UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-08314
Schwab Annuity Portfolios
(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 Annuity Portfolios
211 Main Street, San Francisco, California 94105
(Name and address of agent for service)
Schwab Annuity Portfolios
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: December 31
Date of reporting period: December 31, 2014
Item 1: | Report(s) to Shareholders. |
Schwab S&P 500 Index Portfolio | |||||
Annual report dated December 31, 2014 |
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 Fund’s website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s website at www.sec.gov.
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 Charles Schwab & Co., Inc. The Industry classifications used in the schedules of Portfolio Holdings are sub-categories of Sector classifications.
Investment Adviser: Charles Schwab Investment Management, Inc. (CSIM)
The Investment Environment
The S&P 500 Index repeatedly reached record highs during the 12-month reporting period ended December 31, 2014, and returned 13.7%. Short-term interest rates remained low, capital expenditures by companies rose, corporate earnings generally grew, and U.S. economic growth continued after an uncertain first quarter. These factors supported stocks, even as market volatility and geopolitical tensions rose and the Federal Reserve ended its efforts to hold down long-term interest rates. The Utilities and Health Care sectors were the best performers within the S&P 500 Index, while the Telecommunication Services sector generated a narrowly positive return, and Energy was the only sector to produce a negative return.
Asset Class Performance Comparison % returns during the 12 months ended 12/31/2014
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
13.69% | S&P 500® Index: measures U.S. large-cap stocks | |||
4.89% | Russell 2000® Index: measures U.S. small-cap stocks | |||
−4.90% | MSCI EAFE® Index (Net): measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East | |||
5.97% | Barclays U.S. Aggregate Bond Index: measures the U.S. bond market | |||
0.02% | Barclays U.S. Treasury Bills 1-3 Months Index: measures short-term U.S. Treasury obligations |
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.
Index figures assume dividends and distributions were reinvested, and do not include trading and management costs, which would lower performance. Indices are unmanaged, do not incur management fees, costs and expenses, and you cannot invest in them directly. Remember that past performance is not a guarantee of future results.
Schwab S&P 500 Index Portfolio 1
Portfolio Management
Agnes Hong, CFA, Managing Director and Head of Passive Equity Strategies, leads the portfolio management teams of Schwab’s index mutual funds and equity ETFs. She also has overall responsibility for all aspects of the management of the portfolio. 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 portfolio. Prior to joining CSIM in 2010, Mr. Juwono worked at BlackRock (formerly Barclays Global Investors), where he spent over 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 over four years as a senior financial analyst with Union Bank of California. |
2 Schwab S&P 500 Index Portfolio
Schwab S&P 500 Index Portfolio
The Schwab S&P 500 Index Portfolio (the portfolio) seeks to track the total return of the S&P 500® Index (the index), which includes the stocks of the 500 leading U.S. publicly traded companies from a broad range of industries. To pursue its investment objective, the portfolio uses a replication investment approach and generally gives the same weight to a given stock as does the index. For more information concerning the portfolio’s investment objective, strategy, and risks, please see the portfolio’s prospectus.
Performance. The portfolio returned 13.41% for the 12-month reporting period ended December 31, 2014, compared with the index, which returned 13.69%. Differences between the return of the portfolio and the return of the index may be attributable to, among other things, the operational and transactional costs incurred by the portfolio and not the index.
Market Highlights. U.S. stocks produced double-digit returns for the 12-month reporting period, with large-cap stocks outperforming small-cap stocks. Despite an uncertain global economic outlook during the reporting period, the U.S. economy rebounded, with declining gas prices boosting consumer spending and aiding U.S. growth. In October, the Federal Reserve concluded measured efforts to hold down long-term interest rates, while at the same time, leaving short-term interest rates historically low. These low rates contributed to more affordable financing for businesses and households and generally supported stocks.
Contributors and Detractors. For the 12-month reporting period, the Information Technology sector contributed the most to the index’s return, and to the return of the portfolio. The large average weight of this sector was part of the reason for this contribution, with Information Technology stocks representing approximately 19% of the portfolio. The Information Technology sector returned approximately 20% for the 12-month reporting period, reflecting the overall performance of companies involved in Internet and software services. One example from this sector is Apple, Inc., a company that designs, manufactures, and markets personal computers and related computing, mobile communication, and media devices, as well as a variety of related software and services. The portfolio’s holdings of Apple, Inc. represented the portfolio’s largest position within this sector and returned approximately 41%. The Health Care sector was another significant contributor to the portfolio’s overall performance, representing an average weight of approximately 14% and returning approximately 25% for the reporting period.
The Energy sector was the only detractor from the returns of both the index and the portfolio. The Energy sector represented an average weight of approximately 10% of the portfolio and returned approximately –8% for the 12-month reporting period, reflecting the overall performance of companies engaged in exploration and production, refining and marketing, and storage and transportation of oil, gas, coal and consumable fuels, as well as companies that offer oil and gas equipment and services. One example from this sector is Exxon Mobil Corp., a company that explores, develops and distributes crude oil and natural gas. The portfolio’s holdings of Exxon Mobil Corp. returned approximately –6%. Though the Telecommunication Services sector generated positive returns, it was the weakest contributor to the performance of the portfolio. The Telecommunication Services sector represented an average weight of approximately 3% and returned approximately 3% for the 12-month reporting period.
As of 12/31/14:
Statistics
Number of Holdings | 506 | |||
Weighted Average Market Cap ($ x 1,000,000) | $131,869 | |||
Price/Earnings Ratio (P/E) | 19.9 | |||
Price/Book Ratio (P/B) | 2.7 | |||
Portfolio Turnover Rate | 2% |
Sector Weightings % of Investments
Information Technology | 19.5% | |||
Financials | 16.5% | |||
Health Care | 14.1% | |||
Consumer Discretionary | 12.0% | |||
Industrials | 10.3% | |||
Consumer Staples | 9.7% | |||
Energy | 8.4% | |||
Utilities | 3.2% | |||
Materials | 3.1% | |||
Telecommunication Services | 2.3% | |||
Other | 0.9% | |||
Total | 100.0% |
Top Equity Holdings % of Net Assets1
Apple, Inc. | 3.5% | |||
Exxon Mobile Corp. | 2.1% | |||
Microsoft Corp. | 2.1% | |||
Johnson & Johnson | 1.6% | |||
Berkshire Hathaway, Inc., Class B | 1.5% | |||
Wells Fargo & Co. | 1.4% | |||
General Electric Co. | 1.4% | |||
The Procter & Gamble Co. | 1.3% | |||
JPMorgan Chase & Co. | 1.3% | |||
Chevron Corp. | 1.2% | |||
Total | 17.4% |
Management views and portfolio holdings may have changed since the report date.
Source of Sector Classification: S&P and MSCI.
Standard & Poor’s® S&P®, S&P 500®, Standard & Poor’s 500® and 500® are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by the portfolio. The portfolio is not sponsored, endorsed, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in the portfolio.
1 | This list is not a recommendation of any security by the investment adviser. |
Schwab S&P 500 Index Portfolio 3
Schwab S&P 500 Index Portfolio
Performance and Fund Facts as of 12/31/14
The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabfunds_prospectus.
December 31, 2004 – December 31, 2014
Performance of Hypothetical
$10,000 Investment2
Performance of Hypothetical
$10,000 Investment2
Average Annual Total Returns1,2
Portfolio and inception Date | 1 Year | 5 Years | 10 Years | ||||||||||||
Portfolio: Schwab S&P 500 Index Portfolio (11/01/96) | 13.41 | % | 15.16 | % | 7.54 | % | |||||||||
S&P 500® Index | 13.69 | % | 15.45 | % | 7.67 | % | |||||||||
Fund Category: Morningstar Large-Cap Blend | 10.96 | % | 13.88 | % | 7.02 | % |
Portfolio Expense Ratio3: 0.24%;
All total return figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.
1 | 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 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. Portfolio performance does not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the performance would be less than that shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. | |
3 | As stated in the prospectus. Reflects the total annual operating expenses without contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
4 Schwab S&P 500 Index Portfolio
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
The portfolio incurs ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning July 1, 2014 and held through December 31, 2014.
The Actual Return line in the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ¸ $1,000 = 8.6), then multiply the result by the number given for the portfolio under the heading entitled “Expenses Paid During Period.”
The Hypothetical Return line in the table below provides information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs.
Ending | ||||||||||||||||
Beginning | Account Value | Expenses Paid | ||||||||||||||
Expense Ratio1 | Account Value | (Net of Expenses) | During Period2 | |||||||||||||
(Annualized) | at 7/1/14 | at 12/31/14 | 7/1/14–12/31/14 | |||||||||||||
Schwab S&P 500 Index Portfolio | ||||||||||||||||
Actual Return | 0.23% | $ | 1,000.00 | $ | 1,060.00 | $ | 1.19 | |||||||||
Hypothetical 5% Return | 0.23% | $ | 1,000.00 | $ | 1,024.04 | $ | 1.17 |
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. | |
2 | Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year. |
Schwab S&P 500 Index Portfolio 5
Schwab S&P 500 Index Portfolio
Financial Statements
Financial Highlights
1/1/14– | 1/1/13– | 1/1/12– | 1/1/11– | 1/1/10– | ||||||||||||||||||
12/31/14 | 12/31/13 | 12/31/12 | 12/31/11 | 12/31/10 | ||||||||||||||||||
Per-Share Data ($) | ||||||||||||||||||||||
Net asset value at beginning of period | 27.03 | 20.82 | 18.30 | 18.27 | 16.24 | |||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||
Net investment income (loss) | 0.48 | 0.42 | 0.41 | 0.34 | 0.38 | |||||||||||||||||
Net realized and unrealized gains (losses) | 3.12 | 6.19 | 2.45 | 0.02 | 1 | 2.00 | ||||||||||||||||
Total from investment operations | 3.60 | 6.61 | 2.86 | 0.36 | 2.38 | |||||||||||||||||
Less distributions: | ||||||||||||||||||||||
Distributions from net investment income | (0.42 | ) | (0.40 | ) | (0.34 | ) | (0.33 | ) | (0.35 | ) | ||||||||||||
Net asset value at end of period | 30.21 | 27.03 | 20.82 | 18.30 | 18.27 | |||||||||||||||||
Total return (%) | 13.41 | 32.06 | 15.74 | 1.89 | 14.68 | |||||||||||||||||
Ratios/Supplemental Data (%) | ||||||||||||||||||||||
Ratios to average net assets: | ||||||||||||||||||||||
Net operating expenses | 0.22 | 0.24 | 0.28 | 0.27 | 0.28 | |||||||||||||||||
Gross operating expenses | 0.23 | 0.26 | 0.29 | 0.28 | 0.30 | |||||||||||||||||
Net investment income (loss) | 1.79 | 1.84 | 2.03 | 1.82 | 1.79 | |||||||||||||||||
Portfolio turnover rate | 2 | 2 | 4 | 4 | 3 | |||||||||||||||||
Net assets, end of period ($ x 1,000,000) | 229 | 193 | 139 | 122 | 123 |
1 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.
6 See financial notes
Schwab S&P 500 Index Portfolio
Portfolio Holdings as of December 31, 2014
This section shows all the securities in the fund’s portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus.
Cost | Value | |||||||||||
Holdings by Category | ($) | ($) | ||||||||||
99 | .0% | Common Stock | 108,402,989 | 227,119,146 | ||||||||
0 | .1% | Other Investment Companies | 150,927 | 150,927 | ||||||||
0 | .8% | Short-Term Investments | 1,858,571 | 1,858,574 | ||||||||
99 | .9% | Total Investments | 110,412,487 | 229,128,647 | ||||||||
0 | .1% | Other Assets and Liabilities, Net | 343,867 | |||||||||
100 | .0% | Net Assets | 229,472,514 |
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Common Stock 99.0% of net assets | ||||||||
Automobiles & Components 1.1% | ||||||||
BorgWarner, Inc. | 2,800 | 153,860 | ||||||
Delphi Automotive plc | 3,858 | 280,554 | ||||||
Ford Motor Co. | 47,884 | 742,202 | ||||||
General Motors Co. | 16,995 | 593,295 | ||||||
Harley-Davidson, Inc. | 2,602 | 171,498 | ||||||
Johnson Controls, Inc. | 8,194 | 396,098 | ||||||
The Goodyear Tire & Rubber Co. | 3,262 | 93,195 | ||||||
2,430,702 | ||||||||
Banks 6.0% | ||||||||
Bank of America Corp. | 131,564 | 2,353,680 | ||||||
BB&T Corp. | 8,792 | 341,921 | ||||||
Citigroup, Inc. | 37,238 | 2,014,948 | ||||||
Comerica, Inc. | 2,130 | 99,769 | ||||||
Fifth Third Bancorp | 10,405 | 212,002 | ||||||
Hudson City Bancorp, Inc. | 6,250 | 63,250 | ||||||
Huntington Bancshares, Inc. | 10,456 | 109,997 | ||||||
JPMorgan Chase & Co. | 46,817 | 2,929,808 | ||||||
KeyCorp | 10,300 | 143,170 | ||||||
M&T Bank Corp. | 1,571 | 197,349 | ||||||
People’s United Financial, Inc. | 3,700 | 56,166 | ||||||
Regions Financial Corp. | 17,127 | 180,861 | ||||||
SunTrust Banks, Inc. | 6,600 | 276,540 | ||||||
The PNC Financial Services Group, Inc. | 6,620 | 603,943 | ||||||
U.S. Bancorp | 22,154 | 995,822 | ||||||
Wells Fargo & Co. | 59,215 | 3,246,167 | ||||||
Zions Bancorp | 2,408 | 68,652 | ||||||
13,894,045 | ||||||||
Capital Goods 7.5% | ||||||||
3M Co. | 7,951 | 1,306,508 | ||||||
Allegion plc | 1,233 | 68,382 | ||||||
AMETEK, Inc. | 3,009 | 158,364 | ||||||
Caterpillar, Inc. | 7,731 | 707,618 | ||||||
Cummins, Inc. | 2,079 | 299,729 | ||||||
Danaher Corp. | 7,507 | 643,425 | ||||||
Deere & Co. | 4,561 | 403,512 | ||||||
Dover Corp. | 2,000 | 143,440 | ||||||
Eaton Corp. plc | 5,834 | 396,479 | ||||||
Emerson Electric Co. | 8,511 | 525,384 | ||||||
Fastenal Co. | 3,452 | 164,177 | ||||||
Flowserve Corp. | 1,700 | 101,711 | ||||||
Fluor Corp. | 1,900 | 115,197 | ||||||
General Dynamics Corp. | 3,910 | 538,094 | ||||||
General Electric Co. | 125,843 | 3,180,053 | ||||||
Honeywell International, Inc. | 9,569 | 956,135 | ||||||
Illinois Tool Works, Inc. | 4,444 | 420,847 | ||||||
Ingersoll-Rand plc | 3,300 | 209,187 | ||||||
Jacobs Engineering Group, Inc. * | 1,583 | 70,744 | ||||||
Joy Global, Inc. | 1,300 | 60,476 | ||||||
L-3 Communications Holdings, Inc. | 1,100 | 138,831 | ||||||
Lockheed Martin Corp. | 3,330 | 641,258 | ||||||
Masco Corp. | 4,348 | 109,570 | ||||||
Northrop Grumman Corp. | 2,554 | 376,434 | ||||||
PACCAR, Inc. | 4,630 | 314,886 | ||||||
Pall Corp. | 1,325 | 134,103 | ||||||
Parker Hannifin Corp. | 1,835 | 236,623 | ||||||
Pentair plc | 2,399 | 159,342 | ||||||
Precision Castparts Corp. | 1,800 | 433,584 | ||||||
Quanta Services, Inc. * | 2,597 | 73,729 | ||||||
Raytheon Co. | 3,813 | 412,452 | ||||||
Rockwell Automation, Inc. | 1,685 | 187,372 | ||||||
Rockwell Collins, Inc. | 1,600 | 135,168 | ||||||
Roper Industries, Inc. | 1,279 | 199,972 | ||||||
Snap-on, Inc. | 688 | 94,077 | ||||||
Stanley Black & Decker, Inc. | 1,923 | 184,762 | ||||||
Textron, Inc. | 3,674 | 154,712 | ||||||
The Boeing Co. | 8,194 | 1,065,056 | ||||||
United Rentals, Inc. * | 1,200 | 122,412 | ||||||
United Technologies Corp. | 10,467 | 1,203,705 | ||||||
W.W. Grainger, Inc. | 742 | 189,128 | ||||||
Xylem, Inc. | 2,295 | 87,371 | ||||||
17,124,009 | ||||||||
Commercial & Professional Supplies 0.6% | ||||||||
Cintas Corp. | 1,157 | 90,755 | ||||||
Equifax, Inc. | 1,442 | 116,614 | ||||||
Nielsen N.V. | 3,883 | 173,687 | ||||||
Pitney Bowes, Inc. | 2,300 | 56,051 | ||||||
Republic Services, Inc. | 3,136 | 126,224 | ||||||
Robert Half International, Inc. | 1,750 | 102,165 | ||||||
Stericycle, Inc. * | 1,000 | 131,080 | ||||||
The ADT Corp. | 2,300 | 83,329 | ||||||
The Dun & Bradstreet Corp. | 500 | 60,480 | ||||||
Tyco International plc | 5,313 | 233,028 | ||||||
Waste Management, Inc. | 5,355 | 274,819 | ||||||
1,448,232 |
See financial notes 7
Schwab S&P 500 Index Portfolio
Portfolio Holdings continued
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Consumer Durables & Apparel 1.4% | ||||||||
Coach, Inc. | 3,394 | 127,479 | ||||||
D.R. Horton, Inc. | 3,922 | 99,187 | ||||||
Fossil Group, Inc. * | 600 | 66,444 | ||||||
Garmin Ltd. | 1,500 | 79,245 | ||||||
Harman International Industries, Inc. | 800 | 85,368 | ||||||
Hasbro, Inc. | 1,475 | 81,110 | ||||||
Leggett & Platt, Inc. | 1,600 | 68,176 | ||||||
Lennar Corp., Class A | 2,300 | 103,063 | ||||||
Mattel, Inc. | 4,300 | 133,063 | ||||||
Michael Kors Holdings Ltd. * | 2,500 | 187,750 | ||||||
Mohawk Industries, Inc. * | 800 | 124,288 | ||||||
Newell Rubbermaid, Inc. | 3,424 | 130,420 | ||||||
NIKE, Inc., Class B | 8,657 | 832,371 | ||||||
PulteGroup, Inc. | 4,442 | 95,325 | ||||||
PVH Corp. | 986 | 126,376 | ||||||
Ralph Lauren Corp. | 842 | 155,905 | ||||||
Under Armour, Inc., Class A * | 2,052 | 139,331 | ||||||
VF Corp. | 4,240 | 317,576 | ||||||
Whirlpool Corp. | 933 | 180,759 | ||||||
3,133,236 | ||||||||
Consumer Services 1.7% | ||||||||
Carnival Corp. | 5,622 | 254,845 | ||||||
Chipotle Mexican Grill, Inc. * | 376 | 257,376 | ||||||
Darden Restaurants, Inc. | 1,591 | 93,280 | ||||||
H&R Block, Inc. | 3,338 | 112,424 | ||||||
Marriott International, Inc., Class A | 2,657 | 207,326 | ||||||
McDonald’s Corp. | 11,982 | 1,122,714 | ||||||
Royal Caribbean Cruises Ltd. | 2,000 | 164,860 | ||||||
Starbucks Corp. | 9,168 | 752,234 | ||||||
Starwood Hotels & Resorts Worldwide, Inc. | 2,340 | 189,704 | ||||||
Wyndham Worldwide Corp. | 1,580 | 135,501 | ||||||
Wynn Resorts Ltd. | 1,057 | 157,239 | ||||||
Yum! Brands, Inc. | 5,400 | 393,390 | ||||||
3,840,893 | ||||||||
Diversified Financials 5.2% | ||||||||
Affiliated Managers Group, Inc. * | 700 | 148,568 | ||||||
American Express Co. | 11,072 | 1,030,139 | ||||||
Ameriprise Financial, Inc. | 2,263 | 299,282 | ||||||
Berkshire Hathaway, Inc., Class B * | 22,834 | 3,428,525 | ||||||
BlackRock, Inc. | 1,650 | 589,974 | ||||||
Capital One Financial Corp. | 6,880 | 567,944 | ||||||
CME Group, Inc. | 3,831 | 339,618 | ||||||
Discover Financial Services | 5,690 | 372,638 | ||||||
E*TRADE Financial Corp. * | 3,576 | 86,736 | ||||||
Franklin Resources, Inc. | 4,900 | 271,313 | ||||||
Intercontinental Exchange, Inc. | 1,459 | 319,944 | ||||||
Invesco Ltd. | 5,204 | 205,662 | ||||||
Legg Mason, Inc. | 1,300 | �� | 69,381 | |||||
Leucadia National Corp. | 3,939 | 88,312 | ||||||
McGraw Hill Financial, Inc. | 3,330 | 296,304 | ||||||
Moody’s Corp. | 2,223 | 212,986 | ||||||
Morgan Stanley | 18,699 | 725,521 | ||||||
Navient Corp. | 5,000 | 108,050 | ||||||
Northern Trust Corp. | 2,631 | 177,329 | ||||||
State Street Corp. | 5,200 | 408,200 | ||||||
T. Rowe Price Group, Inc. | 3,223 | 276,727 | ||||||
The Bank of New York Mellon Corp. | 13,778 | 558,974 | ||||||
The Charles Schwab Corp. (a) | 14,049 | 424,139 | ||||||
The Goldman Sachs Group, Inc. | 5,022 | 973,414 | ||||||
The NASDAQ OMX Group, Inc. | 1,400 | 67,144 | ||||||
12,046,824 | ||||||||
Energy 8.3% | ||||||||
Anadarko Petroleum Corp. | 6,383 | 526,598 | ||||||
Apache Corp. | 4,708 | 295,050 | ||||||
Baker Hughes, Inc. | 5,363 | 300,703 | ||||||
Cabot Oil & Gas Corp. | 5,120 | 151,603 | ||||||
Cameron International Corp. * | 2,413 | 120,529 | ||||||
Chesapeake Energy Corp. | 6,356 | 124,387 | ||||||
Chevron Corp. | 23,617 | 2,649,355 | ||||||
Cimarex Energy Co. | 1,151 | 122,006 | ||||||
ConocoPhillips | 15,105 | 1,043,151 | ||||||
CONSOL Energy, Inc. | 2,719 | 91,929 | ||||||
Denbury Resources, Inc. | 4,300 | 34,959 | ||||||
Devon Energy Corp. | 4,732 | 289,646 | ||||||
Diamond Offshore Drilling, Inc. (b) | 800 | 29,368 | ||||||
Ensco plc, Class A | 3,000 | 89,850 | ||||||
EOG Resources, Inc. | 6,875 | 632,981 | ||||||
EQT Corp. | 1,900 | 143,830 | ||||||
Exxon Mobil Corp. | 52,779 | 4,879,419 | ||||||
FMC Technologies, Inc. * | 3,246 | 152,043 | ||||||
Halliburton Co. | 10,395 | 408,835 | ||||||
Helmerich & Payne, Inc. | 1,300 | 87,646 | ||||||
Hess Corp. | 3,133 | 231,278 | ||||||
Kinder Morgan, Inc. | 21,200 | 896,972 | ||||||
Marathon Oil Corp. | 8,768 | 248,047 | ||||||
Marathon Petroleum Corp. | 3,432 | 309,772 | ||||||
Murphy Oil Corp. | 2,032 | 102,657 | ||||||
Nabors Industries Ltd. | 3,660 | 47,507 | ||||||
National Oilwell Varco, Inc. | 5,381 | 352,617 | ||||||
Newfield Exploration Co. * | 1,641 | 44,504 | ||||||
Noble Corp., plc | 2,900 | 48,053 | ||||||
Noble Energy, Inc. | 4,612 | 218,747 | ||||||
Occidental Petroleum Corp. | 9,597 | 773,614 | ||||||
ONEOK, Inc. | 2,600 | 129,454 | ||||||
Phillips 66 | 6,958 | 498,889 | ||||||
Pioneer Natural Resources Co. | 1,885 | 280,582 | ||||||
QEP Resources, Inc. | 1,904 | 38,499 | ||||||
Range Resources Corp. | 2,014 | 107,648 | ||||||
Schlumberger Ltd. | 15,924 | 1,360,069 | ||||||
Southwestern Energy Co. * | 4,473 | 122,068 | ||||||
Spectra Energy Corp. | 8,348 | 303,032 | ||||||
Tesoro Petroleum Corp. | 1,500 | 111,525 | ||||||
The Williams Cos., Inc. | 8,490 | 381,541 | ||||||
Transocean Ltd. (b) | 4,024 | 73,760 | ||||||
Valero Energy Corp. | 6,465 | 320,018 | ||||||
19,174,741 | ||||||||
Food & Staples Retailing 2.5% | ||||||||
Costco Wholesale Corp. | 5,575 | 790,256 | ||||||
CVS Health Corp. | 14,219 | 1,369,432 | ||||||
Safeway, Inc. | 2,740 | 96,229 | ||||||
Sysco Corp. | 7,764 | 308,153 |
8 See financial notes
Schwab S&P 500 Index Portfolio
Portfolio Holdings continued
Number | Value | |||||||
Security | of Shares | ($) | ||||||
The Kroger Co. | 6,455 | 414,476 | ||||||
Wal-Mart Stores, Inc. | 19,382 | 1,664,526 | ||||||
Walgreens Boots Alliance, Inc. | 10,754 | 819,455 | ||||||
Whole Foods Market, Inc. | 4,500 | 226,890 | ||||||
5,689,417 | ||||||||
Food, Beverage & Tobacco 5.1% | ||||||||
Altria Group, Inc. | 24,206 | 1,192,630 | ||||||
Archer-Daniels-Midland Co. | 7,935 | 412,620 | ||||||
Brown-Forman Corp., Class B | 1,927 | 169,268 | ||||||
Campbell Soup Co. | 2,245 | 98,780 | ||||||
Coca-Cola Enterprises, Inc. | 2,700 | 119,394 | ||||||
ConAgra Foods, Inc. | 5,278 | 191,486 | ||||||
Constellation Brands, Inc., Class A * | 2,020 | 198,303 | ||||||
Dr Pepper Snapple Group, Inc. | 2,500 | 179,200 | ||||||
General Mills, Inc. | 7,458 | 397,735 | ||||||
Hormel Foods Corp. | 1,704 | 88,778 | ||||||
Kellogg Co. | 3,200 | 209,408 | ||||||
Keurig Green Mountain, Inc. | 1,500 | 198,592 | ||||||
Kraft Foods Group, Inc. | 7,236 | 453,408 | ||||||
Lorillard, Inc. | 4,508 | 283,733 | ||||||
McCormick & Co., Inc. - Non Voting Shares | 1,500 | 111,450 | ||||||
Mead Johnson Nutrition Co. | 2,500 | 251,350 | ||||||
Molson Coors Brewing Co., Class B | 1,978 | 147,401 | ||||||
Mondelez International, Inc., Class A | 20,696 | 751,782 | ||||||
Monster Beverage Corp. * | 1,800 | 195,030 | ||||||
PepsiCo, Inc. | 18,500 | 1,749,360 | ||||||
Philip Morris International, Inc. | 19,564 | 1,593,488 | ||||||
Reynolds American, Inc. | 3,878 | 249,239 | ||||||
The Coca-Cola Co. | 49,294 | 2,081,193 | ||||||
The Hershey Co. | 1,844 | 191,647 | ||||||
The JM Smucker Co. | 1,246 | 125,821 | ||||||
Tyson Foods, Inc., Class A | 3,808 | 152,663 | ||||||
11,793,759 | ||||||||
Health Care Equipment & Services 4.6% | ||||||||
Abbott Laboratories | 18,407 | 828,683 | ||||||
Aetna, Inc. | 4,382 | 389,253 | ||||||
AmerisourceBergen Corp. | 2,660 | 239,826 | ||||||
Anthem, Inc. | 3,336 | 419,235 | ||||||
Baxter International, Inc. | 6,927 | 507,680 | ||||||
Becton, Dickinson & Co. | 2,385 | 331,897 | ||||||
Boston Scientific Corp. * | 16,177 | 214,345 | ||||||
C.R. Bard, Inc. | 920 | 153,290 | ||||||
Cardinal Health, Inc. | 4,074 | 328,894 | ||||||
CareFusion Corp. * | 2,606 | 154,640 | ||||||
Cerner Corp. * | 3,800 | 245,708 | ||||||
Cigna Corp. | 3,191 | 328,386 | ||||||
Covidien plc | 5,679 | 580,848 | ||||||
DaVita HealthCare Partners, Inc. * | 2,230 | 168,900 | ||||||
DENTSPLY International, Inc. | 1,800 | 95,886 | ||||||
Edwards Lifesciences Corp. * | 1,303 | 165,976 | ||||||
Express Scripts Holding Co. * | 9,137 | 773,630 | ||||||
Humana, Inc. | 1,880 | 270,024 | ||||||
Intuitive Surgical, Inc. * | 441 | 233,263 | ||||||
Laboratory Corp. of America Holdings * | 1,004 | 108,332 | ||||||
McKesson Corp. | 2,870 | 595,755 | ||||||
Medtronic, Inc. | 12,387 | 894,341 | ||||||
Patterson Cos., Inc. | 980 | 47,138 | ||||||
Quest Diagnostics, Inc. | 1,760 | 118,026 | ||||||
St. Jude Medical, Inc. | 3,478 | 226,174 | ||||||
Stryker Corp. | 4,007 | 377,980 | ||||||
Tenet Healthcare Corp. * | 1,125 | 57,004 | ||||||
UnitedHealth Group, Inc. | 11,881 | 1,201,050 | ||||||
Universal Health Services, Inc., Class B | 1,100 | 122,386 | ||||||
Varian Medical Systems, Inc. * | 1,200 | 103,812 | ||||||
Zimmer Holdings, Inc. | 2,083 | 236,254 | ||||||
10,518,616 | ||||||||
Household & Personal Products 2.1% | ||||||||
Avon Products, Inc. | 4,916 | 46,161 | ||||||
Colgate-Palmolive Co. | 10,478 | 724,973 | ||||||
Kimberly-Clark Corp. | 4,553 | 526,053 | ||||||
The Clorox Co. | 1,600 | 166,736 | ||||||
The Estee Lauder Cos., Inc., Class A | 2,700 | 205,740 | ||||||
The Procter & Gamble Co. | 33,930 | 3,090,684 | ||||||
4,760,347 | ||||||||
Insurance 2.8% | ||||||||
ACE Ltd. | 4,097 | 470,663 | ||||||
Aflac, Inc. | 5,663 | 345,953 | ||||||
American International Group, Inc. | 17,565 | 983,816 | ||||||
Aon plc | 3,510 | 332,853 | ||||||
Assurant, Inc. | 800 | 54,744 | ||||||
Cincinnati Financial Corp. | 1,735 | 89,925 | ||||||
Genworth Financial, Inc., Class A * | 6,400 | 54,400 | ||||||
Lincoln National Corp. | 3,262 | 188,120 | ||||||
Loews Corp. | 3,620 | 152,112 | ||||||
Marsh & McLennan Cos., Inc. | 6,698 | 383,393 | ||||||
MetLife, Inc. | 14,462 | 782,250 | ||||||
Principal Financial Group, Inc. | 3,363 | 174,674 | ||||||
Prudential Financial, Inc. | 5,660 | 512,004 | ||||||
The Allstate Corp. | 5,421 | 380,825 | ||||||
The Chubb Corp. | 2,980 | 308,341 | ||||||
The Hartford Financial Services Group, Inc. | 5,615 | 234,089 | ||||||
The Progressive Corp. | 6,473 | 174,706 | ||||||
The Travelers Cos., Inc. | 4,139 | 438,113 | ||||||
Torchmark Corp. | 1,500 | 81,255 | ||||||
Unum Group | 2,976 | 103,803 | ||||||
XL Group plc | 3,300 | 113,421 | ||||||
6,359,460 | ||||||||
Materials 3.1% | ||||||||
Air Products & Chemicals, Inc. | 2,309 | 333,027 | ||||||
Airgas, Inc. | 795 | 91,568 | ||||||
Alcoa, Inc. | 14,455 | 228,244 | ||||||
Allegheny Technologies, Inc. | 1,315 | 45,723 | ||||||
Avery Dennison Corp. | 1,100 | 57,068 | ||||||
Ball Corp. | 1,800 | 122,706 | ||||||
CF Industries Holdings, Inc. | 615 | 167,612 |
