of his or her successor, or until he or she dies, resigns or is removed. The retirement policy requires that each independent trustee retire by December 31 of the year in which the Trustee turns 74 or the Trustee’s twentieth year of service as an independent trustee on any trust in the Fund Complex, whichever occurs first. |
| 2 | Mr. Bettinger, Ms. Chandoha, and Mr. Martinetto are Interested Trustees because they own stock of The Charles Schwab Corporation, the parent company of the investment adviser. |
| 3 | The President, Treasurer and Secretary/Clerk hold office until their respective successors are chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. Each of the other officers serves at the pleasure of the Board. |
137
Schwab Target Funds | Annual Report
Schwab Target Funds
Glossary
138
Schwab Target Funds | Annual Report
Schwab Target Funds
139
Schwab Target Funds | Annual Report
Schwab Target Funds
140
Schwab Target Funds | Annual Report
Schwab Target Funds
141
Schwab Target Funds | Annual Report
Notes
Notes
Schwab Target Funds
Our straightforward
approach sets us apart.
As one of the nation’s largest asset managers, our
goal is to provide investors with a diverse selection of foundational products that aim to deliver consistent performance at a competitive cost. The list below shows all currently available Schwab Funds.
An investor should consider a fund’s investment
objectives, risks, charges and expenses carefully before investing or sending money. This and other important information can be found in the fund’s prospectus. Please call 1-877-824-5615 for a prospectus and brochure for any Schwab Fund.
Please read the prospectus carefully before you invest. This report must be preceded or accompanied by a current prospectus.
Proxy Voting Policies, Procedures and Results
A description of the proxy voting policies and procedures
used to determine how to vote proxies on behalf of the funds is available without charge, upon request, by visiting the Schwab Funds’ website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s
website at www.sec.gov, or by contacting Schwab Funds at 1-877-824-5615.
Information regarding how a fund voted proxies relating to
portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s
website at www.sec.gov.
| 1 | You could lose money by investing in a money market fund. All Schwab Money Funds with the exception of Schwab Variable Share Price Money Fund seek to preserve the value of your investment at $1.00 per share, but cannot guarantee they will do so. Effective October 14, 2016, all Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab Retirement Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury Obligations Money Fund and Schwab Government Money Market Portfolio may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The money market fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. |
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MFR33732-11
00186671
00186671
Table of Contents
Item 2: Code of Ethics.
| (a) | Registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer, and any other persons who perform a similar function, regardless of whether these individuals are employed by Registrant or a third party. |
| (c) | During the period covered by the report, no amendments were made to the provisions of this code of ethics. |
| (d) | During the period covered by the report, Registrant did not grant any waivers, including implicit waivers, from the provisions of this code of ethics. |
| (f)(1) | Registrant has filed this code of ethics as an exhibit pursuant to Item 12(a)(1) of Form N-CSR. |
Item 3: Audit Committee Financial Expert.
Registrant’s Board of Trustees has determined that Kiran M. Patel, Robert W. Burns and Kimberly S. Patmore, each currently serving on its audit, compliance and valuation committee, are each an “audit committee financial expert,” as such term is defined in Item 3 of Form N-CSR. Each member of Registrant’s audit, compliance and valuation committee is “independent” under the standards set forth in Item 3 of Form N-CSR.
The designation of each of Mr. Patel, Mr. Burns and Ms. Patmore as an “audit committee financial expert” pursuant to Item 3 of Form N-CSR does not (i) impose upon such individual any duties, obligations, or liability that are greater than the duties, obligations and liability imposed upon such individual as a member of Registrant’s audit, compliance and valuation committee or Board of Trustees in the absence of such designation; and (ii) affect the duties, obligations or liability of any other member of Registrant’s audit, compliance and valuation committee or Board of Trustees.
Item 4: Principal Accountant Fees and Services.
Registrant is composed of forty-nine series, as of October 31, 2016. Thirty-four series have a fiscal year-end of October 31, whose annual financial statements are reported in Item 1, three series have a fiscal year-end of December 31, eleven series have a fiscal year-end of March 31, and one series has a fiscal year-end of February 28. Principal accountant fees disclosed in Items 4(a)-(d) and 4(g) include fees billed for services rendered to the registrant’s series, based on their respective 2016 and 2015 fiscal years, as applicable.