See financial notes 9
Schwab S&P 500 Index Portfolio
Portfolio Holdings continued
Number | Value | |||||||
Security | of Shares | ($) | ||||||
E.I. du Pont de Nemours & Co. | 11,200 | 828,128 | ||||||
Eastman Chemical Co. | 1,800 | 136,548 | ||||||
Ecolab, Inc. | 3,297 | 344,602 | ||||||
FMC Corp. | 1,700 | 96,951 | ||||||
Freeport-McMoRan, Inc. | 12,677 | 296,135 | ||||||
International Flavors & Fragrances, Inc. | 1,000 | 101,360 | ||||||
International Paper Co. | 5,298 | 283,867 | ||||||
LyondellBasell Industries N.V., Class A | 5,219 | 414,336 | ||||||
Martin Marietta Materials, Inc. | 800 | 88,256 | ||||||
MeadWestvaco Corp. | 2,518 | 111,774 | ||||||
Monsanto Co. | 5,968 | 712,997 | ||||||
Newmont Mining Corp. | 6,452 | 121,943 | ||||||
Nucor Corp. | 3,999 | 196,151 | ||||||
Owens-Illinois, Inc. * | 2,000 | 53,980 | ||||||
PPG Industries, Inc. | 1,754 | 405,437 | ||||||
Praxair, Inc. | 3,562 | 461,493 | ||||||
Sealed Air Corp. | 2,528 | 107,263 | ||||||
Sigma-Aldrich Corp. | 1,482 | 203,434 | ||||||
The Dow Chemical Co. | 13,805 | 629,646 | ||||||
The Mosaic Co. | 3,900 | 178,035 | ||||||
The Sherwin-Williams Co. | 993 | 261,199 | ||||||
Vulcan Materials Co. | 1,555 | 102,210 | ||||||
7,181,693 | ||||||||
Media 3.5% | ||||||||
Cablevision Systems Corp., Class A | 2,500 | 51,600 | ||||||
CBS Corp., Class B - Non Voting Shares | 5,980 | 330,933 | ||||||
Comcast Corp., Class A | 32,192 | 1,867,458 | ||||||
DIRECTV * | 6,180 | 535,806 | ||||||
Discovery Communications, Inc., Class A * | 1,700 | 58,565 | ||||||
Discovery Communications, Inc., Class C * | 3,500 | 118,020 | ||||||
Gannett Co., Inc. | 2,960 | 94,513 | ||||||
News Corp., Class A * | 6,148 | 96,462 | ||||||
Omnicom Group, Inc. | 3,040 | 235,509 | ||||||
Scripps Networks Interactive, Inc., Class A | 1,200 | 90,324 | ||||||
The Interpublic Group of Cos., Inc. | 4,997 | 103,788 | ||||||
The Walt Disney Co. | 19,388 | 1,826,156 | ||||||
Time Warner Cable, Inc. | 3,527 | 536,316 | ||||||
Time Warner, Inc. | 10,527 | 899,216 | ||||||
Twenty-First Century Fox, Inc., Class A | 23,174 | 889,997 | ||||||
Viacom, Inc., Class B | 4,616 | 347,354 | ||||||
8,082,017 | ||||||||
Pharmaceuticals, Biotechnology & Life Sciences 9.5% | ||||||||
AbbVie, Inc. | 19,923 | 1,303,761 | ||||||
Actavis plc * | 3,310 | 852,027 | ||||||
Agilent Technologies, Inc. | 4,301 | 176,083 | ||||||
Alexion Pharmaceuticals, Inc. * | 2,463 | 455,729 | ||||||
Allergan, Inc. | 3,727 | 792,323 | ||||||
Amgen, Inc. | 9,478 | 1,509,751 | ||||||
Biogen Idec, Inc. * | 2,936 | 996,625 | ||||||
Bristol-Myers Squibb Co. | 20,773 | 1,226,230 | ||||||
Celgene Corp. * | 9,975 | 1,115,803 | ||||||
Eli Lilly & Co. | 12,005 | 828,225 | ||||||
Gilead Sciences, Inc. * | 18,795 | 1,771,617 | ||||||
Hospira, Inc. * | 2,187 | 133,954 | ||||||
Johnson & Johnson | 34,610 | 3,619,168 | ||||||
Mallinckrodt plc * | 1,400 | 138,642 | ||||||
Merck & Co., Inc. | 35,386 | 2,009,571 | ||||||
Mylan, Inc. * | 4,591 | 258,795 | ||||||
PerkinElmer, Inc. | 1,500 | 65,595 | ||||||
Perrigo Co., plc | 1,784 | 298,213 | ||||||
Pfizer, Inc. | 79,025 | 2,461,629 | ||||||
Regeneron Pharmaceuticals, Inc. * | 926 | 379,891 | ||||||
Thermo Fisher Scientific, Inc. | 5,050 | 632,714 | ||||||
Vertex Pharmaceuticals, Inc. * | 3,001 | 356,519 | ||||||
Waters Corp. * | 1,000 | 112,720 | ||||||
Zoetis, Inc. | 6,222 | 267,733 | ||||||
21,763,318 | ||||||||
Real Estate 2.4% | ||||||||
American Tower Corp. | 4,882 | 482,586 | ||||||
Apartment Investment & Management Co., Class A | 1,877 | 69,731 | ||||||
AvalonBay Communities, Inc. | 1,608 | 262,731 | ||||||
Boston Properties, Inc. | 1,909 | 245,669 | ||||||
CBRE Group, Inc., Class A * | 3,600 | 123,300 | ||||||
Crown Castle International Corp. | 4,203 | 330,776 | ||||||
Equity Residential | 4,500 | 323,280 | ||||||
Essex Property Trust, Inc. | 800 | 165,280 | ||||||
General Growth Properties, Inc. | 7,800 | 219,414 | ||||||
HCP, Inc. | 5,616 | 247,272 | ||||||
Health Care REIT, Inc. | 4,010 | 303,437 | ||||||
Host Hotels & Resorts, Inc. | 9,060 | 215,356 | ||||||
Iron Mountain, Inc. | 2,287 | 88,415 | ||||||
Kimco Realty Corp. | 6,120 | 153,857 | ||||||
Plum Creek Timber Co., Inc. | 2,568 | 109,885 | ||||||
Prologis, Inc. | 6,110 | 262,913 | ||||||
Public Storage | 1,952 | 360,827 | ||||||
Simon Property Group, Inc. | 3,801 | 692,200 | ||||||
The Macerich Co. | 1,807 | 150,722 | ||||||
Ventas, Inc. | 3,569 | 255,897 | ||||||
Vornado Realty Trust | 2,160 | 254,254 | ||||||
Weyerhaeuser Co. | 6,566 | 235,654 | ||||||
5,553,456 | ||||||||
Retailing 4.4% | ||||||||
Amazon.com, Inc. * | 4,731 | 1,468,266 | ||||||
AutoNation, Inc. * | 900 | 54,369 | ||||||
AutoZone, Inc. * | 400 | 247,644 | ||||||
Bed Bath & Beyond, Inc. * | 2,516 | 191,644 | ||||||
Best Buy Co., Inc. | 3,721 | 145,045 | ||||||
CarMax, Inc. * | 2,726 | 181,497 | ||||||
Dollar General Corp. * | 3,785 | 267,600 | ||||||
Dollar Tree, Inc. * | 2,600 | 182,988 | ||||||
Expedia, Inc. | 1,200 | 102,432 | ||||||
Family Dollar Stores, Inc. | 1,148 | 90,933 | ||||||
GameStop Corp., Class A (b) | 1,454 | 49,145 | ||||||
Genuine Parts Co. | 1,900 | 202,483 | ||||||
Kohl’s Corp. | 2,482 | 151,501 | ||||||
L Brands, Inc. | 2,964 | 256,534 | ||||||
Lowe’s Cos., Inc. | 12,038 | 828,214 |
10 See financial notes
Schwab S&P 500 Index Portfolio
Portfolio Holdings continued
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Macy’s, Inc. | 4,322 | 284,172 | ||||||
Netflix, Inc. * | 756 | 258,257 | ||||||
Nordstrom, Inc. | 1,750 | 138,933 | ||||||
O’Reilly Automotive, Inc. * | 1,309 | 252,140 | ||||||
PetSmart, Inc. | 1,249 | 101,537 | ||||||
Ross Stores, Inc. | 2,539 | 239,326 | ||||||
Staples, Inc. | 8,250 | 149,490 | ||||||
Target Corp. | 7,976 | 605,458 | ||||||
The Gap, Inc. | 3,476 | 146,374 | ||||||
The Home Depot, Inc. | 16,474 | 1,729,276 | ||||||
The Priceline Group, Inc. * | 654 | 745,697 | ||||||
The TJX Cos., Inc. | 8,420 | 577,444 | ||||||
Tiffany & Co. | 1,326 | 141,696 | ||||||
Tractor Supply Co. | 1,700 | 133,994 | ||||||
TripAdvisor, Inc. * | 1,300 | 97,058 | ||||||
Urban Outfitters, Inc. * | 1,200 | 42,156 | ||||||
10,063,303 | ||||||||
Semiconductors & Semiconductor Equipment 2.4% | ||||||||
Altera Corp. | 3,744 | 138,303 | ||||||
Analog Devices, Inc. | 3,930 | 218,194 | ||||||
Applied Materials, Inc. | 15,055 | 375,171 | ||||||
Avago Technologies Ltd. | 3,187 | 320,580 | ||||||
Broadcom Corp., Class A | 6,614 | 286,585 | ||||||
First Solar, Inc. * | 900 | 40,135 | ||||||
Intel Corp. | 60,684 | 2,202,222 | ||||||
KLA-Tencor Corp. | 2,000 | 140,640 | ||||||
Lam Research Corp. | 1,912 | 151,698 | ||||||
Linear Technology Corp. | 3,030 | 138,168 | ||||||
Microchip Technology, Inc. | 2,400 | 108,264 | ||||||
Micron Technology, Inc. * | 13,257 | 464,128 | ||||||
NVIDIA Corp. | 6,368 | 127,678 | ||||||
Texas Instruments, Inc. | 13,168 | 704,027 | ||||||
Xilinx, Inc. | 3,213 | 139,091 | ||||||
5,554,884 | ||||||||
Software & Services 10.3% | ||||||||
Accenture plc, Class A | 7,734 | 690,724 | ||||||
Adobe Systems, Inc. * | 5,835 | 424,205 | ||||||
Akamai Technologies, Inc. * | 2,175 | 136,938 | ||||||
Alliance Data Systems Corp. * | 816 | 233,417 | ||||||
Autodesk, Inc. * | 2,820 | 169,369 | ||||||
Automatic Data Processing, Inc. | 6,315 | 526,482 | ||||||
CA, Inc. | 4,044 | 123,140 | ||||||
Citrix Systems, Inc. * | 2,060 | 131,428 | ||||||
Cognizant Technology Solutions Corp., Class A * | 7,640 | 402,322 | ||||||
Computer Sciences Corp. | 1,700 | 107,185 | ||||||
eBay, Inc. * | 14,123 | 792,583 | ||||||
Electronic Arts, Inc. * | 3,852 | 181,102 | ||||||
Facebook, Inc., Class A * | 26,053 | 2,032,655 | ||||||
Fidelity National Information Services, Inc. | 3,500 | 217,700 | ||||||
Fiserv, Inc. * | 3,120 | 221,426 | ||||||
Google, Inc., Class A * | 3,525 | 1,870,576 | ||||||
Google, Inc., Class C * | 3,581 | 1,885,038 | ||||||
International Business Machines Corp. | 11,478 | 1,841,530 | ||||||
Intuit, Inc. | 3,396 | 313,077 | ||||||
MasterCard, Inc., Class A | 12,020 | 1,035,643 | ||||||
Microsoft Corp. | 102,768 | 4,773,574 | ||||||
Oracle Corp. | 39,862 | 1,792,594 | ||||||
Paychex, Inc. | 4,046 | 186,804 | ||||||
Red Hat, Inc. * | 2,287 | 158,123 | ||||||
salesforce.com, Inc. * | 7,369 | 437,055 | ||||||
Symantec Corp. | 8,287 | 212,603 | ||||||
Teradata Corp. * | 1,800 | 78,624 | ||||||
The Western Union Co. | 6,559 | 117,472 | ||||||
Total System Services, Inc. | 2,100 | 71,316 | ||||||
VeriSign, Inc. * | 1,425 | 81,225 | ||||||
Visa, Inc., Class A | 6,096 | 1,598,371 | ||||||
Xerox Corp. | 13,167 | 182,495 | ||||||
Yahoo! Inc. * | 10,994 | 555,307 | ||||||
23,582,103 | ||||||||
Technology Hardware & Equipment 6.8% | ||||||||
Amphenol Corp., Class A | 3,800 | 204,478 | ||||||
Apple, Inc. | 73,034 | 8,061,493 | ||||||
Cisco Systems, Inc. | 63,961 | 1,779,075 | ||||||
Corning, Inc. | 15,965 | 366,077 | ||||||
EMC Corp. | 24,997 | 743,411 | ||||||
F5 Networks, Inc.* | 895 | 116,766 | ||||||
FLIR Systems, Inc. | 1,834 | 59,257 | ||||||
Harris Corp. | 1,400 | 100,548 | ||||||
Hewlett-Packard Co. | 23,380 | 938,239 | ||||||
Juniper Networks, Inc. | 4,700 | 104,904 | ||||||
Motorola Solutions, Inc. | 2,676 | 179,506 | ||||||
NetApp, Inc. | 3,900 | 161,655 | ||||||
QUALCOMM, Inc. | 20,733 | 1,541,084 | ||||||
SanDisk Corp. | 2,771 | 271,503 | ||||||
Seagate Technology plc | 4,079 | 271,254 | ||||||
TE Connectivity Ltd. | 5,232 | 330,924 | ||||||
Western Digital Corp. | 2,700 | 298,890 | ||||||
15,529,064 | ||||||||
Telecommunication Services 2.3% | ||||||||
AT&T, Inc. | 64,968 | 2,182,275 | ||||||
CenturyLink, Inc. | 7,085 | 280,424 | ||||||
Frontier Communications Corp. | 12,705 | 84,742 | ||||||
Level 3 Communications, Inc. * | 3,367 | 166,263 | ||||||
Verizon Communications, Inc. | 51,847 | 2,425,403 | ||||||
Windstream Holdings, Inc. | 7,243 | 59,682 | ||||||
5,198,789 | ||||||||
Transportation 2.2% | ||||||||
C.H. Robinson Worldwide, Inc. | 1,900 | 142,291 | ||||||
CSX Corp. | 12,501 | 452,911 | ||||||
Delta Air Lines, Inc. | 10,322 | 507,739 | ||||||
Expeditors International of Washington, Inc. | 2,300 | 102,603 | ||||||
FedEx Corp. | 3,285 | 570,473 | ||||||
Kansas City Southern | 1,400 | 170,842 | ||||||
Norfolk Southern Corp. | 3,800 | 416,518 | ||||||
Ryder System, Inc. | 792 | 73,537 | ||||||
Southwest Airlines Co. | 8,573 | 362,810 | ||||||
Union Pacific Corp. | 11,006 | 1,311,145 | ||||||
United Parcel Service, Inc., Class B | 8,658 | 962,510 | ||||||
5,073,379 |
See financial notes 11
Schwab S&P 500 Index Portfolio
Portfolio Holdings continued
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Utilities 3.2% | ||||||||
AES Corp. | 8,189 | 112,763 | ||||||
AGL Resources, Inc. | 1,643 | 89,560 | ||||||
Ameren Corp. | 3,100 | 143,003 | ||||||
American Electric Power Co., Inc. | 5,969 | 362,438 | ||||||
CenterPoint Energy, Inc. | 5,250 | 123,007 | ||||||
CMS Energy Corp. | 3,196 | 111,061 | ||||||
Consolidated Edison, Inc. | 3,535 | 233,345 | ||||||
Dominion Resources, Inc. | 7,226 | 555,679 | ||||||
DTE Energy Co. | 2,138 | 184,659 | ||||||
Duke Energy Corp. | 8,637 | 721,535 | ||||||
Edison International | 4,080 | 267,158 | ||||||
Entergy Corp. | 2,227 | 194,818 | ||||||
Exelon Corp. | 11,260 | 417,521 | ||||||
FirstEnergy Corp. | 5,081 | 198,108 | ||||||
Integrys Energy Group, Inc. | 1,186 | 92,330 | ||||||
NextEra Energy, Inc. | 5,367 | 570,458 | ||||||
NiSource, Inc. | 4,492 | 190,551 | ||||||
Northeast Utilities | 3,836 | 205,303 | ||||||
NRG Energy, Inc. | 3,986 | 107,423 | ||||||
Pepco Holdings, Inc. | 3,150 | 84,830 | ||||||
PG&E Corp. | 5,714 | 304,213 | ||||||
Pinnacle West Capital Corp. | 1,550 | 105,880 | ||||||
PPL Corp. | 8,167 | 296,707 | ||||||
Public Service Enterprise Group, Inc. | 6,314 | 261,463 | ||||||
SCANA Corp. | 1,800 | 108,720 | ||||||
Sempra Energy | 2,831 | 315,260 | ||||||
TECO Energy, Inc. | 2,740 | 56,143 | ||||||
The Southern Co. | 10,929 | 536,723 | ||||||
Wisconsin Energy Corp. | 2,744 | 144,719 | ||||||
Xcel Energy, Inc. | 6,333 | 227,481 | ||||||
7,322,859 | ||||||||
Total Common Stock | ||||||||
(Cost $108,402,989) | 227,119,146 | |||||||
Other Investment Companies 0.1% of net assets | ||||||||
Securities Lending Collateral 0.1% | ||||||||
Wells Fargo Advantage Government Money Market Fund, Institutional Class 0.01% (e) | 150,927 | 150,927 | ||||||
Total Other Investment Company | ||||||||
(Cost $150,927) | 150,927 | |||||||
Issuer | Face Amount | Value | ||||||
Rate, Maturity Date | ($) | ($) | ||||||
Short-Term Investments 0.8% of net assets | ||||||||
Time Deposit 0.7% | ||||||||
Bank of Tokyo-Mitsubishi UFJ | ||||||||
0.03%, 01/02/15 | 1,693,579 | 1,693,579 | ||||||
U.S. Treasury Bills 0.1% | ||||||||
U.S. Treasury Bills | ||||||||
0.02%, 03/19/15 (c)(d) | 140,000 | 139,996 | ||||||
0.03%, 03/19/15 (c)(d) | 25,000 | 24,999 | ||||||
164,995 | ||||||||
Total Short-Term Investments | ||||||||
(Cost $1,858,571) | 1,858,574 | |||||||
End of Investments. |
At 12/31/14, the tax basis cost of the fund’s investments was $113,498,031 and the unrealized appreciation and depreciation were $118,176,778 and ($2,546,162), respectively, with a net unrealized appreciation of $115,630,616.
* | Non-income producing security. | |
(a) | Issuer is affiliated with the fund’s adviser. | |
(b) | All or a portion of this security is on loan. Securities on loan were valued at $144,635. | |
(c) | All or a portion of this security is held as collateral for open futures contracts. | |
(d) | The rate shown is the purchase yield. | |
(e) | The rate shown is the 7-day yield. |
REIT — | Real Estate Investment Trust |
In addition to the above, the fund held the following at 12/31/14.
Contract | Unrealized | |||||||||||
Number of | Value | Appreciation | ||||||||||
Contracts | ($) | ($) | ||||||||||
Futures Contracts | ||||||||||||
S&P 500 Index, e-mini, Long, expires 03/20/15 | 17 | 1,744,540 | 17,076 |
12 See financial notes
Schwab S&P 500 Index Portfolio
Portfolio Holdings continued
The following is a summary of the inputs used to value the fund’s investments as of December 31, 2014 (see financial note 2(a) for additional information):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Significant | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Common Stock1 | $227,119,146 | $— | $— | $227,119,146 | ||||||||||||
Other Investment Companies1 | 150,927 | — | — | 150,927 | ||||||||||||
Short-Term Investments1 | — | 1,858,574 | — | 1,858,574 | ||||||||||||
Total | $227,270,073 | $1,858,574 | $— | $229,128,647 | ||||||||||||
Other Financial Instruments | ||||||||||||||||
Futures Contracts2 | $17,076 | $— | $— | $17,076 |
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 December 31, 2014.
See financial notes 13
Schwab S&P 500 Index Portfolio
Statement of
Assets and Liabilities
As of December 31, 2014
Assets | ||||||
Investments in affiliated issuers, at value (cost $162,772) | $424,139 | |||||
Investments in unaffiliated issuers, at value (cost $110,098,788) including securities on loan of $144,635 | 228,553,581 | |||||
Collateral invested for securities on loan, at value (cost $150,927) | + | 150,927 | ||||
Total investments, at value (cost $110,412,487) | 229,128,647 | |||||
Receivables: | ||||||
Fund shares sold | 317,495 | |||||
Dividends | 302,095 | |||||
Income from securities on loan | 438 | |||||
Interest | 1 | |||||
Prepaid expenses | + | 1,497 | ||||
Total assets | 229,750,173 | |||||
Liabilities | ||||||
Collateral held for securities on loan | 150,927 | |||||
Payables: | ||||||
Investment adviser and administrator fees | 8,568 | |||||
Fund shares redeemed | 54,799 | |||||
Variation margin on futures contracts | 20,655 | |||||
Accrued expenses | + | 42,710 | ||||
Total liabilities | 277,659 | |||||
Net Assets | ||||||
Total assets | 229,750,173 | |||||
Total liabilities | − | 277,659 | ||||
Net assets | $229,472,514 | |||||
Net Assets by Source | ||||||
Capital received from investors | 115,656,783 | |||||
Net investment income not yet distributed | 3,717,734 | |||||
Net realized capital losses | (8,635,239 | ) | ||||
Net unrealized capital appreciation | 118,733,236 | |||||
Net Asset Value (NAV) |
Shares | ||||||||||||
Net Assets | ÷ | Outstanding | = | NAV | ||||||||
$229,472,514 | 7,595,363 | $30.21 |
14 See financial notes
Schwab S&P 500 Index Portfolio
Statement of
Operations
For the period January 1, 2014 through December 31, 2014
Investment Income | ||||||
Dividends received from affiliated issuer | $3,273 | |||||
Dividends received from unaffiliated issuers (net of foreign withholding taxes of $484) | 4,155,352 | |||||
Interest | 1,199 | |||||
Securities on loan | + | 4,517 | ||||
Total investment income | 4,164,341 | |||||
Expenses | ||||||
Investment adviser and administrator fees | 309,783 | |||||
Professional fees | 42,971 | |||||
Portfolio accounting fees | 32,982 | |||||
Index fee | 22,279 | |||||
Shareholder reports | 21,551 | |||||
Transfer agent fees | 21,336 | |||||
Independent trustees’ fees | 20,766 | |||||
Custodian fees | 7,569 | |||||
Interest expense | 49 | |||||
Other expenses | + | 3,575 | ||||
Total expenses | 482,861 | |||||
Expense reduction by CSIM | − | 21,336 | ||||
Net expenses | − | 461,525 | ||||
Net investment income | 3,702,816 | |||||
Realized and Unrealized Gains (Losses) | ||||||
Net realized gains on affiliated issuer | 1,322 | |||||
Net realized gains on unaffiliated investments | 847,992 | |||||
Net realized gains on futures contracts | + | 506,155 | ||||
Net realized gains | 1,355,469 | |||||
Net change in unrealized appreciation (depreciation) on affiliated issuer | 57,367 | |||||
Net change in unrealized appreciation (depreciation) on unaffiliated investments | 21,314,473 | |||||
Net change in unrealized appreciation (depreciation) on futures contracts | + | (107,777 | ) | |||
Net change in unrealized appreciation (depreciation) | + | 21,264,063 | ||||
Net realized and unrealized gains | 22,619,532 | |||||
Increase in net assets resulting from operations | $26,322,348 |
See financial notes 15
Schwab S&P 500 Index Portfolio
Statement of
Changes in Net Assets
For the current and prior report periods
Operations | ||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||
Net investment income | $3,702,816 | $3,048,534 | ||||||||
Net realized gains (losses) | 1,355,469 | (769,458 | ) | |||||||
Net change in unrealized appreciation (depreciation) | + | 21,264,063 | 43,340,343 | |||||||
Increase in net assets from operations | 26,322,348 | 45,619,419 | ||||||||
Distributions to Shareholders | ||||||||||
Distributions from net investment income | ($3,029,534 | ) | ($2,746,605 | ) |
Transactions in Fund Shares
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | VALUE | SHARES | VALUE | |||||||||||||||
Shares sold | 1,454,662 | $41,236,683 | 1,314,487 | $31,642,871 | ||||||||||||||
Shares reinvested | 106,299 | 3,029,534 | 118,083 | 2,746,605 | ||||||||||||||
Shares redeemed | + | (1,125,214 | ) | (31,585,512 | ) | (970,143 | ) | (23,175,830 | ) | |||||||||
Net transactions in fund shares | 435,747 | $12,680,705 | 462,427 | $11,213,646 | ||||||||||||||
Shares Outstanding and Net Assets | ||||||||||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | NET ASSETS | SHARES | NET ASSETS | |||||||||||||||
Beginning of period | 7,159,616 | $193,498,995 | 6,697,189 | $139,412,535 | ||||||||||||||
Total increase | + | 435,747 | 35,973,519 | 462,427 | 54,086,460 | |||||||||||||
End of period | 7,595,363 | $229,472,514 | 7,159,616 | $193,498,995 | ||||||||||||||
Net investment income not yet distributed | $3,717,734 | $3,049,346 |
16 See financial notes
Schwab S&P 500 Index Portfolio
Financial Notes
1. Business Structure of the Fund:
Schwab S&P 500 Index Portfolio (the “fund”) is a series of Schwab Annuity Portfolios (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 Annuity Portfolios (organized January 21, 1994) | ||||
Schwab Money Market Portfolio | ||||
Schwab MarketTrack Growth Portfolio II | ||||
Schwab S&P 500 Index Portfolio | ||||
Schwab VIT Balanced Portfolio | ||||
Schwab VIT Balanced with Growth Portfolio | ||||
Schwab VIT Growth Portfolio | ||||
The fund offers one share class. Shares are bought and sold 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 fund’s Board of Trustees (the “Board”) may authorize the issuance of as many shares as necessary.
The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. At December 31, 2014, 100% of the fund’s shares were held through one insurance company. Subscriptions and redemptions of these insurance separate accounts could have a material impact on the fund.
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 (FASB) 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”).
(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:
• | 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 the 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. 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 |
17
Schwab S&P 500 Index Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
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 fund pursuant to the valuation procedures. |
• | Futures Contracts (“futures”): Futures are valued at their settlement prices as of the close of their exchanges. | |
• | Short-term securities (60 days or less to maturity): Short-term securities may be valued at amortized cost, which approximates market value. | |
• | Underlying funds: Mutual funds are valued at their respective NAVs. |
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 and futures contracts. 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. As investments whose values are classified as Level 2 prices include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. | |
• | Level 3 — significant unobservable inputs (including the 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. |
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 December 31, 2014 are disclosed in the Portfolio Holdings.
18
Schwab S&P 500 Index Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
(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 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 the 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. The fund bears the risk of loss with respect to the investment of cash collateral. The terms of the securities lending agreement allow the fund to terminate any loans at any given time. Securities lending income, as disclosed in the 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 the fund and the lending agent. The fund retains the right to recall a security on loan. The aggregate market value of securities loaned will not at any time exceed one-third of the total assets of the fund, including collateral received from the loan (at market value computed at the time of the loan). Total costs and expenses, including agent fees, associated with securities lending activities under the trust’s Securities Lending Program paid to the unaffiliated lending agent are approximately 15% of the gross lending revenues.
The values of the securities on loan and the related collateral as of December 31, 2014, if any, is disclosed in the fund’s Portfolio Holdings. Investments of cash collateral is also disclosed in the fund’s 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. The fund does not isolate the portion of the fluctuations on investments resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
When a fund closes out a futures 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 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.
(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.
19
Schwab S&P 500 Index Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
(f) Distributions to Shareholders:
The fund makes 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 fund intends to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the fund distributes substantially all of its net investment income and realized net capital gains, if any, to the participating insurance company’s (shareholders) separate accounts 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:
Investment Risk. 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.
Market Risk. Equity 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.
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 fund primarily follows the large-cap portion of the U.S. stock market, as measured by the index. It follows these stocks during upturns as well as downturns. Because of its indexing strategy, the fund does not take steps to reduce market exposure or to lessen the effects of a declining market. In addition, because of the fund’s expenses, the 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 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.
Tracking Error Risk. As an index fund, the 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.
Large Cap Risk. Although the S&P 500 Index encompasses stocks from many different sectors of the economy, its performance primarily reflects that of large-cap stocks, which tend to go in and out of favor based on market and economic conditions. As a result, during a period when these stocks fall behind other types of investment — bonds or mid- or small-cap stocks, for instance — the fund’s performance also will lag those investments.
20
Schwab S&P 500 Index Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector, 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, or asset class.
Derivatives Risk. The fund’s use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments and could cause 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 the fund.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be unable to sell illiquid securities at an advantageous time or price.
Security Lending Risk. Securities lending risk 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.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.
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 (“Advisory Agreement”) between CSIM and the trust.
For its advisory and administrative services to the 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:
Average Daily Net Assets | ||||
First $500 million | 0.15% | |||
More than $500 million but not exceeding $5 billion | 0.09% | |||
More than $5 billion but not exceeding $10 billion | 0.08% | |||
Over $10 billion | 0.07% |
CSIM and its affiliates have made an additional agreement 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 0.28% through April 29, 2016.
The fund may engage in certain transactions involving affiliates. For instance, the 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 fund during the report period:
Realized | Dividends | |||||||||||||||||||||||||
Balance of | Balance of | Market | Gains (Losses) | Received | ||||||||||||||||||||||
Shares Held | Gross | Gross | Shares Held | Value at | 01/01/14 to | 01/01/14 to | ||||||||||||||||||||
at 12/31/13 | Purchases | Sales | at 12/31/14 | 12/31/14 | 12/31/14 | 12/31/14 | ||||||||||||||||||||
13,106 | 1,543 | (600 | ) | 14,049 | $424,139 | $1,322 | $3,273 |
Pursuant to an exemptive order issued by the SEC, the fund may enter into interfund borrowing and lending transactions with other Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate to be charged on a loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review by the Board. The fund had no interfund borrowing or lending activity during the period.
21
Schwab S&P 500 Index Portfolio
Financial Notes (continued)
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:
The fund has access to custodian overdraft facilities, a committed line of credit of $150 million with State Street Bank and Trust Company (“State Street”), an uncommitted line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman & Co. The fund pays interest on the amounts it borrows at rates that are negotiated periodically. The fund also pays an annual fee to State Street for the committed line of credit.
There were no borrowings from the lines of credit by the fund during the period. However, the fund may have utilized its 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 December 31, 2014, purchases and sales/maturities of securities (excluding short-term obligations) were as follows:
Purchases of Securities | Sales/Maturities of Securities | |||||
$19,753,113 | $3,081,988 |
8. Derivatives:
The fund entered into equity index futures contracts during the report period. The fund invested in futures to equitize available cash. The fair value and variation margin for futures contracts held at December 31, 2014 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 fund’s accounting policies with respect to futures contracts and financial note 3 for disclosures concerning the risks of investing in futures contracts. During the period, the month-end average contract values of futures contracts held by the fund was $3,689,574 and the month-end average number of contracts held was 38.
9. Federal Income Taxes:
As of December 31, 2014, the components of distributable earnings on a tax-basis were as follows:
Undistributed ordinary income | $3,678,225 | |||
Undistributed long-term capital gains | — | |||
Unrealized appreciation on investments | 118,176,778 | |||
Unrealized depreciation on investments | (2,546,162 | ) | ||
Net unrealized appreciation (depreciation) | $115,630,616 | |||
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.
22
Schwab S&P 500 Index Portfolio
Financial Notes (continued)
9. Federal Income Taxes (continued):
Capital loss carryforwards may be used to offset future realized capital gains, for federal income tax purposes. As of December 31, 2014, the fund had capital loss carryforwards available to offset future net capital gains before the expiration date as follows:
Expiration Date | ||||
December 31, 2015 | $— | |||
December 31, 2016 | 2,623,397 | |||
December 31, 2017 | 1,365,160 | |||
December 31, 2018 | 257,470 | |||
Total | $4,246,027 | |||
For tax purposes, realized net capital losses and late-year ordinary losses incurred after October 31 may be deferred and treated as occurring on the first day of the following year. For the year ended December 31, 2014, the fund had capital losses deferred of $1,247,083 and capital loss carryforwards utilized of $1,157,395.
The tax-basis components of distributions paid during the current and prior fiscal years were as follows:
Current period distributions | ||||
Ordinary income | $3,029,534 | |||
Long-term capital gains | — | |||
Return of capital | — | |||
Prior period distributions | ||||
Ordinary income | $2,746,605 | |||
Long-term capital gains | — | |||
Return of capital | — |
Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as short-term capital gains and losses, capital losses related to wash sales, and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
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 December 31, 2014, the fund made the following reclassifications:
Capital shares | $— | |||
Undistributed net investment income | (4,894 | ) | ||
Net realized capital gains (losses) | 4,894 |
As of December 31, 2014, 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 December 31, 2014, the fund did not incur any interest or penalties.
10. 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.
23
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab S&P 500 Index Portfolio
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 S&P 500 Index Portfolio (one of the portfolios constituting Schwab Annuity Portfolios, hereafter referred to as the “Fund”) at December 31, 2014, 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 at December 31, 2014 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2015
24
Other Federal Tax Information (unaudited)
For corporate shareholders, 100% of the fund’s dividend distributions paid during the fiscal year ended December 31, 2014, qualify under Internal Revenue code section 854(b)(1)(A) for the corporate dividends received deduction.
25
Trustees and Officers
The tables below give information about the trustees and officers of Schwab Annuity Portfolios, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 95 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 1-800-435-4000.
Independent Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served1) | During the Past Five Years | the Trustee | Other Directorships | |||
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman of JDN Corporate Advisory LLC (advisory services firm) (Oct. 2001 – present). | 74 | Director, WageWorks, Inc. (2010 – present) Director, Redwood Trust, Inc. (1998 – present) | |||
John F. Cogan 1947 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | 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 – present). | 74 | Director, Gilead Sciences, Inc. (2005 – present) | |||
David L. Mahoney 1954 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Private Investor. | 74 | Director, Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) | |||
Kiran M. Patel 1948 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 74 | Director, KLA-Tencor Corporation (2008 – present) | |||
Charles A. Ruffel 1956 Trustee (Trustee of Schwab Annuity Portfolios since 2015.) | Managing Partner and Co-Founder, Kudu Advisors, LLC (financial services) (May 2009 – present); Director, Asset International, Inc. (publisher of financial services information) (Jan. 2009 – Nov. 2014). | 95 | None. | |||
Gerald B. Smith 1950 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 74 | 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 Schwab Annuity Portfolios since 2008.) | Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present). | 74 | Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present) | |||
26
Interested Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served) | During the Past Five Years | the Trustee | Other Directorships | |||
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Annuity Portfolios since 1994.) | Chairman and Director, The Charles Schwab Corporation (1986 – present); Chairman and Director of Charles Schwab & Co., Inc. (1971 – present); Chairman and Director of Charles Schwab Investment Management, Inc. (1989 – present); Chairman and Director of Charles Schwab Bank (2003 – present); Chairman and Chief Executive Officer of Schwab (SIS) Holdings Inc. I and Schwab International Holdings, Inc. (1996 – present); and Director, Chairman and Chief Executive Officer, Schwab Holdings, Inc. (1979 – present). | 74 | Chairman and Director, The Charles Schwab Corporation (1986 – present) Director, Yahoo! Inc. (2014 – present) | |||
Walter W. Bettinger II2 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | Director, President and Chief Executive Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (2008 – present); Director, Charles Schwab Bank (2006 – present); and Director Schwab Holdings, Inc. (2008 – present). | 95 | Director, The Charles Schwab Corporation (2008 – present) | |||
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 Chandoha 1961 President and Chief Executive Officer (Officer of Schwab Annuity Portfolios since 2010.) | Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; 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 (January 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (March 2007 – August 2010). | |
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Annuity Portfolios since 2004.) | Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Treasurer and Chief Financial Officer, Laudus Funds (2006 – present); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – present) and Schwab ETFs (Oct. 2009 – present); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present). | |
Omar Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Equities, Charles Schwab Investment Management, Inc. (April 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 – April 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 Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (April 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 (April 2006 – Jan. 2008). | |
27
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 | |
David Lekich 1964 Chief Legal Officer and Secretary (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President (Sept. 2011 – present), Vice President (March 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 (April 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (April 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. | |
Catherine MacGregor 1964 Vice President and Assistant Secretary (Officer of Schwab Annuity Portfolios since 2005.) | Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 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 | Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees retire at age 72 or after twenty years as a trustee, whichever comes first. In addition, the retirement policy requires any independent trustee of Schwab Funds who also serves as an independent trustee of the Laudus Funds to retire from the Boards of the Schwab Funds upon their required retirement date from either the Boards of Trustees of the Schwab Funds or the Laudus Funds, whichever comes first. | |
2 | Mr. Schwab and Mr. Bettinger 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 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. |
28
Schwab Money Market Portfoliotm | |||||
Annual report dated December 31, 2014 |
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 Fund’s website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s website at www.sec.gov.
Investment Adviser: Charles Schwab Investment Management, Inc. (CSIM)
The Investment Environment
For the 12-month reporting period ended December 31, 2014, yields on taxable money market securities remained at extremely low levels due to the Federal Reserve’s efforts to keep short-term interest rates near zero percent. Overseas, the European Central Bank, the Bank of Japan, and many other central banks also remained focused on keeping interest rates low while attempting to stimulate their stalled economies.
In related industry matters, the Securities and Exchange Commission released final guidance regarding the rules that govern money market funds in July 2014. These amendments seem to strike the right balance of preserving an important cash management tool for investors, while protecting investors from the possibility of significant money market fund redemptions during a crisis. Investors will also benefit from enhanced disclosures and increased protections from these changes.
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.
Schwab Money Market Portfoliotm 1
Portfolio Management
Linda Klingman, Managing Director and Head of Taxable Money Market Strategies, leads the portfolio management team of Schwab’s prime and government taxable money funds. Ms. Klingman also has overall responsibility for all aspects of the management of the funds. Prior to joining CSIM in 1990, Ms. Klingman was a senior money market trader with AIM Management. She has managed money market funds since 1988. | ||
Lynn Paschen, Managing Director and Senior Portfolio Manager, is responsible for the day-to-day management of the portfolio. Prior to joining CSIM in 2011, Ms. Paschen held a number of positions at American Century Investments. She most recently was a portfolio manager, and from 2000 to 2003 worked as a fixed income trader. She has managed money market funds since 2003. |
2 Schwab Money Market Portfoliotm
Schwab Money Market Portfolio™
The Schwab Money Market Portfolio (the portfolio) seeks the highest current income consistent with stability of capital and liquidity. To pursue its goal, the portfolio invests in high-quality, short-term money market investments issued by U.S. and foreign issuers. Examples of these securities include commercial paper, certificates of deposit, repurchase agreements, variable-rate debt securities, and obligations issued by the U.S. government or its agencies and instrumentalities. For more information concerning the portfolio’s investment objective, strategy, and risks, please see the portfolio’s prospectus.
Since December 2008, when the Federal Reserve (the Fed) first cut short-term interest rates to present-day levels, yields on money market securities have remained historically low—a trend that continued throughout the 12-month reporting period ended December 31, 2014. As a result, and to help the portfolio maintain a positive net yield, the portfolio’s investment adviser and its affiliates voluntarily waived certain fees or expenses during the reporting period.1 For more information about the portfolio’s yield and other important characteristics, please review the charts and footnotes that follow this discussion.
Market Highlights. During the reporting period, the U.S. economy rebounded, with many economic measures showing signs of improvement. Outside the U.S., however, many economies faltered during the reporting period, contributing to an uncertain global economic outlook and an appreciation of the U.S. dollar versus international currencies. The Fed kept short-term interest rates at or near record lows and in October, concluded measured efforts to hold down long-term interest rates. The Fed also continued to perform daily test operations of its Reverse Repurchase Facility. The facility sells and repurchases securities and has essentially helped establish a floor for short-term interest rates. This program has become an important source of taxable money market supply and serves as another tool to help the Fed manage its policies. The program is set to continue through January 31, 2016.
Available supply of money market securities largely remains constrained as stricter regulatory mandates have increased the costs of selling short-term securities for many issuers. These higher costs and persistently low interest rates have instead encouraged the issuance of longer-term securities.
Performance, Positioning, and Strategies. Throughout the reporting period, the fund’s investment adviser remained focused on ensuring liquidity and stability of capital as market conditions evolved. A slight increase in repurchase agreement rates toward the end of the reporting period allowed the investment adviser to strategically increase allocation to this sector. However, as rates and rate expectations remained low, the weighted average maturity of the fund in general remained extended during the period. As noted above, the fund continued to waive certain fees and expenses in order to maintain a 0.01% yield. Additionally, money market reform final guidance was released in July 2014 and continues to be closely monitored by the investment adviser.
As of 12/31/14:
Portfolio Composition By Maturity2
% of investments | ||||
1-7 Days | 25.8% | |||
8-30 Days | 26.4% | |||
31-60 Days | 8.9% | |||
61-90 Days | 18.5% | |||
91-180 Days | 16.2% | |||
More than 180 Days | 4.2% | |||
Total | 100.0% |
Statistics
Weighted Average Maturity3 | 52 Days | |
Credit Quality Of Holdings4 % of portfolio | 100% Tier 1 |
Portfolio Composition by Security Type
% of investments | ||||
Government Agency Debt | 64.5% | |||
Repurchase Agreement | ||||
Treasury | 22.7% | |||
Treasury Debt | 12.8% | |||
Total | 100.0% |
An investment in a money fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in a money fund.
Management views and portfolio holdings may have changed since the report date.
1 | The investment adviser and its affiliates may recapture expenses or fees they waived under a voluntary yield waiver until the third anniversary of the end of the fiscal year in which such waiver occurs, subject to certain limitations. For more information on the potential impact of such recapture on future yields, see financial note 4. | |
2 | As shown in the Portfolio Holdings section of the shareholder report. | |
3 | Money funds must maintain a dollar-weighted average maturity of no longer than 60 days and cannot invest in any security whose effective maturity is longer than 397 days (approximately 13 months). | |
4 | Tier 1 securities are rated in one of the two highest rating categories by two nationally recognized statistical rating organizations (“NRSROs”), or by one if only one NRSRO has rated the securities, or, if unrated, determined to be of comparable quality by CSIM pursuant to guidelines adopted by the Board of Trustees. Money market fund shares and U.S. government securities are also Tier 1 securities. The fund uses NRSRO credit ratings from Standard & Poor’s Corp., Moody’s Investors Service, Fitch Ratings, and/or DBRS. The fund may use different ratings provided by other rating agencies for purposes of determining compliance with the fund’s investment policies. The fund itself has not been rated by an independent credit rating agency. |
Schwab Money Market Portfoliotm 3
Schwab Money Market Portfoliotm
Performance and Fund Facts as of 12/31/14
The performance data quoted represents past performance. Past performance does not guarantee future results. Current performance may be lower or higher than performance data quoted. To obtain more current performance information, please visit www.csimfunds.com/schwabfunds_prospectus.
Seven-Day Average Yield Trend for previous 12 months
Seven-Day Yields1,2
The seven-day yield is the income generated by the portfolio’s holdings minus the portfolio’s operating expenses. The seven-day yields are calculated using standard SEC formulas. The effective yield includes the effect of reinvesting daily dividends. Please remember that money market fund yields fluctuate.
Schwab Money Market Portfoliotm | |||||
Seven-Day Yield | 0.01 | % | |||
Seven-Day Effective Yield | 0.01 | % | |||
An investment in a money fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in a money fund.
Portfolio holdings may have changed since the report date.
1 | Portfolio yields do not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the yields would be less than those shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. | |
2 | The investment adviser and its affiliates have voluntarily waived expenses to maintain a positive net yield for the portfolio (voluntary yield waiver). Without the voluntary yield waiver, the portfolio’s yield would have been lower. The voluntary yield waiver added 0.33% to the seven-day yield. Please see financial note 4 for additional details. |
4 Schwab Money Market Portfoliotm
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
The portfolio incurs ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning July 1, 2014 and held through December 31, 2014.
The Actual Return line in the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ¸ $1,000 = 8.6), then multiply the result by the number given for the portfolio under the heading entitled “Expenses Paid During Period.”
The Hypothetical Return line in the table below provides information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs.
Ending | ||||||||||||||||
Beginning | Account Value | Expenses Paid | ||||||||||||||
Expense Ratio1 | Account Value | (Net of Expenses) | During Period2 | |||||||||||||
(Annualized) | at 7/1/14 | at 12/31/14 | 7/1/14–12/31/14 | |||||||||||||
Schwab Money Market Portfoliotm | ||||||||||||||||
Actual Return | 0.07% | $ | 1,000.00 | $ | 1,000.10 | $ | 0.35 | |||||||||
Hypothetical 5% Return | 0.07% | $ | 1,000.00 | $ | 1,024.85 | $ | 0.36 |
1 | Based on the most recent six-month expense ratio which covers a 12-month period; may differ from the expense ratio provided in the Financial Highlights. | |
2 | Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year. |
Schwab Money Market Portfoliotm 5
Schwab Money Market Portfolio™
Financial Statements
Financial Highlights
1/1/14– | 1/1/13– | 1/1/12– | 1/1/11– | 1/1/10– | ||||||||||||||||||
12/31/14 | 12/31/13 | 12/31/12 | 12/31/11 | 12/31/10 | ||||||||||||||||||
Per-Share Data ($) | ||||||||||||||||||||||
Net asset value at beginning of period | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | |||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||
Net investment income (loss) | 0.00 | 1 | 0.00 | 1 | 0.00 | 1 | 0.00 | 1 | 0.00 | 1 | ||||||||||||
Net realized and unrealized gains (losses) | 0.00 | 1 | 0.00 | 1,2 | 0.00 | 1 | (0.00 | )1 | (0.00 | )1 | ||||||||||||
Total from investment operations | 0.00 | 1 | 0.00 | 1 | 0.00 | 1 | 0.00 | 1 | 0.00 | 1 | ||||||||||||
Less distributions: | ||||||||||||||||||||||
Distributions from net investment income | (0.00 | )1 | (0.00 | )1 | (0.00 | )1 | (0.00 | )1 | (0.00 | )1 | ||||||||||||
Distributions from net realized gains | — | — | — | — | (0.00 | )1 | ||||||||||||||||
Total distributions | (0.00 | )1 | (0.00 | )1 | (0.00 | )1 | (0.00 | )1 | (0.00 | )1 | ||||||||||||
Net asset value at end of period | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | |||||||||||||||||
Total return (%) | 0.01 | 0.01 | 0.01 | 0.01 | 0.05 | |||||||||||||||||
Ratios/Supplemental Data (%) | ||||||||||||||||||||||
Ratios to average net assets: | �� | |||||||||||||||||||||
Net operating expenses | 0.07 | 3 | 0.08 | 3 | 0.12 | 3 | 0.10 | 3 | 0.18 | 3 | ||||||||||||
Gross operating expenses | 0.49 | 0.52 | 0.49 | 0.45 | 0.46 | |||||||||||||||||
Net investment income (loss) | 0.01 | 0.01 | 0.01 | 0.01 | 0.01 | |||||||||||||||||
Net assets, end of period ($ x 1,000,000) | 117 | 106 | 116 | 144 | 149 |
1 Per-share amount was less than $0.01.
2 Net realized and unrealized gains (losses) ratio includes payment from affiliate of $45,600. (See financial note 4)
3 Reflects the effect of a voluntary yield waiver in excess of the contractual expense limitation. (See financial note 4)
6 See financial notes
Schwab Money Market Portfolio
Portfolio Holdings as of December 31, 2014
This section shows all the securities in the fund’s portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarter of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The fund also files a complete schedule of portfolio holdings with the SEC monthly on Form N-MFP which is available 60 days after the end of the month to which the information pertains. A monthly schedule of portfolio holdings is also available by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus along with a link to the fund’s Form N-MFP filings on the SEC’s website.
For fixed rate obligations, the rate shown is the coupon rate (the rate established when the obligation was issued) and if the coupon rate is not available, the effective yield at the time of purchase is shown. For variable-rate obligations, the rate shown is the interest rate as of the report date. If the security’s structure includes one of a number of maturity-shortening provisions set forth in Rule 2a-7, such as an interest rate reset, demand feature or put feature, the effective maturity date is disclosed. In addition, the second maturity date shown is either the date on which the principal amount must be paid or the date payment must be made pursuant to a demand feature. If the effective maturity and maturity date are the same, the date will appear in the maturity date column.
Cost | Value | |||||||||||
Holdings by Category | ($) | ($) | ||||||||||
67 | .1% | Fixed-Rate Obligations | 78,229,708 | 78,229,708 | ||||||||
10 | .7% | Variable-Rate Obligations | 12,500,202 | 12,500,202 | ||||||||
0 | .0% | Other Investment Company | 45,600 | 45,600 | ||||||||
22 | .9% | Repurchase Agreements | 26,713,606 | 26,713,606 | ||||||||
100 | .7% | Total Investments | 117,489,116 | 117,489,116 | ||||||||
(0 | .7%) | Other Assets and Liabilities, Net | (804,683 | ) | ||||||||
100 | .0% | Net Assets | 116,684,433 |
Face | ||||||||||||||||||||
Effective | Maturity | Amount | Value | |||||||||||||||||
Issuer | Footnotes | Rate | Maturity | Date | ($) | ($) | ||||||||||||||
Fixed-Rate Obligations 67.1% of net assets | ||||||||||||||||||||
Government Agency Debt 54.2% | ||||||||||||||||||||
Fannie Mae | 0.05% | 02/11/15 | 3,000,000 | 2,999,829 | ||||||||||||||||
0.07% | 03/16/15 | 1,500,000 | 1,499,784 | |||||||||||||||||
0.38% | 03/16/15 | 5,000,000 | 5,002,928 | |||||||||||||||||
Federal Home Loan Bank | 0.07% | 01/07/15 | 1,000,000 | 999,989 | ||||||||||||||||
0.05% | 01/16/15 | 1,250,000 | 1,249,974 | |||||||||||||||||
0.07% | 01/28/15 | 5,000,000 | 4,999,738 | |||||||||||||||||
0.09% | 01/28/15 | 1,000,000 | 999,933 | |||||||||||||||||
0.10% | 01/28/15 | 2,100,000 | 2,099,843 | |||||||||||||||||
0.09% | 01/29/15 | 5,000,000 | 4,999,650 | |||||||||||||||||
0.10% | 02/11/15 | 1,500,000 | 1,499,829 | |||||||||||||||||
0.07% | 02/18/15 | 2,100,000 | 2,099,818 | |||||||||||||||||
0.06% | 02/23/15 | 3,800,000 | 3,799,664 | |||||||||||||||||
0.11% | 03/03/15 | 1,500,000 | 1,499,720 | |||||||||||||||||
0.06% | 03/04/15 | 3,500,000 | 3,499,638 | |||||||||||||||||
0.11% | 03/04/15 | 5,000,000 | 4,999,096 | |||||||||||||||||
0.15% | 03/18/15 | 1,280,000 | 1,279,608 | |||||||||||||||||
0.08% | 04/17/15 | 7,000,000 | 6,998,351 | |||||||||||||||||
0.13% | 06/03/15 | 7,000,000 | 6,999,205 | |||||||||||||||||
Freddie Mac | 0.03% | 01/22/15 | 1,700,000 | 1,699,970 | ||||||||||||||||
0.09% | 03/02/15 | 2,000,000 | 1,999,700 | |||||||||||||||||
0.11% | 03/16/15 | 2,000,000 | 1,999,568 | |||||||||||||||||
63,225,835 | ||||||||||||||||||||
Treasury Debt 12.9% | ||||||||||||||||||||
United States Treasury Department | 0.01% | 01/08/15 | 5,000,000 | 4,999,995 | ||||||||||||||||
0.13% | 04/30/15 | 5,000,000 | 5,000,980 |
See financial notes 7
Schwab Money Market Portfolio
Portfolio Holdings continued
Face | ||||||||||||||||||||
Effective | Maturity | Amount | Value | |||||||||||||||||
Issuer | Footnotes | Rate | Maturity | Date | ($) | ($) | ||||||||||||||
0.25% | 07/15/15 | 5,000,000 | 5,002,898 | |||||||||||||||||
15,003,873 | ||||||||||||||||||||
Total Fixed-Rate Obligations | ||||||||||||||||||||
(Cost $78,229,708) | 78,229,708 | |||||||||||||||||||
Variable-Rate Obligations 10.7% of net assets | ||||||||||||||||||||
Government Agency Debt 10.7% | ||||||||||||||||||||
Farm Credit System | 0.27% | 01/02/15 | 03/04/15 | 2,500,000 | 2,500,387 | |||||||||||||||
Federal Home Loan Bank | 0.11% | 01/20/15 | 03/20/15 | 10,000,000 | 9,999,815 | |||||||||||||||
Total Variable-Rate Obligations | ||||||||||||||||||||
(Cost $12,500,202) | 12,500,202 | |||||||||||||||||||
Number | ||||||||||||||||||||
of | Value | |||||||||||||||||||
Security | Footnotes | Rate | Shares | ($) | ||||||||||||||||
Other Investment Company 0.0% of net assets | ||||||||||||||||||||
Money Market Fund 0.0% | ||||||||||||||||||||
State Street Institutional U.S. Government Money Market Fund, Premier Class | (a) | 0.00% | n/a | n/a | 45,600 | 45,600 | ||||||||||||||
Total Other Investment Company | ||||||||||||||||||||
(Cost $45,600) | 45,600 | |||||||||||||||||||
Maturity | ||||||||||||||||||||
Effective | Maturity | Amount | Value | |||||||||||||||||
Issuer | Footnotes | Rate | Maturity | Date | ($) | ($) | ||||||||||||||
Repurchase Agreements 22.9% of net assets | ||||||||||||||||||||
Treasury Repurchase Agreements 22.9% | ||||||||||||||||||||
Barclays Capital, Inc | ||||||||||||||||||||
Issued 12/31/14, repurchase date 01/02/15 (Collateralized by U.S. Treasury Securities valued at $16,027,899, 0.25% - 3.63%, due 08/31/15 - 03/31/21) | 0.05% | 01/02/15 | 15,713,650 | 15,713,606 | ||||||||||||||||
BNP Paribas Securities Corp | ||||||||||||||||||||
Issued 12/31/14, repurchase date 01/02/15 (Collateralized by U.S. Treasury Securities valued at $11,220,029, 0.25%, due 2/29/16) | 0.06% | 01/02/15 | 11,000,037 | 11,000,000 | ||||||||||||||||
Total Repurchase Agreements | ||||||||||||||||||||
(Cost $26,713,606) | 26,713,606 | |||||||||||||||||||
End of Investments. |
At 12/31/14, the tax basis cost of the fund’s investments was $117,443,515 and the unrealized appreciation and depreciation were $45,601 and ($0), respectively, with a net unrealized appreciation of $45,601.
(a) | The rate shown is the 7-day yield. |
8 See financial notes
Schwab Money Market Portfolio
Portfolio Holdings continued
The following is a summary of the inputs used to value the fund’s investments as of December 31, 2014 (see financial note 2(a) for additional information):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Significant | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Fixed-Rate Obligations1 | $— | $78,229,708 | $— | $78,229,708 | ||||||||||||
Variable-Rate Obligations1 | — | 12,500,202 | — | 12,500,202 | ||||||||||||
Other Investment Companies1 | 45,600 | — | — | 45,600 | ||||||||||||
Repurchase Agreements1 | — | 26,713,606 | — | 26,713,606 | ||||||||||||
Total | $45,600 | $117,443,516 | $— | $117,489,116 | ||||||||||||
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 December 31, 2014.
See financial notes 9
Schwab Money Market Portfolio
Statement of
Assets and Liabilities
As of December 31, 2014
Assets | ||||||
Investments, at cost and value | $90,775,510 | |||||
Repurchase agreements, at cost and value | + | 26,713,606 | ||||
Total investments, at cost and value (Note 2a) | 117,489,116 | |||||
Cash | 1 | |||||
Receivables: | ||||||
Fund shares sold | 567,783 | |||||
Interest | 13,984 | |||||
Prepaid expenses | + | 815 | ||||
Total assets | 118,071,699 | |||||
Liabilities | ||||||
Payables: | ||||||
Investment adviser and administrator fees | 13 | |||||
Fund shares redeemed | 1,360,563 | |||||
Accrued expenses | + | 26,690 | ||||
Total liabilities | 1,387,266 | |||||
Net Assets | ||||||
Total assets | 118,071,699 | |||||
Total liabilities | − | 1,387,266 | ||||
Net assets | $116,684,433 | |||||
Net Assets by Source | ||||||
Capital received from investors | 116,638,253 | |||||
Net realized capital gains | 46,180 | |||||
Net Asset Value (NAV) |
Shares | ||||||||||||
Net Assets | ÷ | Outstanding | = | NAV | ||||||||
$116,684,433 | 116,685,078 | $1.00 |
10 See financial notes
Schwab Money Market Portfolio
Statement of
Operations
For the period January 1, 2014 through December 31, 2014
Investment Income | ||||||
Interest | $88,138 | |||||
Expenses | ||||||
Investment adviser and administrator fees | 396,360 | |||||
Portfolio accounting fees | 44,419 | |||||
Professional fees | 34,092 | |||||
Shareholder reports | 26,471 | |||||
Transfer agent fees | 22,301 | |||||
Independent trustees’ fees | 14,664 | |||||
Custodian fees | 8,687 | |||||
Other expenses | + | 2,423 | ||||
Total expenses | 549,417 | |||||
Expense reduction by CSIM and its affiliates | − | 472,603 | ||||
Net expenses | − | 76,814 | ||||
Net investment income | 11,324 | |||||
Realized Gains (Losses) | ||||||
Net realized gains on investments | 579 | |||||
Increase in net assets resulting from operations | $11,903 |
See financial notes 11
Schwab Money Market Portfolio
Statement of
Changes in Net Assets
For the current and prior report periods
Operations | ||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||
Net investment income | $11,324 | $11,617 | ||||||||
Net realized gains | + | 579 | 46,681 | 1 | ||||||
Increase in net assets from operations | 11,903 | 58,298 | ||||||||
Distributions to Shareholders | ||||||||||
Distributions from net investment income | ($11,324 | ) | ($11,617 | ) | ||||||
Transactions in Fund Shares* | ||||||||||
Shares sold | 158,550,893 | 115,039,074 | ||||||||
Shares reinvested | 11,321 | 11,611 | ||||||||
Shares redeemed | + | (147,670,781 | ) | (125,643,578 | ) | |||||
Net transactions in fund shares | 10,891,433 | (10,592,893 | ) | |||||||
Net Assets | ||||||||||
Beginning of period | 105,792,421 | 116,338,633 | ||||||||
Total increase or decrease | + | 10,892,012 | (10,546,212 | ) | ||||||
End of period | $116,684,433 | $105,792,421 |
* | Transactions took place at $1.00 per share; figures for share quantities are the same as for dollars. | |
1 | Net realized gains includes payment from affiliate. (See financial note 4) |
12 See financial notes
Schwab Money Market Portfolio
Financial Notes
1. Business Structure of the Fund:
Schwab Money Market Portfolio (the “fund”) is a series of Schwab Annuity Portfolios (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 Annuity Portfolios (organized January 21, 1994) | ||||
Schwab Money Market Portfolio | ||||
Schwab MarketTrack Growth Portfolio II | ||||
Schwab S&P 500 Index Portfolio | ||||
Schwab VIT Balanced Portfolio | ||||
Schwab VIT Balanced with Growth Portfolio | ||||
Schwab VIT Growth Portfolio | ||||
The fund offers one share class. Shares are bought and sold 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 fund’s Board of Trustees (the “Board”) may authorize the issuance of as many shares as necessary.
The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. At December 31, 2014, 100% of the fund’s shares were held through three insurance companies. Subscriptions and redemptions of these insurance separate accounts could have a material impact on the fund.
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 (FASB) 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”).
(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.
Securities in the fund are valued at amortized cost (which approximates market value) as permitted in accordance with Rule 2a-7 of the 1940 Act. In the event that security valuations do not approximate market value, securities may be fair valued as determined in accordance with procedures adopted by the Board. 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 fund pursuant to the valuation procedures.
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
13
Schwab Money Market Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
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.
• | Underlying funds: Mutual funds are valued at their respective NAVs. |
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. As investments whose values are classified as Level 2 prices include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. Securities held by money funds operating under Rule 2a-7 of the 1940 Act are valued at amortized cost which approximates current market value and are considered to be valued using Level 2 inputs. | |
• | 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. |
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 December 31, 2014 are disclosed in the Portfolio Holdings.
(b) Accounting Policies for certain Portfolio Investments (if held):
Repurchase Agreements: In a repurchase agreement, a fund buys a security from another party (the “counter-party”), usually a financial institution, with the agreement that it be sold back in the future. Repurchase agreements subject a fund to counter-party risk, meaning that the fund could lose money if the other party fails to perform under the terms of the agreement. The fund mitigates this risk by ensuring that a fund’s repurchase agreements are collateralized by cash, U.S. government securities, fixed income securities, equity securities or other types of securities. These risks are magnified to the extent that a repurchase agreement is secured by collateral other than cash and government securities, such as debt securities, equity securities and high yield securities that are rated below investment grade. All collateral is held by the fund’s custodian (or, with multi-party agreements, the agent’s bank) and is monitored daily to ensure that its market value is at least equal to the repurchase price under the agreement. In the event of a default by the counter-party, realization of the collateral proceeds could be delayed or limited and the value of the collateral may decline. Investments in repurchase agreements are also based on a review of the credit quality of the repurchase agreement counter-party.