The following table presents fees billed by the principal accountant in each of the last two fiscal years for the services rendered to the Funds:
Table of Contents
| (a) Audit Fees | (b)Audit-Related Fees1 | (c) Tax Fees2 | (d) All Other Fees3 | |||||||||||||||||||||||||||
| Fiscal Year 2016 |
Fiscal Year 2015 |
Fiscal Year 2016 |
Fiscal Year 2015 |
Fiscal Year 2016 |
Fiscal Year 2015 |
Fiscal Year 2016 |
Fiscal Year 2015 |
|||||||||||||||||||||||
| $ | 1,176,105 | $ | 1,275,248 | $ | 0 | $ | 0 | $ | 117,450 | $ | 126,645 | $ | 0 | $ | 11,487 | |||||||||||||||
| 1 | The nature of the services includes assurance and related services reasonably related to the performance of the audit of financial statements not included in Audit Fees. |
| 2 | The nature of the services includes tax compliance. |
| 3 | The nature of the services include agreed upon procedures relating to Charles Schwab Investment Management., Inc.’s, (“CSIM”) expenses for purposes of Section 15(c) of the Investment Company Act of 1940. |
| (e) (1) | Registrant’s audit, compliance and valuation committee does not have pre-approval policies and procedures as described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. |
| (2) | There were no services described in each of paragraphs (b) through (d) above (including services required to be approved by Registrant’s audit, compliance and valuation committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X) that were approved by Registrant’s audit, compliance and valuation committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. |
| (f) | Not applicable. |
| (g) | Below are the aggregate non-audit fees billed in each of the last two fiscal years by Registrant’s principal accountant for services rendered to Registrant, to Registrant’s investment adviser, and to any entity controlling, controlled by, or under common control with Registrant’s investment adviser that provides ongoing services to Registrant. |
2016: $117,450 2015: $138,132
| (h) | During the past fiscal year, all non-audit services provided by Registrant’s principal accountant to either Registrant’s investment adviser or to any entity controlling, controlled by, or under common control with Registrant’s investment adviser that provides ongoing services to Registrant were pre-approved. Included in the audit, compliance and valuation committee’s pre-approval was the review and consideration as to whether the provision of these non-audit services is compatible with maintaining the principal accountant’s independence. |
Item 5: Audit Committee of Listed Registrants.
Not applicable.
Table of Contents
Item 6: Schedule of Investments.
Except as noted below, the condensed schedules of investments are included as part of the report to shareholders filed under Item 1 of this Form. The schedules of investments for the Schwab Fundamental US Large Company Index Fund, Schwab Fundamental US Small Company Index Fund, Schwab Fundamental International Large Company Index Fund, Schwab Fundamental International Small Company Index Fund, Schwab Fundamental Emerging Markets Large Company Index Fund, Schwab S&P 500 Index Fund, Schwab Small-Cap Index Fund, Schwab Total Stock Market Index Fund and Schwab International Index Fund are filed under this Item.
Table of Contents
Schwab S&P 500 Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
1
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
2
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
3
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
4
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
5
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab S&P 500 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
At 10/31/16, the tax basis cost of the fund's investments was $13,154,263,315 and the unrealized appreciation and depreciation were $10,049,075,204 and ($563,136,035), respectively, with a net unrealized appreciation of $9,485,939,169.
| * | Non-income producing security. |
| (a) | Issuer is affiliated with the fund's investment adviser. |
| (b) | All or a portion of this security is on loan. Securities on loan were valued at $13,706,721. |
| (c) | The rate shown is the 7-day yield. |
| (d) | The rate shown is the current daily overnight rate. |
In addition to
the above, the fund held the following at 10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| S&P 500 Index, e-mini, Long, expires 12/16/16 | 1,300 | 137,806,500 | (951,893) | |||
6
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
7
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
8
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
9
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
10
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
11
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
12
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
13
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
14
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab 1000 Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
| Security | Number
of Shares |
Value ($) |
| Securities Lending Collateral 0.2% | ||
| Wells Fargo Government Money Market Fund, Select Class 0.32% (c) | 14,824,150 | 14,824,150 |
| Total Other Investment Companies | ||
| (Cost $37,801,743) | 37,801,743 | |
End of Investments.
At 10/31/16, the tax basis cost of the fund's investments was
$1,946,075,504 and the unrealized appreciation and depreciation were $4,517,631,042 and ($21,767,038), respectively, with a net unrealized appreciation of $4,495,864,004.
| * | Non-income producing security. |
| (a) | Issuer is affiliated with the fund's investment adviser. |
| (b) | All or a portion of this security is on loan. Securities on loan were valued at $14,532,147. |
| (c) | The rate shown is the 7-day yield. |
| REIT — | Real Estate Investment Trust |
In addition
to the above, the fund held the following at 10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Appreciation ($) | ||||
| Futures Contracts | ||||||
| S&P 500 Index, e-mini, Long, expires 12/16/16 | 280 | 29,681,400 | 1,633 | |||
15
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
16
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
17
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
18
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
19
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
20
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
21
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
22
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
23
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
24
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
25
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
26
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
27
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
28
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
29
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
30
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
31
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Small-Cap Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
At 10/31/16, the tax basis cost of the fund's investments was $2,131,133,184 and the unrealized appreciation and depreciation were $808,218,794 and ($245,459,896), respectively, with a net unrealized appreciation of $562,758,898.