As of December 31, 2014, the fund had investments in repurchase agreements with a gross value of $26,713,606 as disclosed in the Portfolio Holdings and the Statement of Assets and Liabilities. The value of the related collateral disclosed in the Portfolio Holdings exceeded the value of the repurchase agreements at period end.
14
Schwab Money Market Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
Delayed-Delivery Transactions: The fund may buy securities at a predetermined price or yield, with payment and delivery taking place after the customary settlement period for that type of security. The fund will assume the rights and risks of ownership at the time of purchase, including the risk of price and yield fluctuations. Typically, no interest will accrue to a fund until the security is delivered. The fund will earmark or segregate appropriate liquid assets to cover its delayed-delivery purchase obligations.
(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. If a fund buys a debt security at a discount (less than face value) or a premium (more than face value), it amortizes premiums and accretes discounts from the purchase settlement date up to maturity. The fund then increases (in the case of discounts) or reduces (in the case of premiums) the income it records from the security. If the security is callable (meaning that the issuer has the option to pay it off before its maturity date), then the fund amortizes the premium and accretes discounts to the security’s call date and price, rather than the maturity date and price.
(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 fund declares distributions from net investment income, if any, every day it is open for business. These distributions are paid out to the insurance company separate accounts once a month. The fund makes distributions from net realized capital gains, if any, once a year.
(g) 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.
(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 fund intends to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the fund distributes substantially all of its net investment income and realized net capital gains, if any, to the participating insurance company’s (shareholders) separate accounts each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax.
(j) 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.
15
Schwab Money Market Portfolio
Financial Notes (continued)
3. Risk Factors:
Investment Risk. An investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of a shareholder’s investment at $1 per share, it is possible to lose money by investing in the fund.
Interest Rate Risk. Interest rates rise and fall over time. As with any investment whose yield reflects current interest rates, the fund’s yield will change over time. During periods when interest rates are low, the fund’s yield (and total return) also will be low. Because interest rates in the United States 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 sudden or unpredictable rise in interest rates may cause volatility in the market and may decrease liquidity in the money market securities markets, making it more difficult for the fund to sell its money market investments at a time when the investment adviser might wish to sell such investments. Decreased market liquidity also may make it more difficult to value some or all of the fund’s money market securities holdings. In addition, to the extent the fund makes any reimbursement payments to the investment adviser and/or its affiliates, the fund’s yield would be lower.
Repurchase Agreements Risk. When the fund enters into a repurchase agreement, the fund is exposed to the risk that the counter-party will not fulfill its contractual obligation. In a repurchase agreement, there exists the risk that, when the fund buys a security from a counter-party that agrees to repurchase the security at an agreed upon price (usually higher) and time, the counter-party will not repurchase the security. These risks are magnified to the extent that a repurchase agreement is secured by collateral other than cash and government securities, such as debt securities, equity securities and high yield securities that are rated below investment grade (“Alternative Collateral”). High yield securities that are used as Alternative Collateral are subject to greater levels of credit and liquidity risk, and are considered primarily speculative with respect to the issuer’s continuing ability to make principal and interest payments. Alternative Collateral may be subject to greater price volatility and may be more volatile or less liquid than other types of collateral, increasing the risk that the fund will be unable to recover fully in the event of a counter-party’s default.
Credit Risk. The fund is subject to the risk that a decline in the credit quality of a fund investment could cause the fund to lose money or underperform. The fund could lose money if the issuer of a fund investment fails to make timely principal or interest payments or if a guarantor, liquidity provider or counter-party of a fund investment fails to honor its obligations. Even though the fund’s investments in repurchase agreements are collateralized at all times, there is some risk to the fund if the other party should default on its obligations and the fund is delayed or prevented from recovering or disposing of the collateral. Negative perceptions of the ability of an issuer, guarantor, liquidity provider or counter-party to make payments or otherwise honor its obligations, as applicable, could also cause the price of that investment to decline. The credit quality of the fund’s portfolio holdings can change rapidly in certain market environments and any downgrade or default on the part of a single fund investment could cause the fund’s share price or yield to fall.
Many of the U.S. government securities that the fund invests in are not backed by the full faith and credit of the United States government, which means they are neither issued nor guaranteed by the U.S. Treasury. Although maintained in conservatorship by the Federal Housing Finance Agency since September 2008, Fannie Mae (FNMA) and Freddie Mac (FHLMC) maintain only lines of credit with the U.S. Treasury. The Federal Home Loan Banks (FHLB) maintain limited access to credit lines from the U.S. Treasury. Other securities, such as obligations issued by the Federal Farm Credit Banks Funding Corporation (FFCB), are supported solely by the credit of the issuer. There can be no assurance that the U.S. government will provide financial support to securities of its agencies and instrumentalities if it is not obligated to do so under law. Also, any government guarantees on securities a fund owns do not extend to shares of the fund itself.
Credit Enhancement and Liquidity Support Risk. The fund may invest in securities with credit and/or liquidity supports provided by a bank, bond insurance provider, or other financial institution. Adverse developments affecting a particular credit or liquidity support provider, or more generally, banks and financial institutions, could therefore have a negative effect on the value of the fund’s holdings. To the extent that a portion of the fund’s underlying investments are supported by the same bank or financial institution, these risks may be increased.
Foreign Investment Risk. The fund’s investments in securities of foreign issuers or securities with credit or liquidity enhancements provided by foreign entities may involve certain risks that are greater than those associated with investments in securities of U.S. issuers or securities with credit or liquidity enhancements provided by U.S. entities. These include risks of adverse changes in foreign economic, political, regulatory and other conditions; differing accounting, auditing, financial
16
Schwab Money Market Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
reporting and legal standards and practices; differing securities market structures; and higher transaction costs. In addition, sovereign risk, or the risk that a government may become unwilling or unable to meet its loan obligations or guarantees, could increase the credit risk of financial institutions connected to that particular country.
Management Risk. Any actively managed mutual fund is subject to the risk that its investment adviser will make poor security selections. The fund’s investment 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. The investment adviser’s maturity decisions will also affect the fund’s yield, and in unusual circumstances potentially could affect its share price. To the extent that the investment adviser anticipates interest rate trends imprecisely, the fund’s yield at times could lag those of other money market funds.
Liquidity Risk. Liquidity risk exists when particular investments are difficult to purchase or sell. The market for certain investments may become illiquid due to specific adverse changes in the conditions of a particular issuer or under adverse market or economic conditions independent of the issuer, including, for example, during periods of rising interest rates. In addition, dealer inventories of certain securities — an indication of the ability of dealers to engage in “market making” — are at, or near, historic lows in relation to market size, which could potentially lead to decreased liquidity. The fund’s investments in illiquid securities may reduce the returns of the fund because it may be unable to sell the illiquid securities at an advantageous time or price. Further, transactions in illiquid securities may entail transaction costs that are higher than those for transactions in liquid securities.
Redemption Risk. The fund may experience periods of heavy redemptions that could cause the fund to liquidate its assets at inopportune times or at a loss or depressed value, particularly during periods of declining or illiquid markets. Redemptions by a few large investors in the fund may have a significant adverse effect on the fund’s ability to maintain a stable $1.00 share price. In the event any money market fund fails to maintain a stable net asset value, other money market funds, including the fund, could face a market-wide risk of increased redemption pressures, potentially jeopardizing the stability of their $1.00 share prices.
Money Market Risk. Although a money market fund seeks to maintain a stable $1 NAV, it is possible to lose money by investing in a money market fund. In addition, a money market fund is not designed to offer capital appreciation.
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 (“Advisory Agreement”) between CSIM and the trust.
For its advisory and administrative services to the 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:
Average Daily Net Assets | ||||
First $1 billion | 0.35% | |||
More than $1 billion but not exceeding $10 billion | 0.32% | |||
More than $10 billion but not exceeding $20 billion | 0.30% | |||
More than $20 billion but not exceeding $40 billion | 0.27% | |||
Over $40 billion | 0.25% |
Contractual Expense Limitation
CSIM and its affiliates have made an additional agreement 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 (“expense limitation”) to 0.50% through April 29, 2016.
17
Schwab Money Market Portfolio
Financial Notes (continued)
4. Affiliates and Affiliated Transactions (continued):
During the period ended December 31, 2014, the fund waived $472,603 in expenses of which $22,301 was waived in accordance with the contractual expense limitation agreement noted above and the remainder to maintain a positive net yield as noted below.
Voluntary Yield Waiver/Reimbursement
In addition to the contractual expense limitation agreement noted above, CSIM and its affiliates also may waive and/or reimburse expenses to the extent necessary to maintain a positive net yield for the fund. CSIM and its affiliates may recapture from the fund any of these expenses or fees they have waived and/or reimbursed until the third anniversary of the end of the fiscal year in which such waiver and/or reimbursement occurs, subject to certain limitations. These reimbursement payments by the fund to CSIM and its affiliates are considered “non-routine expenses” and are not subject to any net operating expense limitations in effect at the time of such payment. This recapture could negatively affect the fund’s future yield. There were no prior year amounts recaptured. As of December 31, 2014, the balance of recoupable waivers is as follows:
Expiration Date | ||||||||||||||
December 31, 2015 | December 31, 2016 | December 31, 2017 | Total | |||||||||||
$464,329 | $472,070 | $450,302 | $1,386,701 |
As of December 31, 2014, the fund had recoupable waivers expire in the amount of $495,734.
Pursuant to an exemptive order issued by the SEC, the fund may enter into interfund borrowing and lending transactions with other Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate to be charged on a loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review by the Board. The fund had no interfund borrowing or lending activity during the period.
On February 22, 2013, as noted on the Statement of Changes, The Charles Schwab Corporation made a payment of $45,600 to Schwab Money Market Portfolio to cover the net remaining losses incurred on certain investments. This payment represented 0.04% of the fund’s net assets on that date.
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:
The fund has access to custodian overdraft facilities, a committed line of credit of $150 million with State Street, an uncommitted line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman & Co. The fund pays interest on the amount it borrows at rates that are negotiated periodically. The fund also pays an annual fee to State Street for the committed line of credit.
There were no borrowings from the lines of credit by the fund during the period. However, the fund may have utilized its 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. Federal Income Taxes:
As of December 31, 2014, the fund has distributable earnings on a tax-basis of $579 in undistributed ordinary income.
Capital loss carryforwards may be used to offset future realized capital gains for federal income tax purposes. As of December 31, 2014, the fund had no capital loss carryforwards.
18
Schwab Money Market Portfolio
Financial Notes (continued)
7. Federal Income Taxes (continued):
For tax purposes, realized net capital losses and late-year ordinary losses incurred after October 31 may be deferred and treated as occurring on the first day of the following year. For the year ended December 31, 2014, the fund had no capital losses deferred and no capital loss carryforwards utilized.
The tax-basis components of distributions paid during the current and prior fiscal years were as follows:
Current period distributions | ||||
Ordinary income | $11,324 | |||
Prior period distributions | ||||
Ordinary income | $11,617 |
Distributions paid to shareholders are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as short-term capital gains and losses; capital losses related to wash sales, and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming shareholders as a distribution for tax purposes.
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 December 31, 2014, no such reclassifications were required.
As of December 31, 2014, 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 December 31, 2014, the fund did not incur any interest or penalties.
8. Recent Regulatory Development:
On July 23, 2014 the SEC passed new amendments to the rules governing money market funds. The new amendments have mandatory compliance dates, which are staggered over the next two years. Management is currently evaluating the impact of the new amendments and their impact to the fund’s future financial statements and related disclosures.
9. 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.
19
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab Money Market Portfolio
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 Money Market Portfolio (one of the portfolios constituting Schwab Annuity Portfolios, hereafter referred to as the “Fund”) at December 31, 2014, 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 at December 31, 2014 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2015
20
Trustees and Officers
The tables below give information about the trustees and officers of Schwab Annuity Portfolios, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 95 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 1-800-435-4000.
Independent Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served1) | During the Past Five Years | the Trustee | Other Directorships | |||
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman of JDN Corporate Advisory LLC (advisory services firm) (Oct. 2001 – present). | 74 | Director, WageWorks, Inc. (2010 – present) Director, Redwood Trust, Inc. (1998 – present) | |||
John F. Cogan 1947 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | 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 – present). | 74 | Director, Gilead Sciences, Inc. (2005 – present) | |||
David L. Mahoney 1954 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Private Investor. | 74 | Director, Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) | |||
Kiran M. Patel 1948 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 74 | Director, KLA-Tencor Corporation (2008 – present) | |||
Charles A. Ruffel 1956 Trustee (Trustee of Schwab Annuity Portfolios since 2015.) | Managing Partner and Co-Founder, Kudu Advisors, LLC (financial services) (May 2009 – present); Director, Asset International, Inc. (publisher of financial services information) (Jan. 2009 – Nov. 2014). | 95 | None. | |||
Gerald B. Smith 1950 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 74 | 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 Schwab Annuity Portfolios since 2008.) | Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present). | 74 | Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present) | |||
21
Interested Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served) | During the Past Five Years | the Trustee | Other Directorships | |||
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Annuity Portfolios since 1994.) | Chairman and Director, The Charles Schwab Corporation (1986 – present); Chairman and Director of Charles Schwab & Co., Inc. (1971 – present); Chairman and Director of Charles Schwab Investment Management, Inc. (1989 – present); Chairman and Director of Charles Schwab Bank (2003 – present); Chairman and Chief Executive Officer of Schwab (SIS) Holdings Inc. I and Schwab International Holdings, Inc. (1996 – present); and Director, Chairman and Chief Executive Officer, Schwab Holdings, Inc. (1979 – present). | 74 | Chairman and Director, The Charles Schwab Corporation (1986 – present) Director, Yahoo! Inc. (2014 – present) | |||
Walter W. Bettinger II2 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | Director, President and Chief Executive Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (2008 – present); Director, Charles Schwab Bank (2006 – present); and Director Schwab Holdings, Inc. (2008 – present). | 95 | Director, The Charles Schwab Corporation (2008 – present) | |||
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 Chandoha 1961 President and Chief Executive Officer (Officer of Schwab Annuity Portfolios since 2010.) | Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; 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 (January 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (March 2007 – August 2010). | |
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Annuity Portfolios since 2004.) | Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Treasurer and Chief Financial Officer, Laudus Funds (2006 – present); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – present) and Schwab ETFs (Oct. 2009 – present); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present). | |
Omar Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Equities, Charles Schwab Investment Management, Inc. (April 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 – April 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 Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (April 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 (April 2006 – Jan. 2008). | |
22
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 | |
David Lekich 1964 Chief Legal Officer and Secretary (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President (Sept. 2011 – present), Vice President (March 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 (April 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (April 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. | |
Catherine MacGregor 1964 Vice President and Assistant Secretary (Officer of Schwab Annuity Portfolios since 2005.) | Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 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 | Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees retire at age 72 or after twenty years as a trustee, whichever comes first. In addition, the retirement policy requires any independent trustee of Schwab Funds who also serves as an independent trustee of the Laudus Funds to retire from the Boards of the Schwab Funds upon their required retirement date from either the Boards of Trustees of the Schwab Funds or the Laudus Funds, whichever comes first. | |
2 | Mr. Schwab and Mr. Bettinger 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 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. |
23
Notes
Schwab MarketTrack Growth Portfolio IItm | |||||
Annual report dated December 31, 2014 |
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 Fund’s website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s website at www.sec.gov.
Investment Adviser: Charles Schwab Investment Management, Inc. (CSIM)
The Investment Environment
The Schwab MarketTrack Growth Portfolio II focuses on stock investments, while including some bonds and cash investments in seeking to reduce the portfolio’s volatility.
For the 12-month reporting period ended December 31, 2014, large-cap U.S. stocks performed well, with several equity indices reaching record highs. Small-cap stocks generated positive returns but lagged by comparison, with returns reduced by high relative valuations and the Federal Reserve’s policy shift. As a result, the Dow Jones U.S. Broad Stock Market Index returned 12.6%.
For stocks in developed international markets and in emerging markets, the depreciation of many foreign currencies translated into negative returns in U.S. dollar terms. Healthier economic growth in the U.S. than overseas and a difference in policy efforts between the Federal Reserve and many foreign central banks led to these fluctuations. Reflecting this backdrop, the MSCI EAFE Index (Net)—representing the performance of developed international stocks—returned −4.9%, and the MSCI Emerging Markets Index (Net) returned −2.2%.
U.S. bonds generated noteworthy returns and outperformed international bonds, which were hurt by their falling currencies. Helped by weak U.S. economic growth early in 2014, yields on longer-term U.S. bonds declined, while returns on international bonds were reduced by their falling currencies versus the U.S. dollar. The Barclays U.S. Aggregate Bond index—representing the broad U.S. bond market—returned 6.0%, and the Citigroup Non-U.S. Dollar World Government Bond Index returned −2.7%.
Money market securities continued to help preserve investor capital, while facing another period of low yields.
Asset Class Performance Comparison % returns during the 12 months ended 12/31/2014
This graph compares the performance of various asset classes during the report period. Final performance figures for the period are in the key below.
13.69% | S&P 500® Index: measures U.S. large-cap stocks | |||
4.89% | Russell 2000® Index: measures U.S. small-cap stocks | |||
−4.90% | MSCI EAFE® Index (Net): measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East | |||
5.97% | Barclays U.S. Aggregate Bond Index: measures the U.S. bond market | |||
0.02% | Barclays U.S. Treasury Bills 1-3 Months Index: measures short-term U.S. Treasury obligations |
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.
Index figures assume dividends and distributions were reinvested, and do not include trading and management costs, which would lower performance. Indices are unmanaged, do not incur management fees, costs and expenses, and you cannot invest in them directly. Remember that past performance is not a guarantee of future results.
Schwab MarketTrack Growth Portfolio II 1
Portfolio Management
Zifan Tang, CFA, Managing Director and Head of Asset Allocation Strategies, leads the portfolio management team and has overall responsibility for all aspects of the management of the portfolio. 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. |
2 Schwab MarketTrack Growth Portfolio II
Schwab MarketTrack Growth Portfolio II
The Schwab MarketTrack Growth Portfolio II (the portfolio) seeks high capital growth with less volatility than an all-stock portfolio. The portfolio primarily utilizes a fund-of-funds structure that involves holding equity, fixed income, and money market funds selected from within the Schwab Funds and Laudus Funds complex, but it may buy individual securities to accomplish its objective. The portfolio seeks to remain close to the target allocations of 80% equity, 15% fixed income, and 5% cash or cash equivalents (including money market funds), with the equity allocation further diversified into large-cap, small-cap, and international equities.
Performance. The portfolio uses the internally calculated Growth Composite Index (the composite index) as a performance gauge. (Please see Glossary for components of the composite index.)
For the 12-month reporting period ended December 31, 2014, the portfolio returned 5.46%. The S&P 500® Index and the Barclays U.S. Aggregate Bond Index, reflecting broad-based U.S. stock and bond market performance, returned 13.69% and 5.97%, respectively. The composite index, described above, returned 6.48%.
Market Highlights. U.S. stock markets reached record highs during the 12-month reporting period, as a rebounding U.S. economy and stronger corporate earnings contributed positively to market performance. Signs of economic improvement led the Federal Reserve (the Fed) to wind down its quantitative easing policies and conclude the program in October. At the same time, the Fed left short-term interest rates historically low, generally supporting both stocks and the broad U.S. bond market. Internationally, both developed and emerging markets struggled amid an uncertain global economic outlook and heightened geopolitical tensions. Throughout the 12-month reporting period, many foreign currencies depreciated versus the U.S. dollar, generally reducing overall returns on overseas investments.
Positioning and Strategies. The portfolio’s allocations were broadly in line with those of the composite index.
U.S. large-cap equity exposures provided the greatest contribution to the portfolio’s total return for the reporting period. The largest contribution came from the Schwab® S&P 500 Index Fund, which returned 13.6% and was the portfolio’s largest position. The other U.S. large-cap position, the Schwab 1000 Index® Fund, also contributed to portfolio performance and returned 12.8%. The Schwab Small-Cap Index Fund® represented the portfolio’s U.S. small-cap exposure and returned 5.0% for the 12-month reporting period.
The portfolio’s international equity exposure detracted from the portfolio’s total return and from performance relative to the composite index. The portfolio’s position in the Schwab International Index Fund®, which is the composite index’s international equity allocation component, returned –5.7%, underperforming the MSCI EAFE Index (Net).
The fixed income allocation produced a positive return that contributed to the portfolio’s total return. The Schwab Total Bond Market Fundtm returned 5.8% for the reporting period. On a relative basis, this return was slightly lower than the return of the composite index’s U.S. fixed income allocation component, the Barclays U.S. Aggregate Bond Index. Despite this underperformance, this allocation still contributed positively to the portfolio’s total return.
As of 12/31/14:
Statistics
Number of Holdings | 10 | |||
Portfolio Turnover Rate | 14% |
Asset Class Weightings % of Investments1
Equity Funds – Large-Cap | 40.6% | |||
Equity Funds – Small-Cap | 20.3% | |||
Equity Funds – International | 19.4% | |||
Fixed-Income Funds – Intermediate-Term Bond | 14.7% | |||
Short-Term Investments | 3.4% | |||
Money Market Funds | 1.6% | |||
Total | 100.0% |
Top Holdings % of Net Assets2,3
Schwab S&P 500 Index Fund | 30.4% | |||
Schwab Small-Cap Index Fund | 20.3% | |||
Schwab International Index Fund | 19.5% | |||
Schwab Total Bond Market Fund | 14.8% | |||
Schwab 1000 Index Fund | 10.2% | |||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 1.6% | |||
Total | 96.8% |
Management views and portfolio holdings may have changed since the report date.
Small-company stocks are subject to greater volatility than other asset classes.
Foreign securities can involve risks such as political and economic instability and currency risk.
1 | The portfolio invests mainly in other Schwab Funds and/or Laudus Funds. | |
2 | This list is not a recommendation of any security by the investment adviser. | |
3 | The holdings listed exclude any temporary liquidity investments. |
Schwab MarketTrack Growth Portfolio II 3
Schwab MarketTrack Growth Portfolio IItm
Performance and Fund Facts as of 12/31/14
The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabfunds_prospectus.
December 31, 2004 – December 31, 2014
Performance of Hypothetical
$10,000 Investment2
Performance of Hypothetical
$10,000 Investment2
Average Annual Total Returns1,2
Portfolio and inception Date | 1 Year | 5 Years | 10 Years | ||||||||||||
Portfolio: Schwab MarketTrack Growth Portfolio IItm (11/01/96) | 5.46 | % | 10.71 | % | 6.17 | % | |||||||||
Growth Composite Index | 6.48 | % | 11.12 | % | 6.70 | % | |||||||||
S&P 500® Index | 13.69 | % | 15.45 | % | 7.67 | % | |||||||||
Barclays U.S. Aggregate Bond Index | 5.97 | % | 4.45 | % | 4.71 | % | |||||||||
Fund Category: Morningstar Aggressive Allocation | 5.71 | % | 10.13 | % | 5.85 | % |
Portfolio Expense Ratios3: Net 0.68%; Gross 0.98%
All total return figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.
The components that make up the composite index may vary over time. For index definitions, please see the Glossary.
1 | 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 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. Portfolio performance does not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the performance would be less than that shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. | |
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 0.18%. Net Expense: Expenses reduced by a contractual fee waiver in effect through at least 4/29/16. 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 Schwab MarketTrack Growth Portfolio II
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
The portfolio incurs ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning July 1, 2014 and held through December 31, 2014.
The Actual Return line in the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ¸ $1,000 = 8.6), then multiply the result by the number given for the portfolio under the heading entitled “Expenses Paid During Period.”
The Hypothetical Return line in the table below provides information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs.
Ending | ||||||||||||||||
Beginning | Account Value | Expenses Paid | ||||||||||||||
Expense Ratio1 | Account Value | (Net of Expenses) | During Period2 | |||||||||||||
(Annualized) | at 7/1/14 | at 12/31/14 | 7/1/14–12/31/14 | |||||||||||||
Schwab MarketTrack Growth Portfolio IItm | ||||||||||||||||
Actual Return | 0.50% | $ | 1,000.00 | $ | 1,006.70 | $ | 2.53 | |||||||||
Hypothetical 5% Return | 0.50% | $ | 1,000.00 | $ | 1,022.68 | $ | 2.55 |
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 portfolio invests are not included in this ratio. | |
2 | Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year. |
Schwab MarketTrack Growth Portfolio II 5
Schwab MarketTrack Growth Portfolio II™
Financial Statements
Financial Highlights
1/1/14– | 1/1/13– | 1/1/12– | 1/1/11– | 1/1/10– | ||||||||||||||||||
12/31/14 | 12/31/13 | 12/31/12 | 12/31/11 | 12/31/10 | ||||||||||||||||||
Per-Share Data ($) | ||||||||||||||||||||||
Net asset value at beginning of period | 19.30 | 16.04 | 14.50 | 14.89 | 13.40 | |||||||||||||||||
Income (loss) from investment operations: | ||||||||||||||||||||||
Net investment income (loss)1 | 0.28 | 0.23 | 0.29 | 0.27 | 0.20 | |||||||||||||||||
Net realized and unrealized gains (losses) | 0.77 | 3.48 | 1.64 | (0.40 | ) | 1.62 | ||||||||||||||||
Total from investment operations | 1.05 | 3.71 | 1.93 | (0.13 | ) | 1.82 | ||||||||||||||||
Less distributions: | ||||||||||||||||||||||
Distributions from net investment income | (0.26 | ) | (0.30 | ) | (0.39 | ) | (0.26 | ) | (0.33 | ) | ||||||||||||
Distributions from net realized gains | (0.66 | ) | (0.15 | ) | — | — | — | |||||||||||||||
Total distributions | (0.92 | ) | (0.45 | ) | (0.39 | ) | (0.26 | ) | (0.33 | ) | ||||||||||||
Net asset value at end of period | 19.43 | 19.30 | 16.04 | 14.50 | 14.89 | |||||||||||||||||
Total return (%) | 5.46 | 23.56 | 13.46 | (1.01 | ) | 13.62 | ||||||||||||||||
Ratios/Supplemental Data (%) | ||||||||||||||||||||||
Ratios to average net assets: | ||||||||||||||||||||||
Net operating expenses | 0.50 | 0.50 | 0.50 | 0.50 | 0.50 | |||||||||||||||||
Gross operating expenses | 0.72 | 0.80 | 0.83 | 0.80 | 0.77 | |||||||||||||||||
Net investment income (loss) | 1.45 | 1.28 | 1.85 | 1.78 | 1.41 | |||||||||||||||||
Portfolio turnover rate | 14 | 13 | 8 | 20 | 22 | |||||||||||||||||
Net assets, end of period ($ x 1,000,000) | 33 | 32 | 28 | 28 | 29 |
1 Calculated based on the average shares outstanding during the period.
6 See financial notes
Schwab MarketTrack Growth Portfolio II
Portfolio Holdings as of December 31, 2014
This section shows all the securities in the fund’s portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus.
Cost | Value | |||||||||||
Holdings by Category | ($) | ($) | ||||||||||
96 | .8% | Other Investment Companies | 21,033,415 | 31,526,050 | ||||||||
3 | .3% | Short-Term Investments | 1,090,485 | 1,090,485 | ||||||||
100 | .1% | Total Investments | 22,123,900 | 32,616,535 | ||||||||
(0 | .1%) | Other Assets and Liabilities, Net | (33,614 | ) | ||||||||
100 | .0% | Net Assets | 32,582,921 |
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Other Investment Companies 96.8% of net assets | ||||||||
Equity Funds 80.4% | ||||||||
International 19.5% | ||||||||
Schwab International Index Fund (a) | 349,591 | 6,334,586 | ||||||
Large-Cap 40.6% | ||||||||
Schwab 1000 Index Fund (a) | 63,213 | 3,317,436 | ||||||
Schwab S&P 500 Index Fund (a) | 308,110 | 9,908,804 | ||||||
13,226,240 | ||||||||
Small-Cap 20.3% | ||||||||
Schwab Small-Cap Index Fund (a) | 245,414 | 6,618,828 | ||||||
26,179,654 | ||||||||
Fixed-Income Fund 14.8% | ||||||||
Intermediate-Term Bond 14.8% | ||||||||
Schwab Total Bond Market Fund (a) | 502,667 | 4,810,527 | ||||||
Money Market Fund 1.6% | ||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares 0.01% (a)(b) | 535,869 | 535,869 | ||||||
Total Other Investment Companies | ||||||||
(Cost $21,033,415) | 31,526,050 | |||||||
Issuer | Face Amount | Value | ||||||
Rate, Maturity Date | ($) | ($) | ||||||
Short-Term Investments 3.3% of net assets | ||||||||
Time Deposits 3.3% | ||||||||
Australia & New Zealand Banking Group Ltd. | ||||||||
0.03%, 01/02/15 | 327,975 | 327,975 | ||||||
Bank of Tokyo-Mitsubishi UFJ | ||||||||
0.03%, 01/02/15 | 327,975 | 327,975 | ||||||
JPMorgan Chase | ||||||||
0.03%, 01/02/15 | 106,560 | 106,560 | ||||||
Wells Fargo | ||||||||
0.03%, 01/02/15 | 327,975 | 327,975 | ||||||
Total Short-Term Investments | ||||||||
(Cost $1,090,485) | 1,090,485 | |||||||
End of Investments. |
At 12/31/14, the tax basis cost of the fund’s investments was $22,868,791 and the unrealized appreciation and depreciation were $9,747,744 and ($0) respectively, with a net unrealized appreciation of $9,747,744.
(a) | Issuer is affiliated with the fund’s adviser. | |
(b) | The rate shown is the 7-day yield. |
The following is a summary of the inputs used to value the fund’s investments as of December 31, 2014 (see financial note 2(a) for additional information):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Significant | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Other Investment Companies1 | $31,526,050 | $— | $— | $31,526,050 | ||||||||||||
Short-Term Investments1 | — | 1,090,485 | — | 1,090,485 | ||||||||||||
Total | $31,526,050 | $1,090,485 | $— | $32,616,535 | ||||||||||||
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 December 31, 2014.
See financial notes 7
Schwab MarketTrack Growth Portfolio II
Statement of
Assets and Liabilities
As of December 31, 2014
Assets | ||||||
Investments in affiliated underlying funds, at value (cost $21,033,415) | $31,526,050 | |||||
Investments in unaffiliated issuers, (cost $1,090,485) | + | 1,090,485 | ||||
Total investments, at value (cost $22,123,900) | 32,616,535 | |||||
Receivables: | ||||||
Dividends | 9,188 | |||||
Fund shares sold | 125 | |||||
Interest | 1 | |||||
Prepaid expenses | + | 243 | ||||
Total assets | 32,626,092 | |||||
Liabilities | ||||||
Payables: | ||||||
Investments bought | 9,180 | |||||
Investment adviser and administrator fees | 2,196 | |||||
Accrued expenses | + | 31,795 | ||||
Total liabilities | 43,171 | |||||
Net Assets | ||||||
Total assets | 32,626,092 | |||||
Total liabilities | − | 43,171 | ||||
Net assets | $32,582,921 | |||||
Net Assets by Source | ||||||
Capital received from investors | 21,568,500 | |||||
Net investment income not yet distributed | 487,459 | |||||
Net realized capital gains | 34,327 | |||||
Net unrealized capital appreciation | 10,492,635 | |||||
Net Asset Value (NAV) |
Shares | ||||||||||||
Net Assets | ÷ | Outstanding | = | NAV | ||||||||
$32,582,921 | 1,676,614 | $19.43 |
8 See financial notes
Schwab MarketTrack Growth Portfolio II
Statement of
Operations
For the period January 1, 2014 through December 31, 2014
Investment Income | ||||||
Dividends received from affiliated underlying funds | $618,588 | |||||
Interest | + | 312 | ||||
Total investment income | 618,900 | |||||
Expenses | ||||||
Investment adviser and administrator fees | 139,960 | |||||
Professional fees | 38,140 | |||||
Transfer agent fees | 21,163 | |||||
Shareholder reports | 11,728 | |||||
Independent trustees’ fees | 8,805 | |||||
Portfolio accounting fees | 6,580 | |||||
Custodian fees | 3,335 | |||||
Other expenses | + | 899 | ||||
Total expenses | 230,610 | |||||
Expense reduction by CSIM | − | 71,579 | ||||
Net expenses | − | 159,031 | ||||
Net investment income | 459,869 | |||||
Realized and Unrealized Gains (Losses) | ||||||
Realized capital gain distributions received from affiliated underlying funds | 442,755 | |||||
Net realized gains on sales of affiliated underlying funds | 352,767 | |||||
Net realized gains on unaffiliated investments | + | 2,169 | ||||
Net realized gains | 797,691 | |||||
Net change in unrealized appreciation (depreciation) on investments | + | 447,536 | ||||
Net realized and unrealized gains | 1,245,227 | |||||
Increase in net assets resulting from operations | $1,705,096 |
See financial notes 9
Schwab MarketTrack Growth Portfolio II
Statement of
Changes in Net Assets
For the current and prior report periods
Operations | ||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||
Net investment income | $459,869 | $383,696 | ||||||||
Net realized gains | 797,691 | 1,094,335 | ||||||||
Net change in unrealized appreciation (depreciation) | + | 447,536 | 4,801,914 | |||||||
Increase in net assets from operations | 1,705,096 | 6,279,945 | ||||||||
Distributions to Shareholders | ||||||||||
Distributions from net investment income | (416,505 | ) | (515,494 | ) | ||||||
Distributions from net realized gains | + | (1,060,180 | ) | (261,488 | ) | |||||
Total distributions | ($1,476,685 | ) | ($776,982 | ) |
Transactions in Fund Shares
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | VALUE | SHARES | VALUE | |||||||||||||||
Shares sold | 192,517 | $3,699,470 | 160,572 | $2,826,615 | ||||||||||||||
Shares reinvested | 76,512 | 1,476,685 | 45,786 | 776,982 | ||||||||||||||
Shares redeemed | + | (226,925 | ) | (4,364,176 | ) | (295,004 | ) | (5,202,701 | ) | |||||||||
Net transactions in fund shares | 42,104 | $811,979 | (88,646 | ) | ($1,599,104 | ) | ||||||||||||
Shares Outstanding and Net Assets | ||||||||||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | NET ASSETS | SHARES | NET ASSETS | |||||||||||||||
Beginning of period | 1,634,510 | $31,542,531 | 1,723,156 | $27,638,672 | ||||||||||||||
Total increase or decrease | + | 42,104 | 1,040,390 | (88,646 | ) | 3,903,859 | ||||||||||||
End of period | 1,676,614 | $32,582,921 | 1,634,510 | $31,542,531 | ||||||||||||||
Net investment income not yet distributed | $487,459 | $416,462 |
10 See financial notes
Schwab MarketTrack Growth Portfolio II
Financial Notes
1. Business Structure of the Fund:
Schwab MarketTrack Growth Portfolio II (the “fund”) is a series of Schwab Annuity Portfolios (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 Annuity Portfolios (organized January 21, 1994) | ||||
Schwab Money Market Portfolio | ||||
Schwab MarketTrack Growth Portfolio II | ||||
Schwab S&P 500 Index Portfolio | ||||
Schwab VIT Balanced Portfolio | ||||
Schwab VIT Balanced with Growth Portfolio | ||||
Schwab VIT Growth Portfolio | ||||
The fund is primarily a “fund of funds” as it invests a major portion of its assets in a combination of other Schwab Funds (underlying funds) to achieve its investment objectives and maintain its asset allocation. The fund may also invest directly in equity or fixed income securities and cash equivalents, including money market securities, to achieve its investment objectives.
The fund offers one share class. Shares are bought and sold 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 fund’s Board of Trustees (the “Board”) may authorize the issuance of as many shares as necessary.
The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. At December 31, 2014, 100% of the fund’s shares were held through one insurance company. Subscriptions and redemptions of these insurance separate accounts could have a material impact on the fund.
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 (FASB) 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 http://www.sec.gov or at the SEC’s Public Reference Room in Washington D.C.
(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, 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. The fund makes fair value |
11
Schwab MarketTrack Growth Portfolio II
Financial Notes (continued)
2. Significant Accounting Policies (continued):
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 fund pursuant to the valuation procedures. |
• | Short-term securities (60 days or less to maturity): Short-term securities may be valued at amortized cost, which approximates market value. |
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the fund discloses the fair value of its investments in a hierarchy that prioritizes the 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. As investments whose values are classified as Level 2 prices include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. | |
• | Level 3 — significant unobservable inputs (including the 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. |
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 December 31, 2014 are disclosed in the Portfolio Holdings.
12
Schwab MarketTrack Growth Portfolio II
Financial Notes (continued)
2. Significant Accounting Policies (continued):
(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 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. 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) 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.
(g) Federal Income Taxes:
The fund intends to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the fund distributes substantially all of its net investment income and realized net capital gains, if any, to the participating insurance company’s (shareholders) separate accounts each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax.
(h) 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.
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.
Affiliated Fund 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. However, the portfolio manager is a fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds, without taking fees into consideration.
13
Schwab MarketTrack Growth Portfolio II
Financial Notes (continued)
3. Risk Factors (continued):
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 fund will fluctuate, which means that an investor could lose money.
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.
• | Concentration Risk. To the extent that an underlying fund’s or an index’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector 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 or asset class. | |
• | Investment Risk. An investment in an underlying fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. 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. | |
• | Investment Style Risk. The 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. | |
• | 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. Each underlying index fund seeks to track the performance of its benchmark index, 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. | |
• | 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. | |
• | 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 negatively impact the value or liquidity of the underlying fund’s investments, and could impair the underlying fund’s ability to meet its investment objective or invest in accordance with its investment strategy. To the extent an underlying fund’s investment in a single country or a limited number of countries represents a large percentage of the underlying fund’s assets, the underlying fund’s performance may |
14
Schwab MarketTrack Growth Portfolio II
Financial Notes (continued)
3. Risk Factors (continued):
be adversely affected by the economic, political and social conditions in those countries and it may be subject to increased price volatility. |
• | Currency Risk. As a result of an underlying 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, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in a fund would be adversely affected. | |
• | 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 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. | |
• | Exchange-Traded Funds (“ETFs”) 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 an ETF can result in its value being more volatile than the underlying portfolio of securities. | |
• | Debt Securities Risk. Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the fund fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to their issuer’s ability to make timely payments or otherwise honor their obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. | |
• | 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, an 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 interest rates also may affect an underlying fund’s share price: a sharp rise in interest rates could cause the underlying 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. Because interest rates in the United States are at, or near, historically low levels, a change in a central bank’s monetary policy (e.g., tapering of the Federal Reserve Board’s quantitative easing program) or improving economic conditions may result in an increase in interest rates. | |
• | Liquidity Risk. A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price. | |
• | 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. |
Direct Investment Risk. The fund may invest directly in individual securities as well as other mutual funds, ETFs and cash equivalents, including money market securities to maintain its allocations. 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 securities.
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 (“Advisory Agreement”) between CSIM and the trust.
15
Schwab MarketTrack Growth Portfolio II
Financial Notes (continued)
4. Affiliates and Affiliated Transactions (continued):
For its advisory and administrative services to the 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:
Average Daily Net Assets | ||||
First $500 million | 0.44% | |||
Over $500 million | 0.39% |
CSIM and its affiliates have made an additional agreement 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 (“expense limitation”) to 0.50% through April 29, 2016.
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 December 31, 2014, the Schwab MarketTrack Growth Portfolio II’s ownership percentages of other related funds’ shares are:
Schwab International Index Fund | 0.2% | |||
Schwab 1000 Index Fund | 0.0% | * | ||
Schwab S&P 500 Index Fund | 0.0% | * | ||
Schwab Small-Cap Index Fund | 0.2% | |||
Schwab Total Bond Market Fund | 0.4% | |||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 0.0% | * |
* | Less than 0.1% |
Below is a summary of the fund’s transactions with its affiliated underlying funds during the period ended December 31, 2014.
Realized | Distributions | |||||||||||||||||||||||||||
Balance of | Balance of | Market | Gains (Losses) | Received* | ||||||||||||||||||||||||
Shares Held | Gross | Gross | Shares Held | Value at | 01/01/14 to | 01/01/14 to | ||||||||||||||||||||||
Underlying Funds | at 12/31/13 | Purchases | Sales | at 12/31/14 | 12/31/14 | 12/31/14 | 12/31/14 | |||||||||||||||||||||
Schwab International Index Fund | 321,256 | 64,889 | (36,554 | ) | 349,591 | $6,334,586 | $14,139 | $203,672 | ||||||||||||||||||||
Schwab 1000 Index Fund | 65,712 | 5,369 | (7,868 | ) | 63,213 | 3,317,436 | 60,247 | 139,058 | ||||||||||||||||||||
Schwab S&P 500 Index Fund | 331,594 | 28,441 | (51,925 | ) | 308,110 | 9,908,804 | 255,497 | 176,727 | ||||||||||||||||||||
Schwab Small-Cap Index Fund | 229,403 | 52,489 | (36,478 | ) | 245,414 | 6,618,828 | 25,423 | 435,203 | ||||||||||||||||||||
Schwab Total Bond Market Fund | 497,488 | 66,992 | (61,813 | ) | 502,667 | 4,810,527 | (2,539 | ) | 106,620 | |||||||||||||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 535,806 | 63 | — | 535,869 | 535,869 | — | 63 | |||||||||||||||||||||
Total | $31,526,050 | $352,767 | $1,061,343 | |||||||||||||||||||||||||
* | 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 fund may enter into interfund borrowing and lending transactions with other Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate to be charged on a loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review by the Board. The fund had no interfund borrowing or lending activity during the period.
16
Schwab MarketTrack Growth Portfolio II
Financial Notes (continued)
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:
The fund has access to custodian overdraft facilities, a committed line of credit of $150 million with State Street Bank and Trust Company (“State Street”), an uncommitted line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman & Co. The fund pays interest on the amounts it borrows at rates that are negotiated periodically. The fund also pays an annual fee to State Street for the committed line of credit.
There were no borrowings from the lines of credit by the fund during the period. However, the fund may have utilized its 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 December 31, 2014, purchases and sales/maturities of securities (excluding short-term obligations) were as follows:
Purchases of Securities | Sales/Maturities of Securities | |||||
$4,422,051 | $4,315,001 |
8. Federal Income Taxes:
As of December 31, 2014, the components of distributable earnings on a tax-basis were as follows:
Undistributed ordinary income | $543,742 | |||
Undistributed long-term capital gains | 722,935 | |||
Unrealized appreciation on investments | 9,747,744 | |||
Net unrealized appreciation (depreciation) | $9,747,744 | |||
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 December 31, 2014, the fund had no capital loss carryforwards.
For tax purposes, realized net capital losses and late-year ordinary losses incurred after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2014, the fund had no capital losses deferred and no capital loss carryforwards utilized.
The tax-basis components of distributions paid during the current and prior fiscal years were as follows:
Current period distributions | ||||
Ordinary income | $519,223 | |||
Long-term capital gains | 957,462 | |||
Return of capital | — | |||
Prior period distributions | ||||
Ordinary income | $515,494 | |||
Long-term capital gains | 261,488 | |||
Return of capital | — |
17
Schwab MarketTrack Growth Portfolio II
Financial Notes (continued)
8. Federal Income Taxes (continued):
Distributions paid to the participating insurance company’s separate accounts are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as short-term capital gains and losses, capital losses related to wash sales and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming participating insurance company’s separate accounts as a distribution for tax purposes.
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 December 31, 2014, the fund made the following reclassifications:
Capital shares | $— | |||
Undistributed net investment income | 27,633 | |||
Net realized capital gains (losses) | (27,633 | ) |
As of December 31, 2014, 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 December 31, 2014, the fund did not incur any interest or penalties.
9. 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.
18
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab MarketTrack Growth Portfolio II
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 MarketTrack Growth Portfolio II (one of the portfolios constituting Schwab Annuity Portfolios, hereafter referred to as the “Fund”) at December 31, 2014, 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 December 31, 2014 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
February 16, 2015
19
Other Federal Tax Information (unaudited)
For corporate shareholders, 46.07% of the fund’s dividend distributions paid during the fiscal year ended December 31, 2014, qualify under Internal Revenue code section 854(b)(1)(A) for the corporate dividends received deduction.
For the year ended December 31, 2014, the fund designates $957,462 as capital gain dividend under Internal Revenue Code section 852(b)(3)(C).
20
Trustees and Officers
The tables below give information about the trustees and officers of Schwab Annuity Portfolios, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 95 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 1-800-435-4000.
Independent Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served1) | During the Past Five Years | the Trustee | Other Directorships | |||
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman of JDN Corporate Advisory LLC (advisory services firm) (Oct. 2001 – present). | 74 | Director, WageWorks, Inc. (2010 – present) Director, Redwood Trust, Inc. (1998 – present) | |||
John F. Cogan 1947 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | 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 – present). | 74 | Director, Gilead Sciences, Inc. (2005 – present) | |||
David L. Mahoney 1954 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Private Investor. | 74 | Director, Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) | |||
Kiran M. Patel 1948 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 74 | Director, KLA-Tencor Corporation (2008 – present) | |||
Charles A. Ruffel 1956 Trustee (Trustee of Schwab Annuity Portfolios since 2015.) | Managing Partner and Co-Founder, Kudu Advisors, LLC (financial services) (May 2009 – present); Director, Asset International, Inc. (publisher of financial services information) (Jan. 2009 – Nov. 2014). | 95 | None. | |||
Gerald B. Smith 1950 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 74 | 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 Schwab Annuity Portfolios since 2008.) | Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present). | 74 | Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present) | |||
21
Interested Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served) | During the Past Five Years | the Trustee | Other Directorships | |||
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Annuity Portfolios since 1994.) | Chairman and Director, The Charles Schwab Corporation (1986 – present); Chairman and Director of Charles Schwab & Co., Inc. (1971 – present); Chairman and Director of Charles Schwab Investment Management, Inc. (1989 – present); Chairman and Director of Charles Schwab Bank (2003 – present); Chairman and Chief Executive Officer of Schwab (SIS) Holdings Inc. I and Schwab International Holdings, Inc. (1996 – present); and Director, Chairman and Chief Executive Officer, Schwab Holdings, Inc. (1979 – present). | 74 | Chairman and Director, The Charles Schwab Corporation (1986 – present) Director, Yahoo! Inc. (2014 – present) | |||
Walter W. Bettinger II2 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | Director, President and Chief Executive Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (2008 – present); Director, Charles Schwab Bank (2006 – present); and Director Schwab Holdings, Inc. (2008 – present). | 95 | Director, The Charles Schwab Corporation (2008 – present) | |||
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 Chandoha 1961 President and Chief Executive Officer (Officer of Schwab Annuity Portfolios since 2010.) | Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; 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 (January 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (March 2007 – August 2010). | |
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Annuity Portfolios since 2004.) | Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Treasurer and Chief Financial Officer, Laudus Funds (2006 – present); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – present) and Schwab ETFs (Oct. 2009 – present); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present). | |
Omar Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Equities, Charles Schwab Investment Management, Inc. (April 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 – April 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 Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (April 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 (April 2006 – Jan. 2008). | |
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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 | |
David Lekich 1964 Chief Legal Officer and Secretary (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President (Sept. 2011 – present), Vice President (March 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 (April 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (April 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. | |
Catherine MacGregor 1964 Vice President and Assistant Secretary (Officer of Schwab Annuity Portfolios since 2005.) | Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 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 | Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees retire at age 72 or after twenty years as a trustee, whichever comes first. In addition, the retirement policy requires any independent trustee of Schwab Funds who also serves as an independent trustee of the Laudus Funds to retire from the Boards of the Schwab Funds upon their required retirement date from either the Boards of Trustees of the Schwab Funds or the Laudus Funds, whichever comes first. | |
2 | Mr. Schwab and Mr. Bettinger 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 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. |
23
Glossary
Barclays U.S. Aggregate Bond Index A broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate and hybrid ARM passthroughs), asset-backed securities, and commercial mortgage-backed securities.
Barclays U.S. Treasury Bills: 1 − 3 Months Index An index that includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value.
Citigroup Non-U.S. Dollar World Government Bond Index An index that measures the total rate of return performance for the government bonds of 23 countries, excluding the U.S., with a remaining maturity of at least one year.
Dow Jones U.S. Total Stock Market Index An index that measures all U.S. equity securities with readily available prices.
Growth Composite Index A custom blended index developed by CSIM based on a comparable portfolio asset allocation. Effective March 1, 2014, the index is calculated using the following portion allocations: 40% S&P 500 Index, 20% Russell 2000 Index, 20% MSCI EAFE (Net) Index, 15% Barclays U.S. Aggregate Bond Index, and 5% Barclays U.S. Treasury Bills: 1 − 3 months Index. Prior to March 1, 2014, the Growth Composite Index was comprised of 60% Dow Jones U.S. Total Stock Market Index, 20% MSCI EAFE (Net) Index, 15% Barclays U.S. Aggregate Bond Index, and 5% Barclays U.S. Treasury Bills: 1 − 3 Months Index.The index is maintained by CSIM. The components that make up the composite index may vary over time.
MSCI EAFE Index A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
MSCI Emerging Markets Index A free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
Russell 2000 Index An index that measures the performance of the small-cap segment of the U.S. equity universe.
S&P 500 Index A market capitalization index that is designed to measure the performance of 500 leading publicly held companies in leading industries of the U.S. economy.
24
Schwab VIT Balanced Portfolio | |||||
Annual report dated December 31, 2014 |
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 Fund’s website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s website at www.sec.gov.
Investment Adviser: Charles Schwab Investment Management, Inc. (CSIM)
The Investment Environment
For the 12-month reporting period ended December 31, 2014, large-cap U.S. stocks performed well, with several equity indices reaching record highs. Small-cap stocks generated positive returns but lagged by comparison, with returns reduced by high relative valuations and the Federal Reserve’s policy shift. As a result, the Dow Jones U.S. Broad Stock Market Index returned 12.6%.
For stocks in developed international markets and in emerging markets, the depreciation of many foreign currencies translated into negative returns in U.S. dollar terms. Healthier economic growth in the U.S. than overseas and a difference in policy efforts between the Federal Reserve and many foreign central banks led to these fluctuations. Reflecting this backdrop, the MSCI EAFE Index (Net)—representing the performance of developed international stocks—returned −4.9%, and the MSCI Emerging Markets Index (Net) returned −2.2%.
U.S. bonds generated noteworthy returns and outperformed international bonds, which were hurt by their falling currencies. Helped by weak U.S. economic growth early in 2014, yields on longer-term U.S. bonds declined, while returns on international bonds were reduced by their falling currencies versus the U.S. dollar. The Barclays U.S. Aggregate Bond index—representing the broad U.S. bond market—returned 6.0%, and the Citigroup Non-U.S. Dollar World Government Bond Index returned −2.7%.
Money market securities continued to help preserve investor capital, while facing another period of low yields.
Asset Class Performance Comparison % returns during the 12 months ended 12/31/2014
This graph compares the performance of various asset classes. Final performance figures for the period are in the key below.
13.69% | S&P 500® Index: measures U.S. large-cap stocks | |||
4.89% | Russell 2000® Index: measures U.S. small-cap stocks | |||
−4.90% | MSCI EAFE® Index (Net): measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East | |||
5.97% | Barclays U.S. Aggregate Bond Index: measures the U.S. bond market | |||
0.02% | Barclays U.S. Treasury Bills 1-3 Months Index: measures short-term U.S. Treasury obligations |
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.
Index figures assume dividends and distributions were reinvested, and do not include trading and management costs, which would lower performance. Indices are unmanaged, do not incur management fees, costs and expenses, and you cannot invest in them directly. Remember that past performance is not a guarantee of future results.
Schwab VIT Balanced Portfolio 1
Portfolio Management
Zifan Tang, CFA, Managing Director and Head of Asset Allocation Strategies, leads the portfolio management team and has overall responsibility for all aspects of the management of the portfolio. 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. |
2 Schwab VIT Balanced Portfolio
Schwab VIT Balanced Portfolio
The Schwab VIT Balanced Portfolio (the portfolio) seeks to provide long-term capital appreciation and income. To pursue its goal, the portfolio aims to provide diversification across major asset classes, including domestic equity securities, international equity securities, real assets, fixed income securities, and money market investments, as well as diversification across a range of sub-asset classes within the major asset classes.
The portfolio is considered a “fund-of-funds” in that it gains exposure to these asset classes by primarily investing in exchange traded funds (ETFs) from Schwab, as well as unaffiliated ETFs. The portfolio may also invest in Schwab and Laudus Funds and unaffiliated third-party mutual funds. The portfolio uses the internally calculated VIT Balanced Composite Index (the composite index) as a performance gauge. The composite index is comprised of 44% equity, 38% fixed income, 15% cash, and 3% commodities.
Performance. For the 12-month reporting period ended December 31, 2014, the portfolio returned 4.15%. The Dow Jones U.S. Total Stock Market Index and the Barclays U.S. Aggregate Bond Index, reflecting broad-based U.S. stock and bond market performance, returned 12.47% and 5.97%, respectively. The composite index, described above, returned 4.87%. Differences between the return of the portfolio and the return of the index may be attributable to, among other things, operational and transactional costs incurred by the portfolio that are not incurred by the index.
Market Highlights. U.S. stock markets reached record highs during the 12-month reporting period, as a rebounding U.S. economy and stronger corporate earnings contributed positively to market performance. Signs of economic improvement led the Federal Reserve (the Fed) to wind down its quantitative easing policies and conclude the program in October. At the same time, the Fed left short-term interest rates historically low, generally supporting both stocks and the broad U.S. bond market. Internationally, both developed and emerging markets struggled amid an uncertain global economic outlook and heightened geopolitical tensions. Throughout the 12-month reporting period, many foreign currencies depreciated versus the U.S. dollar, generally reducing overall returns on overseas investments.
Positioning and Strategies. The portfolio’s allocations were broadly in line with those of the composite index.
During the reporting period, the portfolio’s U.S. equity exposures were significant contributors to total return. The portfolio’s U.S. large-cap holding, the Schwab U.S. Large-Cap ETFtm, was the biggest contributor to performance and returned approximately 13.3%. The two remaining U.S. equity holdings—the Schwab U.S. Small-Cap ETFtm and the iShares Micro-Cap ETF—both produced positive returns of 6.5% and 3.5%, respectively. The portfolio’s real estate position was another meaningful contributor to total return, with the Schwab U.S. REIT ETFtm returning 31.9% for the reporting period. Internationally, the Schwab Emerging Markets Equity ETFtm positively contributed to performance, returning 1.1%. The Schwab International Small-Cap Equity ETFtm and the Schwab International Equity ETFtm, however, detracted from performance and returned –5.8% and –4.4%, respectively. Overall, fixed income holdings positively contributed to the performance of the portfolio, with the exception of the SPDR® Barclays International Treasury Bond ETF, which returned –2.5%. With commodities particularly weak for the reporting period, the portfolio’s position in the Credit Suisse Commodity Return Strategy Fund, Class I, returned –16.9%, also detracting from total return.
As of 12/31/14:
Statistics
Number of Holdings | 20 | |||
Portfolio Turnover Rate | 14% |
Asset Class Weightings % of Investments1
Fixed Income | 37.6% | |||
Stocks – U.S. | 20.6% | |||
Stocks – International | 17.5% | |||
Money Market Fund | 11.6% | |||
Real Assets | 9.0% | |||
Short-Term Investments | 3.7% | |||
Total | 100.0% |
Top Holdings % of Net Assets2,3
Schwab U.S. Large-Cap ETF | 15.7% | |||
iShares MBS ETF | 12.7% | |||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 11.7% | |||
Schwab Intermediate-Term U.S. Treasury ETF | 11.5% | |||
Schwab International Equity ETF | 10.4% | |||
iShares Core U.S. Credit Bond ETF | 6.6% | |||
Schwab U.S. REIT ETF | 6.2% | |||
Schwab Emerging Markets Equity ETF | 5.2% | |||
Schwab U.S. Small-Cap ETF | 3.9% | |||
Credit Suisse Commodity Return Strategy Fund, Class I | 2.8% | |||
Total | 86.7% |
Management views and portfolio holdings may have changed since the report date.
1 | The portfolio intends to primarily invest in affiliated Schwab exchange traded funds (ETFs) and unaffiliated third-party ETFs. The portfolio may also invest in affiliated Schwab and Laudus Funds and unaffiliated third party mutual funds (all such ETFs and mutual funds referred to as “underlying funds”). The portfolio may also invest directly in equity or fixed income securities, and money market investments to achieve its investment objectives. | |
2 | This list is not a recommendation of any security by the investment adviser. | |
3 | The holdings listed exclude any temporary liquidity investments. |
Schwab VIT Balanced Portfolio 3
Schwab VIT Balanced Portfolio
Performance and Fund Facts as of 12/31/14
The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabfunds_prospectus.
July 25, 2012 – December 31, 2014
Performance of Hypothetical
$10,000 Investment2
Performance of Hypothetical
$10,000 Investment2
Average Annual Total Returns1,2
Portfolio and inception Date | 1 Year | Since Inception | ||||||||
Portfolio: Schwab VIT Balanced Portfolio (07/25/12) | 4.15 | % | 6.61 | % | ||||||
VIT Balanced Composite Index | 4.87 | % | 7.31 | % | ||||||
S&P 500® Index | 13.69 | % | 21.92 | % | ||||||
Barclays U.S. Aggregate Bond Index | 5.97 | % | 1.68 | % | ||||||
Fund Category: Morningstar Conservative Allocation | 4.02 | % | 7.75 | % |
Portfolio Expense Ratios3: Net 0.79%; Gross 1.28%
All total return figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.
The components that make up the composite index may vary over time. For index definitions, please see the Glossary.
1 | 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 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. Portfolio performance does not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the performance would be less than that shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. | |
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%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
4 Schwab VIT Balanced Portfolio
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
The portfolio incurs ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning July 1, 2014 and held through December 31, 2014.
The Actual Return line in the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ¸ $1,000 = 8.6), then multiply the result by the number given for the portfolio under the heading entitled “Expenses Paid During Period.”
The Hypothetical Return line in the table below provides information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs.
Ending | ||||||||||||||||
Beginning | Account Value | Expenses Paid | ||||||||||||||
Expense Ratio1 | Account Value | (Net of Expenses) | During Period2 | |||||||||||||
(Annualized) | at 7/1/14 | at 12/31/14 | 7/1/14–12/31/14 | |||||||||||||
Schwab VIT Balanced Portfolio | ||||||||||||||||
Actual Return | 0.58% | $ | 1,000.00 | $ | 994.00 | $ | 2.92 | |||||||||
Hypothetical 5% Return | 0.58% | $ | 1,000.00 | $ | 1,022.28 | $ | 2.96 |
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 portfolio invests are not included in this ratio. | |
2 | Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year. |
Schwab VIT Balanced Portfolio 5
Schwab VIT Balanced Portfolio
Financial Statements
Financial Highlights
1/1/14– | 1/1/13– | 7/25/121– | ||||||||||||
12/31/14 | 12/31/13 | 12/31/12 | ||||||||||||
Per-Share Data ($) | ||||||||||||||
Net asset value at beginning of period | 11.21 | 10.50 | 10.00 | |||||||||||
Income (loss) from investment operations: | ||||||||||||||
Net investment income (loss) | 0.15 | 2 | 0.17 | 2 | 0.08 | |||||||||
Net realized and unrealized gains (losses) | 0.31 | 0.55 | 0.42 | |||||||||||
Total from investment operations | 0.46 | 0.72 | 0.50 | |||||||||||
Less distributions: | ||||||||||||||
Distributions from net investment income | (0.06 | ) | (0.01 | ) | — | |||||||||
Distributions from net realized gains | (0.00 | )3 | — | — | ||||||||||
Total distributions | (0.06 | ) | (0.01 | ) | — | |||||||||
Net asset value at end of period | 11.61 | 11.21 | 10.50 | |||||||||||
Total return (%) | 4.15 | 6.89 | 5.00 | 4 | ||||||||||
Ratios/Supplemental Data (%) | ||||||||||||||
Ratios to average net assets: | ||||||||||||||
Net operating expenses5 | 0.57 | 0.58 | 0.58 | 6 | ||||||||||
Gross operating expenses5 | 0.70 | 1.07 | 10.58 | 6 | ||||||||||
Net investment income (loss) | 1.29 | 1.55 | 3.94 | 6 | ||||||||||
Portfolio turnover rate | 14 | 18 | 1 | 4 | ||||||||||
Net assets, end of period ($ x 1,000,000) | 44 | 28 | 2 |
1 Commencement of operations.
2 Calculated based on the average shares outstanding during the period.
3 Per-share amount was less than $0.01.
4 Not annualized.
5 The expenses incurred by underlying funds in which the fund invests are not included in this ratio.
6 Annualized.
6 See financial notes
Schwab VIT Balanced Portfolio
Portfolio Holdings as of December 31, 2014
This section shows all the securities in the fund’s portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus.