| * | Non-income producing security. |
| (a) | Illiquid security. At the period end, the value of these amounted to $831,653 or 0.0% of net assets. |
| (b) | All or a portion of this security is on loan. Securities on loan were valued at $69,176,152. |
| (c) | The rate shown is the 7-day yield. |
| (e) | The rate shown is the current daily overnight rate. |
| (f) | Fair-valued by management in accordance with procedures approved by the Board of Trustees. |
| CVR — | Contingent Value Rights |
| REIT — | Real Estate Investment Trust |
In addition
to the above, the fund held the following at 10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| Russell 2000 Index, mini, Long, expires 12/16/16 | 195 | 23,191,350 | (607,492) | |||
32
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
33
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
34
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
35
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
36
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
37
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
38
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
39
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
40
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
41
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
42
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
43
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
44
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
45
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
46
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
47
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
48
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
49
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
50
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
51
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab Total Stock Market Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
| Security | Number
of Shares |
Value ($) |
| Other Investment Company 0.4% of net assets | ||
| Securities Lending Collateral 0.4% | ||
| Wells Fargo Government Money Market Fund, Select Class 0.32% (d) | 19,726,894 | 19,726,894 |
| Total Other Investment Company | ||
| (Cost $19,726,894) | 19,726,894 | |
| Security
Rate, Maturity Date |
Face
Amount ($) |
Value ($) |
| Short-Term Investment 0.5% of net assets | ||
| Time Deposit 0.5% | ||
| Sumitomo Mitsui Banking Corp. | ||
| 0.15%, 11/01/16 (e) | 21,277,491 | 21,277,491 |
| Total Short-Term Investment | ||
| (Cost $21,277,491) | 21,277,491 | |
End of Investments.
At 10/31/16, the tax basis cost of the fund's investments was
$3,163,837,603 and the unrealized appreciation and depreciation were $1,826,837,441 and ($127,275,257), respectively, with a net unrealized appreciation of $1,699,562,184.
| * | Non-income producing security. |
| (a) | Issuer is affiliated with the fund's investment adviser. |
| (b) | Illiquid security. At the period end, the value of these amounted to $73,410 or 0.0% of net assets. |
| (c) | All or a portion of this security is on loan. Securities on loan were valued at $19,150,544. |
| (d) | The rate shown is the 7-day yield. |
| (e) | The rate shown is the current daily overnight rate. |
| (f) | Fair-valued by management in accordance with procedures approved by the Board of Trustees. |
| CVR — | Contingent Value Rights |
| REIT — | Real Estate Investment Trust |
In addition
to the above, the fund held the following at 10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| Russell 2000 Index, mini, Long, expires 12/16/16 | 35 | 4,162,550 | (144,920) | |||
| S&P 500 Index, e-mini, Long, expires 12/16/16 | 205 | 21,731,025 | (247,030) | |||
| Net Unrealized Depreciation | (391,950) | |||||
52
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
53
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
54
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
55
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
56
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
57
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
58
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
59
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
60
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
61
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
62
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
63
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
64
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
65
Schwab Equity Index Funds | Annual Report
See financial notes
Schwab International Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
In addition to the above, the fund held the following at
10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| MSCI EAFE, e-mini, Long, expires 12/16/16 | 400 | 33,314,000 | (428,653) | |||
66
Schwab Equity Index Funds | Annual Report
See financial notes
Table of Contents
Schwab Fundamental US Large Company Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
1
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
2
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
3
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
4
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
5
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
6
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
At 10/31/16, the tax basis cost of the fund's investments was $3,731,287,989 and the unrealized appreciation and depreciation were $1,023,735,954 and ($186,708,548), respectively, with a net unrealized appreciation of $837,027,406.