Cost | Value | |||||||||||
Holdings by Category | ($) | ($) | ||||||||||
96 | .6% | Other Investment Companies | 41,160,914 | 42,883,335 | ||||||||
3 | .7% | Short-Term Investments | 1,651,593 | 1,651,593 | ||||||||
100 | .3% | Total Investments | 42,812,507 | 44,534,928 | ||||||||
(0 | .3%) | Other Assets and Liabilities, Net | (128,074 | ) | ||||||||
100 | .0% | Net Assets | 44,406,854 |
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Other Investment Companies 96.6% of net assets | ||||||||
U.S. Stocks 20.6% | ||||||||
Large-Cap 15.7% | ||||||||
Schwab U.S. Large-Cap ETF (a) | 141,801 | 6,955,339 | ||||||
Micro-Cap 1.0% | ||||||||
iShares Micro-Cap ETF | 5,734 | 441,404 | ||||||
Small-Cap 3.9% | ||||||||
Schwab U.S. Small-Cap ETF (a) | 31,894 | 1,757,997 | ||||||
9,154,740 | ||||||||
International Stocks 17.6% | ||||||||
Developed-Market Large-Cap 10.4% | ||||||||
Schwab International Equity ETF (a) | 159,264 | 4,604,322 | ||||||
Developed-Market Small-Cap 2.0% | ||||||||
Schwab International Small-Cap Equity ETF (a) | 30,897 | 891,378 | ||||||
Emerging-Market 5.2% | ||||||||
Schwab Emerging Markets Equity ETF (a) | 96,332 | 2,302,335 | ||||||
7,798,035 | ||||||||
Real Assets 9.0% | ||||||||
Commodity 2.8% | ||||||||
Credit Suisse Commodity Return Strategy Fund, Class I * | 206,758 | 1,242,613 | ||||||
Real Estate 6.2% | ||||||||
Schwab U.S. REIT ETF (a) | 70,944 | 2,763,269 | ||||||
4,005,882 | ||||||||
Fixed Income 37.7% | ||||||||
Agency Bond 2.0% | ||||||||
iShares Agency Bond ETF | 7,931 | 896,996 | ||||||
Corporate Bond 6.6% | ||||||||
iShares Core U.S. Credit Bond ETF | 26,380 | 2,949,548 | ||||||
High Yield Bond 1.2% | ||||||||
SPDR Barclays High Yield Bond ETF | 13,582 | 524,401 | ||||||
Inflation-Protected Bond 1.7% | ||||||||
Schwab U.S. TIPS ETF (a) | 13,958 | 757,082 | ||||||
International Developed-Market Bond 2.0% | ||||||||
SPDR Barclays International Treasury Bond ETF | 15,986 | 884,505 | ||||||
Mortgage-Backed Bond 12.7% | ||||||||
iShares MBS ETF | 51,457 | 5,625,279 | ||||||
Treasury Bond 11.5% | ||||||||
Schwab Intermediate-Term U.S. Treasury ETF (a) | 95,231 | 5,104,382 | ||||||
16,742,193 | ||||||||
Money Market Fund 11.7% | ||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares 0.01% (a)(b) | 5,182,485 | 5,182,485 | ||||||
Total Other Investment Companies | ||||||||
(Cost $41,160,914) | 42,883,335 | |||||||
Issuer | Face Amount | Value | ||||||
Rate, Maturity Date | ($) | ($) | ||||||
Short-Term Investments 3.7% of net assets | ||||||||
Time Deposits 3.7% | ||||||||
Australia & New Zealand Banking Group Ltd. | ||||||||
0.03%, 01/02/15 | 445,781 | 445,781 | ||||||
Bank of Tokyo-Mitsubishi UFJ | ||||||||
0.03%, 01/02/15 | 445,781 | 445,781 | ||||||
JPMorgan Chase | ||||||||
0.03%, 01/02/15 | 314,250 | 314,250 | ||||||
Wells Fargo | ||||||||
0.03%, 01/02/15 | 445,781 | 445,781 | ||||||
Total Short-Term Investments | ||||||||
(Cost $1,651,593) | 1,651,593 | |||||||
End of Investments. |
At 12/31/14, the tax basis cost of the fund’s investments was $42,966,924 and the unrealized appreciation and depreciation were $2,144,075 and ($576,071) respectively, with a net unrealized appreciation of $1,568,004.
* | Non-income producing security. | |
(a) | Issuer is affiliated with the fund’s adviser. | |
(b) | The rate shown is the 7-day yield. |
See financial notes 7
Schwab VIT Balanced Portfolio
Portfolio Holdings continued
ETF — | Exchange Traded Fund | |
MBS — | Mortgage-Backed Security | |
REIT — | Real Estate Investment Trust | |
SPDR — | Standard & Poor’s Depositary Receipts | |
TIPS — | Treasury Inflation Protected Securities |
The following is a summary of the inputs used to value the fund’s investments as of December 31, 2014 (see financial note 2(a) for additional information):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Significant | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Other Investment Companies1 | $42,883,335 | $— | $— | $42,883,335 | ||||||||||||
Short-Term Investments1 | — | 1,651,593 | — | 1,651,593 | ||||||||||||
Total | $42,883,335 | $1,651,593 | $— | $44,534,928 | ||||||||||||
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 December 31, 2014.
8 See financial notes
Schwab VIT Balanced Portfolio
Statement of
Assets and Liabilities
As of December 31, 2014
Assets | ||||||
Investments in affiliated underlying funds, at value (cost $28,533,104) | $30,318,589 | |||||
Investments in unaffiliated issuers, at value (cost $14,279,403) | + | 14,216,339 | ||||
Total investments, at value (cost $42,812,507) | 44,534,928 | |||||
Receivables: | ||||||
Investments sold | 236,910 | |||||
Dividends | 17,601 | |||||
Prepaid expenses | + | 255 | ||||
Total assets | 44,789,694 | |||||
Liabilities | ||||||
Payables: | ||||||
Investments bought | 343,990 | |||||
Investment adviser and administrator fees | 4,247 | |||||
Fund shares redeemed | 1,411 | |||||
Accrued expenses | + | 33,192 | ||||
Total liabilities | 382,840 | |||||
Net Assets | ||||||
Total assets | 44,789,694 | |||||
Total liabilities | − | 382,840 | ||||
Net assets | $44,406,854 | |||||
Net Assets by Source | ||||||
Capital received from investors | 42,301,206 | |||||
Net investment income not yet distributed | 488,217 | |||||
Net realized capital losses | (104,990 | ) | ||||
Net unrealized capital appreciation | 1,722,421 | |||||
Net Asset Value (NAV) |
Shares | ||||||||||||
Net Assets | ÷ | Outstanding | = | NAV | ||||||||
$44,406,854 | 3,826,283 | $11.61 |
See financial notes 9
Schwab VIT Balanced Portfolio
Statement of
Operations
For the period January 1, 2014 through December 31, 2014
Investment Income | ||||||
Dividends received from affiliated underlying funds | $482,403 | |||||
Dividends received from unaffiliated underlying funds | 222,408 | |||||
Interest | + | 360 | ||||
Total investment income | 705,171 | |||||
Expenses | ||||||
Investment adviser and administrator fees | 170,813 | |||||
Professional fees | 37,672 | |||||
Transfer agent fees | 22,094 | |||||
Shareholder reports | 13,765 | |||||
Independent trustees’ fees | 8,910 | |||||
Portfolio accounting fees | 6,847 | |||||
Custodian fees | 6,570 | |||||
Other expenses | + | 708 | ||||
Total expenses | 267,379 | |||||
Expense reduction by CSIM | − | 50,090 | ||||
Net expenses | − | 217,289 | ||||
Net investment income | 487,882 | |||||
Realized and Unrealized Gains (Losses) | ||||||
Realized capital gain distributions received from unaffiliated underlying funds | 5,228 | |||||
Net realized losses on sales of affiliated underlying funds | (37,001 | ) | ||||
Net realized losses on sales of unaffiliated underlying funds | + | (29,261 | ) | |||
Net realized losses | (61,034 | ) | ||||
Net change in unrealized appreciation (depreciation) on affiliated underlying funds | 895,270 | |||||
Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | 23,638 | ||||
Net change in unrealized appreciation (depreciation) | + | 918,908 | ||||
Net realized and unrealized gains | 857,874 | |||||
Increase in net assets resulting from operations | $1,345,756 |
10 See financial notes
Schwab VIT Balanced Portfolio
Statement of
Changes in Net Assets
For the current and prior report periods
Operations | ||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||
Net investment income | $487,882 | $222,651 | ||||||||
Net realized losses | (61,034 | ) | (40,228 | ) | ||||||
Net change in unrealized appreciation (depreciation) | + | 918,908 | 784,145 | |||||||
Increase in net assets from operations | 1,345,756 | 966,568 | ||||||||
Distributions to Shareholders | ||||||||||
Distributions from net investment income | (222,767 | ) | (18,631 | ) | ||||||
Distributions from net realized gains | + | (3,104 | ) | — | ||||||
Total distributions | ($225,871 | ) | ($18,631 | ) |
Transactions in Fund Shares
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | VALUE | SHARES | VALUE | |||||||||||||||
Shares sold | 1,672,538 | $19,220,062 | 2,473,872 | $26,880,610 | ||||||||||||||
Shares reinvested | 19,338 | 225,870 | 1,730 | 18,306 | ||||||||||||||
Shares redeemed | + | (387,370 | ) | (4,422,237 | ) | (184,414 | ) | (2,004,307 | ) | |||||||||
Net transactions in fund shares | 1,304,506 | $15,023,695 | 2,291,188 | $24,894,609 | ||||||||||||||
Shares Outstanding and Net Assets | ||||||||||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | NET ASSETS | SHARES | NET ASSETS | |||||||||||||||
Beginning of period | 2,521,777 | $28,263,274 | 230,589 | $2,420,728 | ||||||||||||||
Total increase | + | 1,304,506 | 16,143,580 | 2,291,188 | 25,842,546 | |||||||||||||
End of period | 3,826,283 | $44,406,854 | 2,521,777 | $28,263,274 | ||||||||||||||
Net investment income not yet distributed | $488,217 | $222,567 |
See financial notes 11
Schwab VIT Balanced Portfolio
Financial Notes
1. Business Structure of the Fund:
Schwab VIT Balanced Portfolio (the “fund”) is a series of Schwab Annuity Portfolios (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 Annuity Portfolios (organized January 21, 1994) | ||||
Schwab Money Market Portfolio | ||||
Schwab MarketTrack Growth Portfolio II | ||||
Schwab S&P 500 Index Portfolio | ||||
Schwab VIT Balanced Portfolio | ||||
Schwab VIT Balanced with Growth Portfolio | ||||
Schwab VIT Growth Portfolio | ||||
The fund is a “fund of funds” which primarily invests in affiliated Schwab exchange traded funds (“ETFs”) and unaffiliated third-party ETFs. The fund may also invest in affiliated Schwab and Laudus Funds and unaffiliated third-party mutual funds (all such ETFs and mutual funds referred to as “underlying funds”). The fund may also invest directly in equity or fixed income securities and cash equivalents, including money market securities, to achieve its investment objectives.
The fund offers one share class. Shares are bought and sold 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 fund’s Board of Trustees (the “Board”) may authorize the issuance of as many shares as necessary.
The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. At December 31, 2014, 100% of the fund’s shares were held through one insurance company. Subscriptions and redemptions of these insurance separate accounts could have a material impact on the fund.
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 (FASB) 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 http://www.sec.gov or at the SEC’s Public Reference Room in Washington D.C.
(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. ETFs traded on a recognized securities exchange are valued at the last reported sale price that day or the official closing price, if applicable. | |
• | 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, a fund may fair value a security when it is |
12
Schwab VIT Balanced Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
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 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 fund pursuant to the valuation procedures. |
• | Short-term securities (60 days or less to maturity): Short-term securities may be valued at amortized cost, which approximates market value. |
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the fund discloses the fair value of its investments in a hierarchy that prioritizes the 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 and ETFs. 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. As investments whose values are classified as Level 2 prices include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. | |
• | Level 3 — significant unobservable inputs (including the 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. |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
13
Schwab VIT Balanced Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
The levels associated with valuing the fund’s investments as of December 31, 2014 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 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. 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) 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.
(g) Federal Income Taxes:
The fund intends to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the fund distributes substantially all of its net investment income and realized net capital gains, if any, to the participating insurance company’s (shareholders) separate accounts each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax.
(h) 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.
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.
Affiliated Fund Risk. The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated ETFs and mutual funds may create a conflict of interest because the fees paid to it by some underlying funds are
14
Schwab VIT Balanced Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
higher than the fees paid by other underlying funds. However, the portfolio manager is a fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds, without taking fees into consideration.
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 fund will fluctuate, which means that an investor could lose money.
ETFs 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 an ETF can result in its value being more volatile than the underlying portfolio of securities.
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. The risks below summarize certain principal investment risks of the underlying funds that are also principal investment risks to which the fund is subject because of the fund’s investment allocation in the underlying funds and the underlying funds’ asset allocation.
• | 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. | |
• | 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 mid- or 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 — bonds or large-cap stocks, for instance — an underlying fund’s performance also will lag those investments. | |
• | 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 negatively impact the value or liquidity of the underlying fund’s investments, and could impair the underlying 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. To the extent an underlying fund’s investment in a single country or a limited number of countries represents a large percentage of the underlying fund’s assets, the underlying 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 Market Risk. An underlying fund’s investments in securities of emerging market countries may involve certain risks that are greater than those associated with investments in securities of developed countries. 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 an underlying fund’s investments in emerging market countries and, at times, it may be difficult to value such investments. | |
• | Currency Risk. As a result of an underlying 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, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in an underlying fund would be adversely affected. |
15
Schwab VIT Balanced Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
• | Growth Investing Risk. Certain of the underlying funds pursue a “growth style” of investing. Growth investing focuses on a company’s prospects for growth of revenue and earnings. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks also can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks. Since growth companies usually invest a high portion of earnings in their business, they may lack the dividends of value stocks that can cushion stock prices in a falling market. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks. | |
• | Value Investing Risk. Certain of the underlying funds may pursue a “value style” of investing. Value investing focuses on companies whose stocks appear undervalued in light of factors such as the company’s earnings, book value, revenues or cash flow. If an underlying fund’s investment adviser’s (or sub-adviser’s) assessment of a company’s value or prospects for exceeding earnings expectations or market conditions is wrong, the underlying fund could suffer losses or produce poor performance relative to other funds. In addition, “value stocks” can continue to be undervalued by the market for long periods of time. | |
• | Debt Securities Risk. Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the fund fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to their issuer’s ability to make timely payments or otherwise honor their obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. | |
• | 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, an 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 interest rates also may affect an underlying fund’s share price: a sharp rise in interest rates could cause the underlying 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. Because interest rates in the United States are at, or near, historically low levels, a change in a central bank’s monetary policy (e.g., tapering of the Federal Reserve Board’s quantitative easing program) or improving economic conditions may result in an increase in interest rates. | |
• | Credit Risk. Certain of the underlying funds are subject to the risk that a decline in the credit quality of a portfolio investment could cause the underlying fund’s share price to fall. 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. Securities rated below investment grade (junk bonds) involve greater risk of price declines than investment grade securities due to actual or perceived changes in the issuer’s creditworthiness. | |
• | Prepayment and Extension Risk. An underlying fund’s investments in fixed income securities are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause the underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the underlying fund’s yield or share price. | |
• | U.S. Government Securities Risk. Some of the U.S. government securities that the underlying funds invest in are not backed by the full faith and credit of the U.S. government, which means they are neither issued nor guaranteed by the U.S. Treasury. Certain securities such as those issued by the Federal Home Loan Banks are supported by limited lines of credit maintained by their issuers with the U.S. Treasury. Securities issued by other issuers, such as the Federal Farm Credit Banks Funding Corporation, are supported solely by the credit of the issuer. There can be no assurance that the U.S. government will provide financial support to securities of its agencies and instrumentalities if it is not obligated to do so under law. Also, any government guarantees on securities the underlying funds own do not extend to shares of the underlying funds themselves. | |
• | Real Estate Investment Risk. An underlying fund in which the portfolio may invest may have a policy of concentrating its investments in real estate companies and companies related to the real estate industry. Such an underlying fund is subject to risks associated with the direct ownership of real estate securities and a portfolio’s investment in such an underlying fund is subject to risks associated with the direct ownership of real estate securities and an investment in the underlying fund will be closely linked to the performance of the real estate markets. These risks include, among others, declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds or |
16
Schwab VIT Balanced Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
other limits to accessing the credit or capital markets; defaults by borrowers or tenants, particularly during an economic downturn; and changes in interest rates. |
• | Real Estate Investment Trust (REIT) Risk. An underlying fund may invest in REITs. An underlying fund’s investments in 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, equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills 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 for the underlying fund. In addition, REITs have their own expenses, and the underlying fund will bear a proportionate share of those expenses. | |
• | 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 to its agencies or instrumentalities where it was not obligated to do so. Mortgage-backed securities 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. Because of prepayment and extension risk, mortgage-backed securities react differently to changes in interest rates than other bonds. Small movements in interest rates — both increases and decreases — may quickly and significantly affect the value of certain mortgage-backed securities. 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 because of an adverse market action, expenses, or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA transaction. | |
• | 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. | |
• | Commodity Risk. To the extent that an underlying fund invests in commodity-linked derivative instruments, it may subject the underlying fund to greater volatility than investments in traditional securities. Also, commodity-linked investments may be more volatile and less liquid than the underlying commodity. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and other regulatory and market developments. The use of leveraged commodity-linked derivatives creates an opportunity for increased return, but also creates the possibility for a greater loss. | |
• | Liquidity Risk. A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price. | |
• | 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 and could cause the fund to lose more than the principal amount invested. | |
• | Management Risk. An underlying fund may be an actively managed mutual fund. Any actively managed mutual fund is subject to the risk that its investment adviser (or sub-adviser(s)) will select investments or allocate assets in a manner 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. | |
• | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the |
17
Schwab VIT Balanced Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
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. |
• | Tracking Error Risk. An underlying fund may seek to track the performance of its benchmark index, 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. | |
• | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector 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 or asset class. | |
• | Money Market Risk. Although an underlying money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in a money market fund. In addition, a money market fund is not designed to offer capital appreciation. |
Direct Investment Risk. The fund may invest directly in individual securities to maintain its allocations. 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 securities and instruments.
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 (“Advisory Agreement”) between CSIM and the trust.
For its advisory and administrative services to the fund, CSIM is entitled to receive an annual fee, payable monthly, equal to 0.45% of the fund’s average daily net assets.
CSIM and its affiliates have made an additional agreement with the fund, for so long as CSIM serves as the investment adviser to the fund, which may only be amended or terminated with approval of the fund’s Board, to limit the total annual fund operating expenses charged, excluding interest, taxes and certain non-routine expenses of the fund to 0.58%.
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 ETFs and mutual funds. As of December 31, 2014, the Schwab VIT Balanced Portfolio’s ownership percentages of other related funds’ shares are:
Schwab U.S. Large-Cap ETF | 0.2% | |||
Schwab U.S. Small-Cap ETF | 0.1% | |||
Schwab International Equity ETF | 0.2% | |||
Schwab International Small-Cap Equity ETF | 0.2% | |||
Schwab Emerging Markets Equity ETF | 0.2% | |||
Schwab U.S. REIT ETF | 0.2% | |||
Schwab U.S. TIPS ETF | 0.1% | |||
Schwab Intermediate-Term U.S. Treasury ETF | 2.0% | |||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 0.0% | * |
* | Less than 0.1% |
18
Schwab VIT Balanced Portfolio
Financial Notes (continued)
4. Affiliates and Affiliated Transactions (continued):
Below is a summary of the fund’s transactions with its affiliated underlying funds during the period ended December 31, 2014.
Realized | Distributions | |||||||||||||||||||||||||||
Balance of | Balance of | Market | Gains (Losses) | Received* | ||||||||||||||||||||||||
Shares Held | Gross | Gross | Shares Held | Value at | 01/01/14 to | 01/01/14 to | ||||||||||||||||||||||
Underlying Funds | at 12/31/13 | Purchases | Sales | at 12/31/14 | 12/31/14 | 12/31/14 | 12/31/14 | |||||||||||||||||||||
Schwab U.S. Large-Cap ETF | 99,462 | 67,897 | (25,558 | ) | 141,801 | $6,955,339 | $1,435 | $114,412 | ||||||||||||||||||||
Schwab U.S. Small-Cap ETF | 21,495 | 16,802 | (6,403 | ) | 31,894 | 1,757,997 | 1,309 | 23,285 | ||||||||||||||||||||
Schwab International Equity ETF | 100,719 | 77,084 | (18,539 | ) | 159,264 | 4,604,322 | (13,445 | ) | 132,243 | |||||||||||||||||||
Schwab International Small-Cap Equity ETF | 18,399 | 16,790 | (4,292 | ) | 30,897 | 891,378 | (729 | ) | 21,826 | |||||||||||||||||||
Schwab Emerging Markets Equity ETF | 60,028 | 51,329 | (15,025 | ) | 96,332 | 2,302,335 | (19,832 | ) | 61,322 | |||||||||||||||||||
Schwab U.S. REIT ETF | 55,879 | 33,945 | (18,880 | ) | 70,944 | 2,763,269 | 11,541 | 57,536 | ||||||||||||||||||||
Schwab U.S. TIPS ETF | 9,060 | 6,093 | (1,195 | ) | 13,958 | 757,082 | (4,265 | ) | 8,595 | |||||||||||||||||||
Schwab Intermediate-Term U.S. Treasury ETF | 59,772 | 44,512 | (9,053 | ) | 95,231 | 5,104,382 | (13,015 | ) | 62,676 | |||||||||||||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 3,482,000 | 1,700,485 | — | 5,182,485 | 5,182,485 | — | 508 | |||||||||||||||||||||
Total | $30,318,589 | ($37,001 | ) | $482,403 | ||||||||||||||||||||||||
* | 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 fund may enter into interfund borrowing and lending transactions with other Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate to be charged on a loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review 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:
The fund has access to custodian overdraft facilities, a committed line of credit of $150 million with State Street Bank and Trust Company (“State Street”), an uncommitted line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman & Co. The fund pays interest on the amount it borrows at rates that are negotiated periodically. The fund also pays an annual fee to State Street for the committed line of credit.
There were no borrowings from the lines of credit by the fund during the period. However, the fund may have utilized its 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 December 31, 2014, purchases and sales/maturities of securities (excluding short-term obligations) were as follows:
Purchases of Securities | Sales/Maturities of Securities | |||||
$19,742,583 | $5,225,707 |
19
Schwab VIT Balanced Portfolio
Financial Notes (continued)
8. Federal Income Taxes:
As of December 31, 2014, the components of distributable earnings on a tax-basis were as follows:
Undistributed ordinary income | $507,500 | |||
Undistributed long-term capital gains | 30,144 | |||
Unrealized appreciation on investments | 2,144,075 | |||
Unrealized depreciation on investments | (576,071 | ) | ||
Net unrealized appreciation (depreciation) | $1,568,004 | |||
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 December 31, 2014, the fund had no capital loss carryforwards.
For tax purposes, realized net capital losses and late-year ordinary losses incurred after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2014, the fund had no capital losses deferred and had no capital loss carryforwards utilized.
The tax-basis components of distributions paid during the current and prior fiscal years were as follows:
Current period distributions | ||||
Ordinary income | $225,768 | |||
Long-term capital gains | 103 | |||
Return of capital | — | |||
Prior period distributions | ||||
Ordinary income | $18,631 | |||
Long-term capital gains | — | |||
Return of capital | — |
Distributions paid to the participating insurance company’s separate accounts are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as short-term capital gains and losses, capital losses related to wash sales and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming participating insurance company’s separate accounts as a distribution for tax purposes.
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 December 31, 2014, the fund made the following reclassifications:
Capital shares | $— | |||
Undistributed net investment income | 535 | |||
Net realized capital gains (losses) | (535 | ) |
As of December 31, 2014, 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 December 31, 2014, the fund did not incur any interest or penalties.
9. 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.
20
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab VIT Balanced Portfolio
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 VIT Balanced Portfolio (one of the portfolios constituting Schwab Annuity Portfolios, hereafter referred to as the “Fund”) at December 31, 2014, 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 periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the 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 December 31, 2014 by correspondence with the custodian, brokers and the transfer agent of the underlying funds, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2015
21
Other Federal Tax Information (unaudited)
For corporate shareholders, 22.51% of the fund’s dividend distributions paid during the fiscal year ended December 31, 2014, qualify for the corporate dividends received deduction.
Under Section 852 (b)(3)(C) of the Internal Revenue Code, the fund hereby designates $103 as long-term capital gain dividends for the fiscal year ended December 31, 2014.
22
Trustees and Officers
The tables below give information about the trustees and officers of Schwab Annuity Portfolios, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 95 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 1-800-435-4000.
Independent Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served1) | During the Past Five Years | the Trustee | Other Directorships | |||
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman of JDN Corporate Advisory LLC (advisory services firm) (Oct. 2001 – present). | 74 | Director, WageWorks, Inc. (2010 – present) Director, Redwood Trust, Inc. (1998 – present) | |||
John F. Cogan 1947 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | 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 – present). | 74 | Director, Gilead Sciences, Inc. (2005 – present) | |||
David L. Mahoney 1954 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Private Investor. | 74 | Director, Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) | |||
Kiran M. Patel 1948 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 74 | Director, KLA-Tencor Corporation (2008 – present) | |||
Charles A. Ruffel 1956 Trustee (Trustee of Schwab Annuity Portfolios since 2015.) | Managing Partner and Co-Founder, Kudu Advisors, LLC (financial services) (May 2009 – present); Director, Asset International, Inc. (publisher of financial services information) (Jan. 2009 – Nov. 2014). | 95 | None. | |||
Gerald B. Smith 1950 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 74 | 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 Schwab Annuity Portfolios since 2008.) | Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present). | 74 | Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present) | |||
23
Interested Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served) | During the Past Five Years | the Trustee | Other Directorships | |||
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Annuity Portfolios since 1994.) | Chairman and Director, The Charles Schwab Corporation (1986 – present); Chairman and Director of Charles Schwab & Co., Inc. (1971 – present); Chairman and Director of Charles Schwab Investment Management, Inc. (1989 – present); Chairman and Director of Charles Schwab Bank (2003 – present); Chairman and Chief Executive Officer of Schwab (SIS) Holdings Inc. I and Schwab International Holdings, Inc. (1996 – present); and Director, Chairman and Chief Executive Officer, Schwab Holdings, Inc. (1979 – present). | 74 | Chairman and Director, The Charles Schwab Corporation (1986 – present) Director, Yahoo! Inc. (2014 – present) | |||
Walter W. Bettinger II2 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | Director, President and Chief Executive Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (2008 – present); Director, Charles Schwab Bank (2006 – present); and Director Schwab Holdings, Inc. (2008 – present). | 95 | Director, The Charles Schwab Corporation (2008 – present) | |||
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 Chandoha 1961 President and Chief Executive Officer (Officer of Schwab Annuity Portfolios since 2010.) | Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; 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 (January 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (March 2007 – August 2010). | |
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Annuity Portfolios since 2004.) | Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Treasurer and Chief Financial Officer, Laudus Funds (2006 – present); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – present) and Schwab ETFs (Oct. 2009 – present); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present). | |
Omar Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Equities, Charles Schwab Investment Management, Inc. (April 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 – April 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 Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (April 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 (April 2006 – Jan. 2008). | |
24
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 | |
David Lekich 1964 Chief Legal Officer and Secretary (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President (Sept. 2011 – present), Vice President (March 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 (April 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (April 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. | |
Catherine MacGregor 1964 Vice President and Assistant Secretary (Officer of Schwab Annuity Portfolios since 2005.) | Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 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 | Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees retire at age 72 or after twenty years as a trustee, whichever comes first. In addition, the retirement policy requires any independent trustee of Schwab Funds who also serves as an independent trustee of the Laudus Funds to retire from the Boards of the Schwab Funds upon their required retirement date from either the Boards of Trustees of the Schwab Funds or the Laudus Funds, whichever comes first. | |
2 | Mr. Schwab and Mr. Bettinger 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 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. |
25
Glossary
Barclays Global Treasury ex-U.S. Index An index that tracks fixed-rate local currency non-U.S. government debt of investment grade countries with a remaining maturity of at least one year. The Capped version of the index uses custom weights.
Barclays High Yield Very Liquid Index An index that includes publicly issued U.S. dollar denominated, non-investment grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year, are rated high-yield (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, S&P, and Fitch, respectively, and have $600 million or more of outstanding face value.
Barclays U.S. Aggregate: Agencies Index An index that measures fixed rate securities issued by U.S. government agencies with at least one year to final maturity and $250 million par amount outstanding. The index is a sub-set of the Barclays US Aggregate: Government-Related Index.
Barclays U.S. Aggregate Bond Index A broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate and hybrid ARM passthroughs), asset-backed securities, and commercial mortgage-backed securities.
Barclays U.S. Credit Index An index that comprises the Barclays U.S. Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.
Barclays U.S. Mortgage-Backed Securities (MBS): Agency Fixed Rate MBS Index An index that measures agency mortgage-backed pass-through fixed-rate securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
Barclays U.S. TIPS Index (Series-L) A rules-based, market value-weighted index that tracks inflation-protected securities issued by the U.S. Treasury that have at least one year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value.
Barclays 3 − 10 Year U.S. Treasury Bond Index An index that measures the performance of U.S. Treasury securities that have a remaining maturity of greater than or equal to three years and less than 10 years.
Barclays U.S. Treasury Bills: 1 − 3 Months Index An index that includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value.
Bloomberg Commodity Index A broadly diversified index composed of futures contracts on physical commodities. The total return index reflects the return on fully collateralized positions in the underlying commodity futures.
Citigroup Non-U.S. Dollar World Government Bond Index An index that measures the total rate of return performance for the government bonds of 23 countries, excluding the U.S., with a remaining maturity of at least one year.
Dow Jones U.S. Large-Cap Total Stock Market Index An index that is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the largest 750 stocks and is float-adjusted market cap weighted.
Dow Jones U.S. Select REIT Index A float-adjusted market capitalization weighted index comprised of real estate investment trusts (REITs).
Dow Jones U.S. Small-Cap Total Stock Market Index An index that is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the stocks ranked 751-2500 by full market capitalization and is float-adjusted market cap weighted.
Dow Jones U.S. Total Stock Market Index An index that measures all U.S. equity securities with readily available prices.
FTSE Developed ex US Index An index that comprises large and mid cap stocks providing coverage of developed markets (23 countries) excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
FTSE Developed Small Cap ex-US Liquid Index An index that comprises small-cap companies in developed countries excluding the United States, as defined by the index provider. The index defines the small-cap universe as approximately the bottom 10% of the eligible universe with a minimum free float capitalization of $150 million.
FTSE Emerging Index An index comprised of large- and mid-cap companies in emerging countries, as defined by the index provider. The index defines the large and mid-cap universe as approximately the top 90% of the eligible universe. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes.
MSCI EAFE Index A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
MSCI Emerging Markets Index A free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
Russell 2000 Index An index that measures the performance of the small-cap segment of the U.S. equity universe.
Russell Microcap Index An index that measures the performance of the microcap segment of the U.S. equity market. Microcap stocks make up less than 3% of the U.S. equity market (by market cap) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next smallest eligible securities by market cap.
26
S&P 500 Index A market capitalization index that is designed to measure the performance of 500 leading publicly held companies in leading industries of the U.S. economy.
VIT Balanced Composite Index A custom blended index developed by CSIM based on a comparable portfolio asset allocation and calculated using the following portion allocations: 15% Dow Jones U.S. Large Cap Total Stock Market Index, 4% Dow Jones U.S. Small-Cap Total Stock Market Index, 1% Russell Microcap Index, 11% FTSE Developed ex-US Index (Net), 2% FTSE Developed Small Cap ex-US Liquid Index (Net), 5% FTSE Emerging Index (Net), 6% Dow Jones U.S. Select REIT Index, 3% Bloomberg Commodity Index, 2% Barclays U.S. TIPS Index (Series-L), 12% Barclays 3 − 10 Year U.S. Treasury Bond Index, 2% Barclays U.S. Aggregate: Agencies Index, 6% Barclays U.S. Credit Index, 13% Barclays U.S. MBS: Agency Fixed Rate MBS Index, 2% Barclays Global Treasury ex-U.S. [Capped] Index, 1% Barclays High Yield Bond Very Liquid Index, 15% Barclays U.S. Treasury Bills: 1 − 3 Month Index. The index is maintained by CSIM. The components that make up the composite index may vary over time.
27
Notes
Schwab VIT Balanced with Growth Portfolio | |||||
Annual report dated December 31, 2014 |
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 Fund’s website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s website at www.sec.gov.
Investment Adviser: Charles Schwab Investment Management, Inc. (CSIM)
The Investment Environment
For the 12-month reporting period ended December 31, 2014, large-cap U.S. stocks performed well, with several equity indices reaching record highs. Small-cap stocks generated positive returns but lagged by comparison, with returns reduced by high relative valuations and the Federal Reserve’s policy shift. As a result, the Dow Jones U.S. Broad Stock Market Index returned 12.6%.
For stocks in developed international markets and in emerging markets, the depreciation of many foreign currencies translated into negative returns in U.S. dollar terms. Healthier economic growth in the U.S. than overseas and a difference in policy efforts between the Federal Reserve and many foreign central banks led to these fluctuations. Reflecting this backdrop, the MSCI EAFE Index (Net)—representing the performance of developed international stocks—returned −4.9%, and the MSCI Emerging Markets Index (Net) returned −2.2%.
U.S. bonds generated noteworthy returns and outperformed international bonds, which were hurt by their falling currencies. Helped by weak U.S. economic growth early in 2014, yields on longer-term U.S. bonds declined, while returns on international bonds were reduced by their falling currencies versus the U.S. dollar. The Barclays U.S. Aggregate Bond index—representing the broad U.S. bond market—returned 6.0%, and the Citigroup Non-U.S. Dollar World Government Bond Index returned −2.7%.
Money market securities continued to help preserve investor capital, while facing another period of low yields.
Asset Class Performance Comparison % returns during the 12 months ended 12/31/2014
This graph compares the performance of various asset classes. Final performance figures for the period are in the key below.
13.69% | S&P 500® Index: measures U.S. large-cap stocks | |||
4.89% | Russell 2000® Index: measures U.S. small-cap stocks | |||
−4.90% | MSCI EAFE® Index (Net): measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East | |||
5.97% | Barclays U.S. Aggregate Bond Index: measures the U.S. bond market | |||
0.02% | Barclays U.S. Treasury Bills 1-3 Months Index: measures short-term U.S. Treasury obligations |
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.
Index figures assume dividends and distributions were reinvested, and do not include trading and management costs, which would lower performance. Indices are unmanaged, do not incur management fees, costs and expenses, and you cannot invest in them directly. Remember that past performance is not a guarantee of future results.
Schwab VIT Balanced with Growth Portfolio 1
Portfolio Management
Zifan Tang, CFA, Managing Director and Head of Asset Allocation Strategies, leads the portfolio management team and has overall responsibility for all aspects of the management of the portfolio. 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. |
2 Schwab VIT Balanced with Growth Portfolio
Schwab VIT Balanced with Growth Portfolio
The Schwab VIT Balanced with Growth Portfolio (the portfolio) seeks to provide long-term capital appreciation and income. To pursue its goal, the portfolio aims to provide diversification across major asset classes, including domestic equity securities, international equity securities, real assets, fixed income securities, and money market investments, as well as diversification across a range of sub-asset classes within the major asset classes.
The portfolio is considered a “fund-of-funds” in that it gains exposure to these asset classes by primarily investing in exchange traded funds (ETFs) from Schwab, as well as unaffiliated ETFs. The portfolio may also invest in Schwab and Laudus Funds and unaffiliated third-party mutual funds. The portfolio uses the internally calculated VIT Balanced with Growth Composite Index (the composite index) as a performance gauge. The composite index is comprised of 61% equity, 30% fixed income, 5% cash, and 4% commodities.
Performance. For the 12-month reporting period ended December 31, 2014, the portfolio returned 4.15%. The Dow Jones U.S. Total Stock Market Index and the Barclays U.S. Aggregate Bond Index, reflecting broad-based U.S. stock and bond market performance, returned 12.47% and 5.97%, respectively. The composite index, described above, returned 5.02%. Differences between the return of the portfolio and the return of the index may be attributable to, among other things, operational and transactional costs incurred by the portfolio that are not incurred by the index.
Market Highlights. U.S. stock markets reached record highs during the 12-month reporting period, as a rebounding U.S. economy and stronger corporate earnings contributed positively to market performance. Signs of economic improvement led the Federal Reserve (the Fed) to wind down its quantitative easing policies and conclude the program in October. At the same time, the Fed left short-term interest rates historically low, generally supporting both stocks and the broad U.S. bond market. Internationally, both developed and emerging markets struggled amid an uncertain global economic outlook and heightened geopolitical tensions. Throughout the 12-month reporting period, many foreign currencies depreciated versus the U.S. dollar, generally reducing overall returns on overseas investments.
Positioning and Strategies. The portfolio’s allocations were broadly in line with those of the composite index.
During the reporting period, the portfolio’s U.S. equity exposures were significant contributors to total return. The portfolio’s U.S. large-cap holding, the Schwab U.S. Large-Cap ETFtm, was the biggest contributor to performance and returned approximately 13.3%. The two remaining U.S. equity holdings—the Schwab U.S. Small-Cap ETFtm and the iShares Micro-Cap ETF—both produced positive returns of 6.5% and 3.5%, respectively. The portfolio’s real estate position was another meaningful contributor to total return, with the Schwab U.S. REIT ETFtm returning 31.9% for the reporting period. Internationally, the Schwab Emerging Markets Equity ETFtm positively contributed to performance, returning 1.1%. The Schwab International Small-Cap Equity ETFtm and the Schwab International Equity ETFtm, however, detracted from performance and returned –5.8% and –4.4%, respectively. Overall, fixed income holdings positively contributed to the performance of the portfolio, with the exception of the SPDR® Barclays International Treasury Bond ETF, which returned –2.5%. With commodities particularly weak for the reporting period, the portfolio’s position in the Credit Suisse Commodity Return Strategy Fund, Class I, returned –16.9%, also detracting from total return.
As of 12/31/14:
Statistics
Number of Holdings | 19 | |||
Portfolio Turnover Rate | 8% |
Asset Class Weightings % of Investments1
Fixed Income | 29.6% | |||
Stocks – U.S. | 29.6% | |||
Stocks – International | 25.6% | |||
Real Assets | 10.0% | |||
Money Market Fund | 2.8% | |||
Short-Term Investments | 2.4% | |||
Total | 100.0% |
Top Holdings % of Net Assets2,3
Schwab U.S. Large-Cap ETF | 22.6% | |||
Schwab International Equity ETF | 16.4% | |||
iShares MBS ETF | 10.7% | |||
Schwab Intermediate-Term U.S. Treasury ETF | 8.5% | |||
Schwab U.S. REIT ETF | 6.2% | |||
Schwab Emerging Markets Equity ETF | 6.2% | |||
Schwab U.S. Small-Cap ETF | 6.0% | |||
iShares Core U.S. Credit Bond ETF | 4.6% | |||
Credit Suisse Commodity Return Strategy Fund, Class I | 3.8% | |||
Schwab International Small-Cap Equity ETF | 3.0% | |||
Total | 88.0% |
Management views and portfolio holdings may have changed since the report date.
1 | The portfolio intends to primarily invest in affiliated Schwab exchange traded funds (ETFs) and unaffiliated third-party ETFs. The portfolio may also invest in affiliated Schwab and Laudus Funds and unaffiliated third party mutual funds (all such ETFs and mutual funds referred to as “underlying funds”). The portfolio may also invest directly in equity or fixed income securities, and money market investments to achieve its investment objectives. | |
2 | This list is not a recommendation of any security by the investment adviser. | |
3 | The holdings listed exclude any temporary liquidity investments. |
Schwab VIT Balanced with Growth Portfolio 3
Schwab VIT Balanced with Growth Portfolio
Performance and Fund Facts as of 12/31/14
The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabfunds_prospectus.
July 25, 2012 – December 31, 2014
Performance of Hypothetical
$10,000 Investment2
Performance of Hypothetical
$10,000 Investment2
Average Annual Total Returns1,2
Portfolio and inception Date | 1 Year | Since Inception | ||||||||
Portfolio: Schwab VIT Balanced with Growth Portfolio (07/25/12) | 4.15 | % | 9.07 | % | ||||||
VIT Balanced with Growth Composite Index | 5.02 | % | 10.05 | % | ||||||
S&P 500® Index | 13.69 | % | 21.92 | % | ||||||
Barclays U.S. Aggregate Bond Index | 5.97 | % | 1.68 | % | ||||||
Fund Category: Morningstar Moderate Allocation | 6.21 | % | 12.77 | % |
Portfolio Expense Ratios3: Net 0.79%; Gross 0.96%
All total return figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.
The components that make up the composite index may vary over time. For index definitions, please see the Glossary.
1 | 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 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. Portfolio performance does not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the performance would be less than that shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. | |
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%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
4 Schwab VIT Balanced with Growth Portfolio
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
The portfolio incurs ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning July 1, 2014 and held through December 31, 2014.
The Actual Return line in the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ¸ $1,000 = 8.6), then multiply the result by the number given for the portfolio under the heading entitled “Expenses Paid During Period.”
The Hypothetical Return line in the table below provides information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs.
Ending | ||||||||||||||||
Beginning | Account Value | Expenses Paid | ||||||||||||||
Expense Ratio1 | Account Value | (Net of Expenses) | During Period2 | |||||||||||||
(Annualized) | at 7/1/14 | at 12/31/14 | 7/1/14–12/31/14 | |||||||||||||
Schwab VIT Balanced with Growth Portfolio | ||||||||||||||||
Actual Return | 0.55% | $ | 1,000.00 | $ | 986.30 | $ | 2.75 | |||||||||
Hypothetical 5% Return | 0.55% | $ | 1,000.00 | $ | 1,022.43 | $ | 2.80 |
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 portfolio invests are not included in this ratio. | |
2 | Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year. |
Schwab VIT Balanced with Growth Portfolio 5
Schwab VIT Balanced with Growth Portfolio
Financial Statements
Financial Highlights
1/1/14– | 1/1/13– | 7/25/121– | ||||||||||||
12/31/14 | 12/31/13 | 12/31/12 | ||||||||||||
Per-Share Data ($) | ||||||||||||||
Net asset value at beginning of period | 11.86 | 10.71 | 10.00 | |||||||||||
Income (loss) from investment operations: | ||||||||||||||
Net investment income (loss) | 0.19 | 2 | 0.23 | 2 | 0.09 | |||||||||
Net realized and unrealized gains (losses) | 0.30 | 0.93 | 0.62 | |||||||||||
Total from investment operations | 0.49 | 1.16 | 0.71 | |||||||||||
Less distributions: | ||||||||||||||
Distributions from net investment income | (0.09 | ) | (0.01 | ) | — | |||||||||
Distributions from net realized gains | (0.00 | )3 | — | — | ||||||||||
Total distributions | (0.09 | ) | (0.01 | ) | — | |||||||||
Net asset value at end of period | 12.26 | 11.86 | 10.71 | |||||||||||
Total return (%) | 4.15 | 10.79 | 7.10 | 4 | ||||||||||
Ratios/Supplemental Data (%) | ||||||||||||||
Ratios to average net assets: | ||||||||||||||
Net operating expenses5 | 0.55 | 0.58 | 0.58 | 6 | ||||||||||
Gross operating expenses5 | 0.57 | 0.75 | 16.10 | 6 | ||||||||||
Net investment income (loss) | 1.53 | 2.07 | 4.80 | 6 | ||||||||||
Portfolio turnover rate | 8 | 14 | 1 | 4 | ||||||||||
Net assets, end of period ($ x 1,000,000) | 99 | 70 | 2 |
1 Commencement of operations.
2 Calculated based on the average shares outstanding during the period.
3 Per-share amount was less than $0.01.
4 Not annualized.
5 The expenses incurred by underlying funds in which the fund invests are not included in this ratio.
6 Annualized.
6 See financial notes
Schwab VIT Balanced with Growth Portfolio
Portfolio Holdings as of December 31, 2014
This section shows all the securities in the fund’s portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus.
Cost | Value | |||||||||||
Holdings by Category | ($) | ($) | ||||||||||
97 | .7% | Other Investment Companies | 92,028,572 | 96,978,381 | ||||||||
2 | .4% | Short-Term Investments | 2,404,631 | 2,404,631 | ||||||||
100 | .1% | Total Investments | 94,433,203 | 99,383,012 | ||||||||
(0 | .1%) | Other Assets and Liabilities, Net | (106,408 | ) | ||||||||
100 | .0% | Net Assets | 99,276,604 |
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Other Investment Companies 97.7% of net assets | ||||||||
U.S. Stocks 29.6% | ||||||||
Large-Cap 22.6% | ||||||||
Schwab U.S. Large-Cap ETF (a) | 458,286 | 22,478,928 | ||||||
Micro-Cap 1.0% | ||||||||
iShares Micro-Cap ETF | 12,835 | 988,038 | ||||||
Small-Cap 6.0% | ||||||||
Schwab U.S. Small-Cap ETF (a) | 107,162 | 5,906,770 | ||||||
29,373,736 | ||||||||
International Stocks 25.6% | ||||||||
Developed-Market Large-Cap 16.4% | ||||||||
Schwab International Equity ETF (a) | 562,561 | 16,263,639 | ||||||
Developed-Market Small-Cap 3.0% | ||||||||
Schwab International Small-Cap Equity ETF (a) | 103,790 | 2,994,341 | ||||||
Emerging-Market 6.2% | ||||||||
Schwab Emerging Markets Equity ETF (a) | 258,260 | 6,172,414 | ||||||
25,430,394 | ||||||||
Real Assets 10.0% | ||||||||
Commodity 3.8% | ||||||||
Credit Suisse Commodity Return Strategy Fund, Class I * | 628,530 | 3,777,466 | ||||||
Real Estate 6.2% | ||||||||
Schwab U.S. REIT ETF (a) | 158,515 | 6,174,159 | ||||||
9,951,625 | ||||||||
Fixed Income 29.7% | ||||||||
Agency Bond 2.0% | ||||||||
iShares Agency Bond ETF | 17,630 | 1,993,953 | ||||||
Corporate Bond 4.6% | ||||||||
iShares Core U.S. Credit Bond ETF | 41,170 | 4,603,218 | ||||||
High Yield Bond 1.2% | ||||||||
SPDR Barclays High Yield Bond ETF | 30,562 | 1,179,999 | ||||||
Inflation-Protected Bond 1.7% | ||||||||
Schwab U.S. TIPS ETF (a) | 31,344 | 1,700,098 | ||||||
International Developed-Market Bond 1.0% | ||||||||
SPDR Barclays International Treasury Bond ETF | 17,531 | 969,990 | ||||||
Mortgage-Backed Bond 10.7% | ||||||||
iShares MBS ETF | 96,947 | 10,598,246 | ||||||
Treasury Bond 8.5% | ||||||||
Schwab Intermediate-Term U.S. Treasury ETF (a) | 156,770 | 8,402,872 | ||||||
29,448,376 | ||||||||
Money Market Fund 2.8% | ||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares 0.01% (a)(b) | 2,774,250 | 2,774,250 | ||||||
Total Other Investment Companies | ||||||||
(Cost $92,028,572) | 96,978,381 | |||||||
Issuer | Face Amount | Value | ||||||
Rate, Maturity Date | ($) | ($) | ||||||
Short-Term Investments 2.4% of net assets | ||||||||
Time Deposits 2.4% | ||||||||
Australia & New Zealand Banking Group Ltd. | ||||||||
0.03%, 01/02/15 | 399,871 | 399,871 | ||||||
Bank of Tokyo-Mitsubishi UFJ | ||||||||
0.03%, 01/02/15 | 1,002,380 | 1,002,380 | ||||||
Wells Fargo | ||||||||
0.03%, 01/02/15 | 1,002,380 | 1,002,380 | ||||||
Total Short-Term Investments | ||||||||
(Cost $2,404,631) | 2,404,631 | |||||||
End of Investments. |
At 12/31/14, the tax basis cost of the fund’s investments was $94,656,281 and the unrealized appreciation and depreciation were $6,402,466 and ($1,675,735) respectively, with a net unrealized appreciation of $4,726,731.
* | Non-income producing security. | |
(a) | Issuer is affiliated with the fund’s adviser. | |
(b) | The rate shown is the 7-day yield. |
See financial notes 7
Schwab VIT Balanced with Growth Portfolio
Portfolio Holdings continued
ETF — | Exchange Traded Fund | |
MBS — | Mortgage-Backed Security | |
REIT — | Real Estate Investment Trust | |
SPDR — | Standard & Poor’s Depositary Receipts | |
TIPS — | Treasury Inflation Protected Securities |
The following is a summary of the inputs used to value the fund’s investments as of December 31, 2014 (see financial note 2(a) for additional information):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Significant | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Other Investment Companies1 | $96,978,381 | $— | $— | $96,978,381 | ||||||||||||
Short-Term Investments1 | — | 2,404,631 | — | 2,404,631 | ||||||||||||
Total | $96,978,381 | $2,404,631 | $— | $99,383,012 | ||||||||||||
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 December 31, 2014.
8 See financial notes
Schwab VIT Balanced with Growth Portfolio
Statement of
Assets and Liabilities
As of December 31, 2014
Assets | ||||||
Investments in affiliated underlying funds, at value (cost $67,561,693) | $72,867,471 | |||||
Investments in unaffiliated issuers, at value (cost $26,871,510) | + | 26,515,541 | ||||
Total investments, at value (cost $94,433,203) | 99,383,012 | |||||
Receivables: | ||||||
Investments sold | 889,831 | |||||
Dividends | 26,459 | |||||
Prepaid expenses | + | 611 | ||||
Total assets | 100,299,913 | |||||
Liabilities | ||||||
Payables: | ||||||
Investments bought | 969,183 | |||||
Investment adviser and administrator fees | 11,170 | |||||
Fund shares redeemed | 9,431 | |||||
Accrued expenses | + | 33,525 | ||||
Total liabilities | 1,023,309 | |||||
Net Assets | ||||||
Total assets | 100,299,913 | |||||
Total liabilities | − | 1,023,309 | ||||
Net assets | $99,276,604 | |||||
Net Assets by Source | ||||||
Capital received from investors | 93,106,809 | |||||
Net investment income not yet distributed | 1,356,140 | |||||
Net realized capital losses | (136,154 | ) | ||||
Net unrealized capital appreciation | 4,949,809 | |||||
Net Asset Value (NAV) |
Shares | ||||||||||||
Net Assets | ÷ | Outstanding | = | NAV | ||||||||
$99,276,604 | 8,098,662 | $12.26 |
See financial notes 9
Schwab VIT Balanced with Growth Portfolio
Statement of
Operations
For the period January 1, 2014 through December 31, 2014
Investment Income | ||||||
Dividends received from affiliated underlying funds | $1,423,958 | |||||
Dividends received from unaffiliated underlying funds | 413,913 | |||||
Interest | + | 725 | ||||
Total investment income | 1,838,596 | |||||
Expenses | ||||||
Investment adviser and administrator fees | 397,816 | |||||
Professional fees | 41,050 | |||||
Transfer agent fees | 22,132 | |||||
Shareholder reports | 13,797 | |||||
Independent trustees’ fees | 12,246 | |||||
Custodian fees | 8,606 | |||||
Portfolio accounting fees | 7,907 | |||||
Other expenses | + | 1,267 | ||||
Total expenses | 504,821 | |||||
Expense reduction by CSIM | − | 22,132 | ||||
Net expenses | − | 482,689 | ||||
Net investment income | 1,355,907 | |||||
Realized and Unrealized Gains (Losses) | ||||||
Realized capital gain distributions received from unaffiliated underlying funds | 5,734 | |||||
Net realized losses on sales of affiliated underlying funds | (4,682 | ) | ||||
Net realized losses on sales of unaffiliated underlying funds | + | (31,871 | ) | |||
Net realized losses | (30,819 | ) | ||||
Net change in unrealized appreciation (depreciation) on affiliated underlying funds | 2,183,057 | |||||
Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | (210,952 | ) | |||
Net change in unrealized appreciation (depreciation) | + | 1,972,105 | ||||
Net realized and unrealized gains | 1,941,286 | |||||
Increase in net assets resulting from operations | $3,297,193 |
10 See financial notes
Schwab VIT Balanced with Growth Portfolio
Statement of
Changes in Net Assets
For the current and prior report periods
Operations | ||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||
Net investment income | $1,355,907 | $672,303 | ||||||||
Net realized losses | (30,819 | ) | (92,134 | ) | ||||||
Net change in unrealized appreciation (depreciation) | + | 1,972,105 | 2,953,194 | |||||||
Increase in net assets from operations | 3,297,193 | 3,533,363 | ||||||||
Distributions to Shareholders | ||||||||||
Distributions from net investment income | (672,772 | ) | (14,602 | ) | ||||||
Distributions from net realized gains | + | (12,459 | ) | — | ||||||
Total distributions | ($685,231 | ) | ($14,602 | ) |
Transactions in Fund Shares
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | VALUE | SHARES | VALUE | |||||||||||||||
Shares sold | 2,491,882 | $30,247,487 | 6,037,874 | $68,100,595 | ||||||||||||||
Shares reinvested | 55,127 | 685,231 | 1,327 | 14,477 | ||||||||||||||
Shares redeemed | + | (325,359 | ) | (3,961,691 | ) | (316,241 | ) | (3,590,732 | ) | |||||||||
Net transactions in fund shares | 2,221,650 | $26,971,027 | 5,722,960 | $64,524,340 | ||||||||||||||
Shares Outstanding and Net Assets | ||||||||||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | NET ASSETS | SHARES | NET ASSETS | |||||||||||||||
Beginning of period | 5,877,012 | $69,693,615 | 154,052 | $1,650,514 | ||||||||||||||
Total increase | + | 2,221,650 | 29,582,989 | 5,722,960 | 68,043,101 | |||||||||||||
End of period | 8,098,662 | $99,276,604 | 5,877,012 | $69,693,615 | ||||||||||||||
Net investment income not yet distributed | $1,356,140 | $672,287 |
See financial notes 11
Schwab VIT Balanced with Growth Portfolio
Financial Notes
1. Business Structure of the Fund:
Schwab VIT Balanced with Growth Portfolio (the “fund”) is a series of Schwab Annuity Portfolios (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 Annuity Portfolios (organized January 21, 1994) | ||||
Schwab Money Market Portfolio | ||||
Schwab MarketTrack Growth Portfolio II | ||||
Schwab S&P 500 Index Portfolio | ||||
Schwab VIT Balanced Portfolio | ||||
Schwab VIT Balanced with Growth Portfolio | ||||
Schwab VIT Growth Portfolio | ||||
The fund is a “fund of funds” which primarily invests in affiliated Schwab exchange traded funds (“ETFs”) and unaffiliated third-party ETFs. The fund may also invest in affiliated Schwab and Laudus Funds and unaffiliated third-party mutual funds (all such ETFs and mutual funds referred to as “underlying funds”). The fund may also invest directly in equity or fixed income securities and cash equivalents, including money market securities, to achieve its investment objectives.
The fund offers one share class. Shares are bought and sold 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 fund’s Board of Trustees (the “Board”) may authorize the issuance of as many shares as necessary.
The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. At December 31, 2014, 100% of the fund’s shares were held through one insurance company. Subscriptions and redemptions of these insurance separate accounts could have a material impact on the fund.
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 (FASB) 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 http://www.sec.gov or at the SEC’s Public Reference Room in Washington D.C.
(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. ETFs traded on a recognized securities exchange are valued at the last reported sale price that day or the official closing price, if applicable. | |
• | 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, a fund may fair value a security when it is |
12
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
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 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 fund pursuant to the valuation procedures. |
• | Short-term securities (60 days or less to maturity): Short-term securities may be valued at amortized cost, which approximates market value. |
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the fund discloses the fair value of its investments in a hierarchy that prioritizes the 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 and ETFs. 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. As investments whose values are classified as Level 2 prices include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. | |
• | Level 3 — significant unobservable inputs (including the 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. |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
13
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
The levels associated with valuing the fund’s investments as of December 31, 2014 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 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. 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) 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.
(g) Federal Income Taxes:
The fund intends to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the fund distributes substantially all of its net investment income and realized net capital gains, if any, to the participating insurance company’s (shareholders) separate accounts each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax.
(h) 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.
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.
Affiliated Fund Risk. The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated ETFs and mutual funds may create a conflict of interest because the fees paid to it by some underlying funds are
14
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
higher than the fees paid by other underlying funds. However, the portfolio manager is a fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds, without taking fees into consideration.
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 fund will fluctuate, which means that an investor could lose money.
ETFs 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 an ETF can result in its value being more volatile than the underlying portfolio of securities.
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. The risks below summarize certain principal investment risks of the underlying funds that are also principal investment risks to which the fund is subject because of the fund’s investment allocation in the underlying funds and the underlying funds’ asset allocation.
• | 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. | |
• | 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 mid- or 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 — bonds or large-cap stocks, for instance — an underlying fund’s performance also will lag those investments. | |
• | 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 negatively impact the value or liquidity of the underlying fund’s investments, and could impair the underlying 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. To the extent an underlying fund’s investment in a single country or a limited number of countries represents a large percentage of the underlying fund’s assets, the underlying 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 Market Risk. An underlying fund’s investments in securities of emerging market countries may involve certain risks that are greater than those associated with investments in securities of developed countries. 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 an underlying fund’s investments in emerging market countries and, at times, it may be difficult to value such investments. | |
• | Currency Risk. As a result of an underlying 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, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in an underlying fund would be adversely affected. |
15
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
• | Growth Investing Risk. Certain of the underlying funds pursue a “growth style” of investing. Growth investing focuses on a company’s prospects for growth of revenue and earnings. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks also can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks. Since growth companies usually invest a high portion of earnings in their business, they may lack the dividends of value stocks that can cushion stock prices in a falling market. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks. | |
• | Value Investing Risk. Certain of the underlying funds may pursue a “value style” of investing. Value investing focuses on companies whose stocks appear undervalued in light of factors such as the company’s earnings, book value, revenues or cash flow. If an underlying fund’s investment adviser’s (or sub-adviser’s) assessment of a company’s value or prospects for exceeding earnings expectations or market conditions is wrong, the underlying fund could suffer losses or produce poor performance relative to other funds. In addition, “value stocks” can continue to be undervalued by the market for long periods of time. | |
• | Debt Securities Risk. Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the fund fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to their issuer’s ability to make timely payments or otherwise honor their obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. | |
• | 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, an 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 interest rates also may affect an underlying fund’s share price: a sharp rise in interest rates could cause the underlying 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. Because interest rates in the United States are at, or near, historically low levels, a change in a central bank’s monetary policy (e.g., tapering of the Federal Reserve Board’s quantitative easing program) or improving economic conditions may result in an increase in interest rates. | |
• | Credit Risk. Certain of the underlying funds are subject to the risk that a decline in the credit quality of a portfolio investment could cause the underlying fund’s share price to fall. 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. Securities rated below investment grade (junk bonds) involve greater risk of price declines than investment grade securities due to actual or perceived changes in the issuer’s creditworthiness. | |
• | Prepayment and Extension Risk. An underlying fund’s investments in fixed income securities are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause the underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the underlying fund’s yield or share price. | |
• | U.S. Government Securities Risk. Some of the U.S. government securities that the underlying funds invest in are not backed by the full faith and credit of the U.S. government, which means they are neither issued nor guaranteed by the U.S. Treasury. Certain securities such as those issued by the Federal Home Loan Banks are supported by limited lines of credit maintained by their issuers with the U.S. Treasury. Securities issued by other issuers, such as the Federal Farm Credit Banks Funding Corporation, are supported solely by the credit of the issuer. There can be no assurance that the U.S. government will provide financial support to securities of its agencies and instrumentalities if it is not obligated to do so under law. Also, any government guarantees on securities the underlying funds own do not extend to shares of the underlying funds themselves. | |
• | Real Estate Investment Risk. An underlying fund in which the portfolio may invest may have a policy of concentrating its investments in real estate companies and companies related to the real estate industry. Such an underlying fund is subject to risks associated with the direct ownership of real estate securities and a portfolio’s investment in such an underlying fund is subject to risks associated with the direct ownership of real estate securities and an investment in the underlying fund will be closely linked to the performance of the real estate markets. These risks include, among others, declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds or |
16
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
other limits to accessing the credit or capital markets; defaults by borrowers or tenants, particularly during an economic downturn; and changes in interest rates. |
• | Real Estate Investment Trust (REIT) Risk. An underlying fund may invest in REITs. An underlying fund’s investments in 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, equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills 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 for the underlying fund. In addition, REITs have their own expenses, and the underlying fund will bear a proportionate share of those expenses. | |
• | 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 to its agencies or instrumentalities where it was not obligated to do so. Mortgage-backed securities 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. Because of prepayment and extension risk, mortgage-backed securities react differently to changes in interest rates than other bonds. Small movements in interest rates — both increases and decreases — may quickly and significantly affect the value of certain mortgage-backed securities. 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 because of an adverse market action, expenses, or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA transaction. | |
• | 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. | |
• | Commodity Risk. To the extent that an underlying fund invests in commodity-linked derivative instruments, it may subject the underlying fund to greater volatility than investments in traditional securities. Also, commodity-linked investments may be more volatile and less liquid than the underlying commodity. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and other regulatory and market developments. The use of leveraged commodity-linked derivatives creates an opportunity for increased return, but also creates the possibility for a greater loss. | |
• | Liquidity Risk. A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price. | |
• | 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 and could cause the fund to lose more than the principal amount invested. | |
• | Management Risk. An underlying fund may be an actively managed mutual fund. Any actively managed mutual fund is subject to the risk that its investment adviser (or sub-adviser(s)) will select investments or allocate assets in a manner 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. | |
• | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the |
17
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
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. |
• | Tracking Error Risk. An underlying fund may seek to track the performance of its benchmark index, 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. | |
• | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector 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 or asset class. | |
• | Money Market Risk. Although an underlying money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in a money market fund. In addition, a money market fund is not designed to offer capital appreciation. |
Direct Investment Risk. The fund may invest directly in individual securities to maintain its allocations. 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 securities and instruments.
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 (“Advisory Agreement”) between CSIM and the trust.
For its advisory and administrative services to the fund, CSIM is entitled to receive an annual fee, payable monthly, equal to 0.45% of the fund’s average daily net assets.
CSIM and its affiliates have made an additional agreement with the fund, for so long as CSIM serves as the investment adviser to the fund, which may only be amended or terminated with approval of the fund’s Board, to limit the total annual fund operating expenses charged, excluding interest, taxes and certain non-routine expenses of the fund to 0.58%.
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 ETFs and mutual funds. As of December 31, 2014, the Schwab VIT Balanced with Growth Portfolio’s ownership percentages of other related funds’ shares are:
Schwab U.S. Large-Cap ETF | 0.6% | |||
Schwab U.S. Small-Cap ETF | 0.3% | |||
Schwab International Equity ETF | 0.6% | |||
Schwab International Small-Cap Equity ETF | 0.8% | |||
Schwab Emerging Markets Equity ETF | 0.5% | |||
Schwab U.S. REIT ETF | 0.5% | |||
Schwab U.S. TIPS ETF | 0.3% | |||
Schwab Intermediate-Term U.S. Treasury ETF | 3.3% | |||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 0.0% | * |
* | Less than 0.1% |
18
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
4. Affiliates and Affiliated Transactions (continued):
Below is a summary of the fund’s transactions with its affiliated underlying funds during the period ended December 31, 2014.