| * | Non-income producing security. |
| (a) | All or a portion of this security is on loan. Securities on loan were valued at $8,591,040. |
| (b) | Issuer is affiliated with the fund's investment adviser. |
| (c) | The rate shown is the 7-day yield. |
In addition to the above, the
fund held the following at 10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| S&P 500 Index, e-mini, Long, expires 12/16/16 | 240 | 25,441,200 | (254,824) | |||
7
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
8
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
9
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
10
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
11
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
12
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
13
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
14
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental US Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
15
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
16
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
17
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
18
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
19
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
20
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
21
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
22
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
23
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
24
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
25
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
26
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
27
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
| ADR — | American Depositary Receipt |
| CDI — | CHESS Depositary Interest |
| CVA — | Dutch Certificate |
| Reg'd — | Registered |
| REIT — | Real Estate Investment Trust |
| RSP — | Risparmio (Convertible Savings Shares) |
| SDR — | Swedish Depositary Receipt |
In addition to
the above the fund held the following at 10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| MSCI EAFE, e-mini, Long, expires 12/16/16 | 85 | 7,079,225 | (159,730) | |||
28
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
29
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
30
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
31
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
32
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
33
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
34
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
35
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
36
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
37
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
38
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
39
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
40
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
41
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
42
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
43
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
44
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
45
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
46
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental International Small Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| MSCI EAFE, e-mini, Long, expires 12/16/16 | 80 | 6,662,800 | (50,330) | |||
47
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Portfolio Holdings as of October 31, 2016
This section shows all the securities in the fund's portfolio
and their values as of the report date.
The fund files
its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available on the SEC's website at www.sec.gov and may be viewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also makes available its complete schedule of portfolio holdings 15 to 20 days after calendar
quarters on the fund's website at www.csimfunds.com/schwabfunds_prospectus.
48
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
49
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
50
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
51
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
52
Schwab Fundamental Index Funds | Annual Report
See financial notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
53
Schwab Fundamental Index Funds | Annual
Report
See financial
notes
Schwab Fundamental Emerging Markets Large Company Index Fund
Portfolio Holdings as of October 31, 2016 (continued)
In addition to the above, the fund held the following at
10/31/16:
| Number
of Contracts |
Contract
Value ($) |
Unrealized
Depreciation ($) | ||||
| Futures Contracts | ||||||
| MSCI EMG MKT, e-mini, Long, expires 12/16/16 | 15 | 677,625 | (12,533) | |||
54
Schwab Fundamental Index Funds | Annual Report
See financial notes
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab S&P 500 Index Fund
Schwab Small-Cap Index Fund
Schwab Total Stock Market Index Fund
Schwab International Index Fund
Schwab Fundamental US Large Company Index Fund
Schwab Fundamental US Small Company Index Fund
Schwab Fundamental International Large Company Index Fund
Schwab Fundamental International Small Company Index Fund
Schwab Fundamental Emerging Markets Large Company Index Fund
In our opinion, the accompanying statements of assets and liabilities, including the condensed portfolio holdings, and the related statements of operations and of changes in net assets and the financial highlights (included in Item 1 of this Form N-CSR) and the portfolio holdings (included in Item 6 of this Form N-CSR) present fairly, in all material respects, the financial position of Schwab S&P 500 Index Fund, Schwab Small-Cap Index Fund, Schwab Total Stock Market Index Fund, Schwab International Index Fund, Schwab Fundamental US Large Company Index Fund, Schwab Fundamental US Small Company Index Fund, Schwab Fundamental International Large Company Index Fund, Schwab Fundamental International Small Company Index Fund and Schwab Fundamental Emerging Markets Large Company Index Fund (nine of the funds constituting Schwab Capital Trust, hereafter referred to as the “Funds”) at October 31, 2016, 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 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, financial highlights and portfolio holdings (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2016 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
December 16, 2016
Table of Contents
Item 7: Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8: Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9: Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10: Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11: Controls and Procedures.
| (a) | Based on their evaluation of Registrant’s disclosure controls and procedures, as of a date within 90 days of the filing date, Registrant’s Chief Executive Officer, Marie Chandoha and Registrant’s Chief Financial Officer, Mark Fischer, have concluded that Registrant’s disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to Registrant’s officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above. |
| (b) | During the second fiscal quarter of the period covered by this report, there have been no changes in Registrant’s internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, Registrant’s internal control over financial reporting. |
Item 12: Exhibits.
| (a) (1) | Registrant’s code of ethics (that is the subject of the disclosure required by Item 2(a)) is attached. | |
| (2) | Separate certifications for Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached. | |
| (3) | Not applicable. | |
Table of Contents
| (b) | A certification for Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(b) under the 1940 Act, is attached. This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the Form N-CSR with the Commission. |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Schwab Capital Trust
| By: | /s/ Marie Chandoha | |
| Marie Chandoha Chief Executive Officer | ||
| Date: |
12/14/16 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Marie Chandoha | |
| Marie Chandoha Chief Executive Officer | ||
| Date: |
12/14/16 | |
| By: | /s/ Mark Fischer | |
| Mark Fischer Chief Financial Officer | ||
| Date: |
12/14/16 | |