Realized | Distributions | |||||||||||||||||||||||||||
Balance of | Balance of | Market | Gains (Losses) | Received* | ||||||||||||||||||||||||
Shares Held | Gross | Gross | Shares Held | Value at | 01/01/14 to | 01/01/14 to | ||||||||||||||||||||||
Underlying Funds | at 12/31/13 | Purchases | Sales | at 12/31/14 | 12/31/14 | 12/31/14 | 12/31/14 | |||||||||||||||||||||
Schwab U.S. Large-Cap ETF | 355,558 | 140,665 | (37,937 | ) | 458,286 | $22,478,928 | $13,750 | $381,459 | ||||||||||||||||||||
Schwab U.S. Small-Cap ETF | 79,506 | 42,198 | (14,542 | ) | 107,162 | 5,906,770 | 4,222 | 80,745 | ||||||||||||||||||||
Schwab International Equity ETF | 381,064 | 204,519 | (23,022 | ) | 562,561 | 16,263,639 | (2,780 | ) | 463,552 | |||||||||||||||||||
Schwab International Small-Cap Equity ETF | 67,676 | 43,274 | (7,160 | ) | 103,790 | 2,994,341 | 1,008 | 74,434 | ||||||||||||||||||||
Schwab Emerging Markets Equity ETF | 175,928 | 102,449 | (20,117 | ) | 258,260 | 6,172,414 | (23,032 | ) | 165,192 | |||||||||||||||||||
Schwab U.S. REIT ETF | 137,375 | 51,408 | (30,268 | ) | 158,515 | 6,174,159 | 19,072 | 132,697 | ||||||||||||||||||||
Schwab U.S. TIPS ETF | 22,342 | 9,970 | (968 | ) | 31,344 | 1,700,098 | (4,457 | ) | 19,696 | |||||||||||||||||||
Schwab Intermediate-Term U.S. Treasury ETF | 106,773 | 58,200 | (8,203 | ) | 156,770 | 8,402,872 | (12,465 | ) | 105,917 | |||||||||||||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 1,974,000 | 800,250 | — | 2,774,250 | 2,774,250 | — | 266 | |||||||||||||||||||||
Total | $72,867,471 | ($4,682 | ) | $1,423,958 | ||||||||||||||||||||||||
* | 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 fund may enter into interfund borrowing and lending transactions with other Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate to be charged on a loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review 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:
The fund has access to custodian overdraft facilities, a committed line of credit of $150 million with State Street Bank and Trust Company (“State Street”), an uncommitted line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman & Co. The fund pays interest on the amount it borrows at rates that are negotiated periodically. The fund also pays an annual fee to State Street for the committed line of credit.
There were no borrowings from the lines of credit by the fund during the period. However, the fund may have utilized its 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 December 31, 2014, purchases and sales/maturities of securities (excluding short-term obligations) were as follows:
Purchases of Securities | Sales/Maturities of Securities | |||||
$34,144,107 | $7,192,953 |
19
Schwab VIT Balanced with Growth Portfolio
Financial Notes (continued)
8. Federal Income Taxes:
As of December 31, 2014, the components of distributable earnings on a tax-basis were as follows:
Undistributed ordinary income | $1,387,314 | |||
Undistributed long-term capital gains | 55,750 | |||
Unrealized appreciation on investments | 6,402,466 | |||
Unrealized depreciation on investments | (1,675,735 | ) | ||
Net unrealized appreciation (depreciation) | $4,726,731 | |||
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 December 31, 2014, the fund had no capital loss carryforwards.
For tax purposes, realized net capital losses and late-year ordinary losses incurred after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2014, the fund had no capital losses deferred and no capital loss carryforwards utilized.
The tax-basis components of distributions paid during the current and prior fiscal years were as follows:
Current period distributions | ||||
Ordinary income | $685,099 | |||
Long-term capital gains | 132 | |||
Return of capital | — | |||
Prior period distributions | ||||
Ordinary income | $14,602 | |||
Long-term capital gains | — | |||
Return of capital | — |
Distributions paid to the participating insurance company’s separate accounts are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as short-term capital gains and losses, capital losses related to wash sales and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming participating insurance company’s separate accounts as a distribution for tax purposes.
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 December 31, 2014, the fund made the following reclassifications:
Capital shares | $— | |||
Undistributed net investment income | 718 | |||
Net realized capital gains (losses) | (718 | ) |
As of December 31, 2014, 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 December 31, 2014, the fund did not incur any interest or penalties.
9. 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.
20
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab VIT Balanced with Growth Portfolio
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 VIT Balanced with Growth Portfolio (one of the portfolios constituting Schwab Annuity Portfolios, hereafter referred to as the “Fund”) at December 31, 2014, 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 periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the 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 December 31, 2014 by correspondence with the custodian, brokers and the transfer agent of the underlying funds, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2015
21
Other Federal Tax Information (unaudited)
For corporate shareholders, 23.33% of the fund’s dividend distributions paid during the fiscal year ended December 31, 2014, qualify for the corporate dividends received deduction.
Under Section 852 (b)(3)(C) of the Internal Revenue Code, the fund hereby designates $132 as long-term capital gain dividends for the fiscal year ended December 31, 2014.
22
Trustees and Officers
The tables below give information about the trustees and officers of Schwab Annuity Portfolios, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 95 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 1-800-435-4000.
Independent Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served1) | During the Past Five Years | the Trustee | Other Directorships | |||
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman of JDN Corporate Advisory LLC (advisory services firm) (Oct. 2001 – present). | 74 | Director, WageWorks, Inc. (2010 – present) Director, Redwood Trust, Inc. (1998 – present) | |||
John F. Cogan 1947 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | 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 – present). | 74 | Director, Gilead Sciences, Inc. (2005 – present) | |||
David L. Mahoney 1954 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Private Investor. | 74 | Director, Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) | |||
Kiran M. Patel 1948 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 74 | Director, KLA-Tencor Corporation (2008 – present) | |||
Charles A. Ruffel 1956 Trustee (Trustee of Schwab Annuity Portfolios since 2015.) | Managing Partner and Co-Founder, Kudu Advisors, LLC (financial services) (May 2009 – present); Director, Asset International, Inc. (publisher of financial services information) (Jan. 2009 – Nov. 2014). | 95 | None. | |||
Gerald B. Smith 1950 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 74 | 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 Schwab Annuity Portfolios since 2008.) | Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present). | 74 | Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present) | |||
23
Interested Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served) | During the Past Five Years | the Trustee | Other Directorships | |||
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Annuity Portfolios since 1994.) | Chairman and Director, The Charles Schwab Corporation (1986 – present); Chairman and Director of Charles Schwab & Co., Inc. (1971 – present); Chairman and Director of Charles Schwab Investment Management, Inc. (1989 – present); Chairman and Director of Charles Schwab Bank (2003 – present); Chairman and Chief Executive Officer of Schwab (SIS) Holdings Inc. I and Schwab International Holdings, Inc. (1996 – present); and Director, Chairman and Chief Executive Officer, Schwab Holdings, Inc. (1979 – present). | 74 | Chairman and Director, The Charles Schwab Corporation (1986 – present) Director, Yahoo! Inc. (2014 – present) | |||
Walter W. Bettinger II2 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | Director, President and Chief Executive Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (2008 – present); Director, Charles Schwab Bank (2006 – present); and Director Schwab Holdings, Inc. (2008 – present). | 95 | Director, The Charles Schwab Corporation (2008 – present) | |||
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 Chandoha 1961 President and Chief Executive Officer (Officer of Schwab Annuity Portfolios since 2010.) | Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; 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 (January 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (March 2007 – August 2010). | |
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Annuity Portfolios since 2004.) | Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Treasurer and Chief Financial Officer, Laudus Funds (2006 – present); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – present) and Schwab ETFs (Oct. 2009 – present); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present). | |
Omar Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Equities, Charles Schwab Investment Management, Inc. (April 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 – April 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 Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (April 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 (April 2006 – Jan. 2008). | |
24
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 | |
David Lekich 1964 Chief Legal Officer and Secretary (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President (Sept. 2011 – present), Vice President (March 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 (April 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (April 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. | |
Catherine MacGregor 1964 Vice President and Assistant Secretary (Officer of Schwab Annuity Portfolios since 2005.) | Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 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 | Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees retire at age 72 or after twenty years as a trustee, whichever comes first. In addition, the retirement policy requires any independent trustee of Schwab Funds who also serves as an independent trustee of the Laudus Funds to retire from the Boards of the Schwab Funds upon their required retirement date from either the Boards of Trustees of the Schwab Funds or the Laudus Funds, whichever comes first. | |
2 | Mr. Schwab and Mr. Bettinger 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 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. |
25
Glossary
Barclays Global Treasury ex-U.S. Index An index that tracks fixed-rate local currency non-U.S. government debt of investment grade countries with a remaining maturity of at least one year. The Capped version of the index uses custom weights.
Barclays High Yield Very Liquid Index An index that includes publicly issued U.S. dollar denominated, non-investment grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year, are rated high-yield (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, S&P, and Fitch, respectively, and have $600 million or more of outstanding face value.
Barclays U.S. Aggregate: Agencies Index An index that measures fixed rate securities issued by U.S. government agencies with at least one year to final maturity and $250 million par amount outstanding. The index is a sub-set of the Barclays US Aggregate: Government-Related Index.
Barclays U.S. Aggregate Bond Index A broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate and hybrid ARM passthroughs), asset-backed securities, and commercial mortgage-backed securities.
Barclays U.S. Credit Index An index that comprises the Barclays U.S. Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.
Barclays U.S. Mortgage-Backed Securities (MBS): Agency Fixed Rate MBS Index An index that measures agency mortgage-backed pass-through fixed-rate securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
Barclays U.S. TIPS Index (Series-L) A rules-based, market value-weighted index that tracks inflation-protected securities issued by the U.S. Treasury that have at least one year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value.
Barclays 3 − 10 Year U.S. Treasury Bond Index An index that measures the performance of U.S. Treasury securities that have a remaining maturity of greater than or equal to three years and less than 10 years.
Barclays U.S. Treasury Bills: 1 − 3 Months Index An index that includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value.
Bloomberg Commodity Index A broadly diversified index composed of futures contracts on physical commodities. The total return index reflects the return on fully collateralized positions in the underlying commodity futures.
Citigroup Non-U.S. Dollar World Government Bond Index An index that measures the total rate of return performance for the government bonds of 23 countries, excluding the U.S., with a remaining maturity of at least one year.
Dow Jones U.S. Large-Cap Total Stock Market Index An index that is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the largest 750 stocks and is float-adjusted market cap weighted.
Dow Jones U.S. Select REIT Index A float-adjusted market capitalization weighted index comprised of real estate investment trusts (REITs).
Dow Jones U.S. Small-Cap Total Stock Market Index An index that is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the stocks ranked 751-2500 by full market capitalization and is float-adjusted market cap weighted.
Dow Jones U.S. Total Stock Market Index An index that measures all U.S. equity securities with readily available prices.
FTSE Developed ex US Index An index that comprises large and mid cap stocks providing coverage of developed markets (23 countries) excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
FTSE Developed Small Cap ex-US Liquid Index An index that comprises small-cap companies in developed countries excluding the United States, as defined by the index provider. The index defines the small-cap universe as approximately the bottom 10% of the eligible universe with a minimum free float capitalization of $150 million.
FTSE Emerging Index An index comprised of large- and mid-cap companies in emerging countries, as defined by the index provider. The index defines the large and mid-cap universe as approximately the top 90% of the eligible universe. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes.
MSCI EAFE Index A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
MSCI Emerging Markets Index A free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
Russell 2000 Index An index that measures the performance of the small-cap segment of the U.S. equity universe.
Russell Microcap Index An index that measures the performance of the microcap segment of the U.S. equity market. Microcap stocks make up less than 3% of the U.S. equity market (by market cap) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next smallest eligible securities by market cap.
26
S&P 500 Index A market capitalization index that is designed to measure the performance of 500 leading publicly held companies in leading industries of the U.S. economy.
VIT Balanced with Growth Composite Index A custom blended index developed by CSIM based on a comparable portfolio asset allocation and calculated using the following portion allocations: 22% Dow Jones U.S. Large Cap Total Stock Market Index, 6% Dow Jones U.S. Small-Cap Total Stock Market Index, 1% Russell Microcap Index, 17% FTSE Developed ex-US Index (Net), 3% FTSE Developed Small Cap ex-US Liquid Index (Net), 6% FTSE Emerging Index (Net), 6% Dow Jones U.S. Select REIT Index, 4% Bloomberg Commodity Index, 2% Barclays U.S. TIPS Index (Series-L), 9% Barclays 3 − 10 Year U.S. Treasury Bond Index, 2% Barclays U.S. Aggregate: Agencies Index, 4% Barclays U.S. Credit Index, 11% Barclays U.S. MBS: Agency Fixed Rate MBS Index, 1% Barclays Global Treasury ex-U.S. [Capped] Index, 1% Barclays High Yield Bond Very Liquid Index, 5% Barclays U.S. Treasury Bill: 1 − 3 Month Index. The index is maintained by CSIM. The components that make up the composite index may vary over time.
27
Notes
Schwab VIT Growth Portfolio | |||||
Annual report dated December 31, 2014 |
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 Fund’s website at www.csimfunds.com/schwabfunds_prospectus, the SEC’s website at www.sec.gov, or by contacting Schwab Funds at 1-800-435-4000.
Information regarding how a fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available, without charge, by visiting Schwab’s website at www.csimfunds.com/schwabfunds_prospectus or the SEC’s website at www.sec.gov.
Investment Adviser: Charles Schwab Investment Management, Inc. (CSIM)
The Investment Environment
For the 12-month reporting period ended December 31, 2014, large-cap U.S. stocks performed well, with several equity indices reaching record highs. Small-cap stocks generated positive returns but lagged by comparison, with returns reduced by high relative valuations and the Federal Reserve’s policy shift. As a result, the Dow Jones U.S. Broad Stock Market Index returned 12.6%.
For stocks in developed international markets and in emerging markets, the depreciation of many foreign currencies translated into negative returns in U.S. dollar terms. Healthier economic growth in the U.S. than overseas and a difference in policy efforts between the Federal Reserve and many foreign central banks led to these fluctuations. Reflecting this backdrop, the MSCI EAFE Index (Net)—representing the performance of developed international stocks—returned −4.9%, and the MSCI Emerging Markets Index (Net) returned −2.2%.
U.S. bonds generated noteworthy returns and outperformed international bonds, which were hurt by their falling currencies. Helped by weak U.S. economic growth early in 2014, yields on longer-term U.S. bonds declined, while returns on international bonds were reduced by their falling currencies versus the U.S. dollar. The Barclays U.S. Aggregate Bond index—representing the broad U.S. bond market—returned 6.0%, and the Citigroup Non-U.S. Dollar World Government Bond Index returned −2.7%.
Money market securities continued to help preserve investor capital, while facing another period of low yields.
Asset Class Performance Comparison % returns during the 12 months ended 12/31/2014
This graph compares the performance of various asset classes. Final performance figures for the period are in the key below.
13.69% | S&P 500® Index: measures U.S. large-cap stocks | |||
4.89% | Russell 2000® Index: measures U.S. small-cap stocks | |||
−4.90% | MSCI EAFE® Index (Net): measures (in U.S. dollars) large-cap stocks in Europe, Australasia and the Far East | |||
5.97% | Barclays U.S. Aggregate Bond Index: measures the U.S. bond market | |||
0.02% | Barclays U.S. Treasury Bills 1-3 Months Index: measures short-term U.S. Treasury obligations |
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.
Index figures assume dividends and distributions were reinvested, and do not include trading and management costs, which would lower performance. Indices are unmanaged, do not incur management fees, costs and expenses, and you cannot invest in them directly. Remember that past performance is not a guarantee of future results.
Schwab VIT Growth Portfolio 1
Portfolio Management
Zifan Tang, CFA, Managing Director and Head of Asset Allocation Strategies, leads the portfolio management team and has overall responsibility for all aspects of the management of the portfolio. 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. |
2 Schwab VIT Growth Portfolio
Schwab VIT Growth Portfolio
The Schwab VIT Growth Portfolio (the portfolio) seeks to provide long-term capital appreciation. To pursue its goal, the portfolio aims to provide diversification across major asset classes, including domestic equity securities, international equity securities, real assets, fixed income securities, and money market investments, as well as diversification across a range of sub-asset classes within the major asset classes.
The portfolio is considered a “fund-of-funds” in that it gains exposure to these asset classes by primarily investing in exchange traded funds (ETFs) from Schwab, as well as unaffiliated ETFs. The portfolio may also invest in Schwab and Laudus Funds and unaffiliated third-party mutual funds. The portfolio uses the internally calculated VIT Growth Composite Index (the composite index) as a performance gauge. The composite index is comprised of 78% equity, 13% fixed income, 5% cash, and 4% commodities.
Performance. For the 12-month reporting period ended December 31, 2014, the portfolio returned 3.97%. The Dow Jones U.S. Total Stock Market Index and the Barclays U.S. Aggregate Bond Index, reflecting broad-based U.S. stock and bond market performance, returned 12.47% and 5.97%, respectively. The composite index, described above, returned 4.95%. Differences between the return of the portfolio and the return of the index may be attributable to, among other things, operational and transactional costs incurred by the portfolio that are not incurred by the index.
Market Highlights. U.S. stock markets reached record highs during the 12-month reporting period, as a rebounding U.S. economy and stronger corporate earnings contributed positively to market performance. Signs of economic improvement led the Federal Reserve (the Fed) to wind down its quantitative easing policies and conclude the program in October. At the same time, the Fed left short-term interest rates historically low, generally supporting both stocks and the broad U.S. bond market. Internationally, both developed and emerging markets struggled amid an uncertain global economic outlook and heightened geopolitical tensions. Throughout the 12-month reporting period, many foreign currencies depreciated versus the U.S. dollar, generally reducing overall returns on overseas investments.
Positioning and Strategies. The portfolio’s allocations were broadly in line with those of the composite index.
During the reporting period, the portfolio’s U.S. equity exposures were significant contributors to total return. The portfolio’s U.S. large-cap holding, the Schwab U.S. Large-Cap ETFtm, was the biggest contributor to performance and returned approximately 13.3%. The two remaining U.S. equity holdings—the Schwab U.S. Small-Cap ETFtm and the iShares Micro-Cap ETF—both produced positive returns of 6.5% and 3.5%, respectively. The portfolio’s real estate position was another meaningful contributor to total return, with the Schwab U.S. REIT ETFtm returning 31.9% for the reporting period. Internationally, the Schwab Emerging Markets Equity ETFtm positively contributed to performance, returning 1.1%. The Schwab International Small-Cap Equity ETFtm and the Schwab International Equity ETFtm, however, detracted from performance and returned –5.8% and –4.4%, respectively. Fixed income holdings positively contributed to the performance of the portfolio, led by a positive performance by the iShares MBS ETF, which returned 6.2% for the 12-month reporting period. With commodities particularly weak for the reporting period, the portfolio’s position in the Credit Suisse Commodity Return Strategy Fund, Class I, returned –16.9%, also detracting from total return.
As of 12/31/14:
Statistics
Number of Holdings | 17 | |||
Portfolio Turnover Rate | 9% |
Asset Class Weightings % of Investments1
Stocks – U.S. | 38.2% | |||
Stocks – International | 33.4% | |||
Fixed Income | 12.5% | |||
Real Assets | 10.0% | |||
Short-Term Investments | 3.0% | |||
Money Market Fund | 2.9% | |||
Total | 100.0% |
Top Holdings % of Net Assets2,3
Schwab U.S. Large-Cap ETF | 29.6% | |||
Schwab International Equity ETF | 20.4% | |||
Schwab Emerging Markets Equity ETF | 8.2% | |||
Schwab U.S. Small-Cap ETF | 6.9% | |||
Schwab U.S. REIT ETF | 6.2% | |||
Schwab International Small-Cap Equity ETF | 5.0% | |||
iShares MBS ETF | 4.6% | |||
Schwab Intermediate-Term U.S.��Treasury ETF | 4.5% | |||
Credit Suisse Commodity Return Strategy Fund, Class I | 3.8% | |||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 2.9% | |||
Total | 92.1% |
Management views and portfolio holdings may have changed since the report date.
1 | The portfolio intends to primarily invest in affiliated Schwab exchange traded funds (ETFs) and unaffiliated third-party ETFs. The portfolio may also invest in affiliated Schwab and Laudus Funds and unaffiliated third party mutual funds (all such ETFs and mutual funds referred to as “underlying funds”). The portfolio may also invest directly in equity or fixed income securities, and money market investments to achieve its investment objectives. | |
2 | This list is not a recommendation of any security by the investment adviser. | |
3 | The holdings listed exclude any temporary liquidity investments. |
Schwab VIT Growth Portfolio 3
Schwab VIT Growth Portfolio
Performance and Fund Facts as of 12/31/14
The performance data quoted represents past performance. Past performance does not guarantee future results. Investment returns and principal value will fluctuate so that an investor’s shares may be worth more or less than their original cost. Current performance may be lower or higher than performance data quoted. To obtain performance information current to the most recent month end, please visit www.csimfunds.com/schwabfunds_prospectus.
July 25, 2012 – December 31, 2014
Performance of Hypothetical
$10,000 Investment2
Performance of Hypothetical
$10,000 Investment2
Average Annual Total Returns1,2
Portfolio and inception Date | 1 Year | Since Inception | ||||||||
Portfolio: Schwab VIT Growth Portfolio (07/25/12) | 3.97 | % | 11.91 | % | ||||||
VIT Growth Composite Index | 4.95 | % | 12.73 | % | ||||||
S&P 500® Index | 13.69 | % | 21.92 | % | ||||||
Barclays U.S. Aggregate Bond Index | 5.97 | % | 1.68 | % | ||||||
Fund Category: Morningstar Aggressive Allocation | 5.71 | % | 14.65 | % |
Portfolio Expense Ratios3: Net 0.78%; Gross 0.97%
All total return figures on this page assume dividends and distributions were reinvested. Index figures do not include trading and management costs, which would lower performance. Indices are unmanaged, and you cannot invest in them directly. Performance results less than one year are not annualized.
The components that make up the composite index may vary over time. For index definitions, please see the Glossary.
1 | 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 | Portfolio expenses have been partially absorbed by CSIM and its affiliates. Without these reductions, the portfolio’s returns would have been lower. Portfolio performance does not reflect the additional fees and expenses imposed by the insurance company under the variable insurance product contract. If those contract fees and expenses were included, the performance would be less than that shown. Please refer to the variable insurance product prospectus for a complete listing of these expenses. | |
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 0.20%. Net Expense: Expenses reduced by a contractual fee waiver in effect for so long as CSIM serves as adviser to the fund. Gross Expense: Does not reflect the effect of contractual fee waivers. For actual ratios during the period, refer to the financial highlights section of the financial statements. |
4 Schwab VIT Growth Portfolio
Fund Expenses (Unaudited)
Examples for a $1,000 Investment
The portfolio incurs ongoing costs, such as management fees, transfer agent and shareholder services fees, and other fund expenses.
The expense examples below are intended to help you understand your ongoing cost (in dollars) of investing in a fund and to compare this cost with the ongoing cost of investing in other mutual funds. These examples are based on an investment of $1,000 invested for six months beginning July 1, 2014 and held through December 31, 2014.
The Actual Return line in the table below provides information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value ¸ $1,000 = 8.6), then multiply the result by the number given for the portfolio under the heading entitled “Expenses Paid During Period.”
The Hypothetical Return line in the table below provides information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed return of 5% per year before expenses. Because the return used is not an actual return, it may not be used to estimate the actual ending account value or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the portfolio and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs.
Ending | ||||||||||||||||
Beginning | Account Value | Expenses Paid | ||||||||||||||
Expense Ratio1 | Account Value | (Net of Expenses) | During Period2 | |||||||||||||
(Annualized) | at 7/1/14 | at 12/31/14 | 7/1/14–12/31/14 | |||||||||||||
Schwab VIT Growth Portfolio | ||||||||||||||||
Actual Return | 0.54% | $ | 1,000.00 | $ | 981.20 | $ | 2.70 | |||||||||
Hypothetical 5% Return | 0.54% | $ | 1,000.00 | $ | 1,022.48 | $ | 2.75 |
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 portfolio invests are not included in this ratio. | |
2 | Expenses for the portfolio are equal to its annualized expense ratio, multiplied by the average account value over the period, multiplied by 184 days of the period, and divided by 365 days of the fiscal year. |
Schwab VIT Growth Portfolio 5
Schwab VIT Growth Portfolio
Financial Statements
Financial Highlights
1/1/14– | 1/1/13– | 7/25/121– | ||||||||||||
12/31/14 | 12/31/13 | 12/31/12 | ||||||||||||
Per-Share Data ($) | ||||||||||||||
Net asset value at beginning of period | 12.65 | 10.95 | 10.00 | |||||||||||
Income (loss) from investment operations: | ||||||||||||||
Net investment income (loss) | 0.20 | 2 | 0.33 | 2 | 0.13 | |||||||||
Net realized and unrealized gains (losses) | 0.30 | 1.37 | 0.82 | |||||||||||
Total from investment operations | 0.50 | 1.70 | 0.95 | |||||||||||
Less distributions: | ||||||||||||||
Distributions from net investment income | (0.10 | ) | (0.00 | )3 | — | |||||||||
Distributions from net realized gains | (0.00 | )3 | — | — | ||||||||||
Total distributions | (0.10 | ) | (0.00 | )3 | — | |||||||||
Net asset value at end of period | 13.05 | 12.65 | 10.95 | |||||||||||
Total return (%) | 3.97 | 15.56 | 9.50 | 4 | ||||||||||
Ratios/Supplemental Data (%) | ||||||||||||||
Ratios to average net assets: | ||||||||||||||
Net operating expenses5 | 0.54 | 0.58 | 0.59 | 6,7 | ||||||||||
Gross operating expenses5 | 0.56 | 0.77 | 26.08 | 6 | ||||||||||
Net investment income (loss) | 1.56 | 2.72 | 3.96 | 6 | ||||||||||
Portfolio turnover rate | 9 | 9 | 29 | 4 | ||||||||||
Net assets, end of period ($ x 1,000,000) | 107 | 77 | 1 |
1 Commencement of operations.
2 Calculated based on the average shares outstanding during the period.
3 Per-share amount was less than $0.01.
4 Not annualized.
5 The expenses incurred by underlying funds in which the fund invests are not included in this ratio.
6 Annualized.
7 The ratio of net operating expenses would have been 0.58%, if interest expense had not been incurred.
6 See financial notes
Schwab VIT Growth Portfolio
Portfolio Holdings as of December 31, 2014
This section shows all the securities in the fund’s portfolio and their values as of the report date.
The fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-800-SEC-0330 for information on the operation of the Public Reference Room. The schedule of portfolio holdings filed on a fund’s most recent Form N-Q is also available by visiting the fund’s website at www.csimfunds.com/schwabfunds_prospectus.
Cost | Value | |||||||||||
Holdings by Category | ($) | ($) | ||||||||||
97 | .6% | Other Investment Companies | 98,029,588 | 104,039,510 | ||||||||
3 | .0% | Short-Term Investments | 3,234,364 | 3,234,364 | ||||||||
100 | .6% | Total Investments | 101,263,952 | 107,273,874 | ||||||||
(0 | .6%) | Other Assets and Liabilities, Net | (653,584 | ) | ||||||||
100 | .0% | Net Assets | 106,620,290 |
Number | Value | |||||||
Security | of Shares | ($) | ||||||
Other Investment Companies 97.6% of net assets | ||||||||
U.S. Stocks 38.5% | ||||||||
Large-Cap 29.6% | ||||||||
Schwab U.S. Large-Cap ETF (a) | 642,848 | 31,531,695 | ||||||
Micro-Cap 2.0% | ||||||||
iShares Micro-Cap ETF | 27,536 | 2,119,721 | ||||||
Small-Cap 6.9% | ||||||||
Schwab U.S. Small-Cap ETF (a) | 134,191 | 7,396,608 | ||||||
41,048,024 | ||||||||
International Stocks 33.6% | ||||||||
Developed-Market Large-Cap 20.4% | ||||||||
Schwab International Equity ETF (a) | 750,998 | 21,711,352 | ||||||
Developed-Market Small-Cap 5.0% | ||||||||
Schwab International Small-Cap Equity ETF (a) | 185,661 | 5,356,320 | ||||||
Emerging-Market 8.2% | ||||||||
Schwab Emerging Markets Equity ETF (a) | 366,374 | 8,756,339 | ||||||
35,824,011 | ||||||||
Real Assets 10.0% | ||||||||
Commodity 3.8% | ||||||||
Credit Suisse Commodity Return Strategy Fund, Class I * | 674,686 | 4,054,860 | ||||||
Real Estate 6.2% | ||||||||
Schwab U.S. REIT ETF (a) | 170,419 | 6,637,820 | ||||||
10,692,680 | ||||||||
Fixed Income 12.6% | ||||||||
Corporate Bond 2.8% | ||||||||
iShares Core U.S. Credit Bond ETF | 26,891 | 3,006,683 | ||||||
Inflation-Protected Bond 0.7% | ||||||||
Schwab U.S. TIPS ETF (a) | 13,459 | 730,016 | ||||||
Mortgage-Backed Bond 4.6% | ||||||||
iShares MBS ETF | 45,154 | 4,936,235 | ||||||
Treasury Bond 4.5% | ||||||||
Schwab Intermediate-Term U.S. Treasury ETF (a) | 88,127 | 4,723,607 | ||||||
13,396,541 | ||||||||
Money Market Fund 2.9% | ||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares 0.01% (a)(b) | 3,078,254 | 3,078,254 | ||||||
Total Other Investment Companies | ||||||||
(Cost $98,029,588) | 104,039,510 | |||||||
Issuer | Face Amount | Value | ||||||
Rate, Maturity Date | ($) | ($) | ||||||
Short-Term Investments 3.0% of net assets | ||||||||
Time Deposits 3.0% | ||||||||
DBS Bank Ltd. | ||||||||
0.03%, 01/02/15 | 26,209 | 26,209 | ||||||
DNB | ||||||||
0.03%, 01/02/15 | 1,069,385 | 1,069,385 | ||||||
JPMorgan Chase | ||||||||
0.03%, 01/02/15 | 1,069,385 | 1,069,385 | ||||||
Sumitomo Mitsui Banking Corp. | ||||||||
0.03%, 01/02/15 | 1,069,385 | 1,069,385 | ||||||
Total Short-Term Investments | ||||||||
(Cost $3,234,364) | 3,234,364 | |||||||
End of Investments. |
At 12/31/14, the tax basis cost of the fund’s investments was $101,515,901 and the unrealIzed appreciation and depreciation were $7,815,497 and ($2,057,524), respectively, with a net unrealized appreciation of $5,757,973.
* | Non-income producing security. | |
(a) | Issuer is affiliated with the fund’s adviser. | |
(b) | The rate shown is the 7-day yield. |
ETF — | Exchange Traded Fund | |
MBS — | Mortgage-Backed Security | |
REIT — | Real Estate Investment Trust | |
TIPS — | Treasury Inflation Protected Securities |
See financial notes 7
Schwab VIT Growth Portfolio
Portfolio Holdings continued
The following is a summary of the inputs used to value the fund’s investments as of December 31, 2014 (see financial note 2(a) for additional information):
Quoted Prices in | Significant | |||||||||||||||
Active Markets for | Other Significant | Unobservable | ||||||||||||||
Identical Assets | Observable Inputs | Inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | Total | ||||||||||||
Other Investment Companies1 | $104,039,510 | $— | $— | $104,039,510 | ||||||||||||
Short-Term Investments1 | — | 3,234,364 | — | 3,234,364 | ||||||||||||
Total | $104,039,510 | $3,234,364 | $— | $107,273,874 | ||||||||||||
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 December 31, 2014.
8 See financial notes
Schwab VIT Growth Portfolio
Statement of
Assets and Liabilities
As of December 31, 2014
Assets | ||||||
Investments in affiliated underlying funds, at value (cost $83,589,947) | $89,922,011 | |||||
Investments in unaffiliated issuers, at value (cost $17,674,005) | + | 17,351,863 | ||||
Total investments, at value (cost $101,263,952) | 107,273,874 | |||||
Receivables: | ||||||
Investments sold | 728,064 | |||||
Fund shares sold | 381,327 | |||||
Dividends | 7,091 | |||||
Prepaid expenses | + | 686 | ||||
Total assets | 108,391,042 | |||||
Liabilities | ||||||
Payables: | ||||||
Investments bought | 1,725,627 | |||||
Investment adviser and administrator fees | 11,854 | |||||
Fund shares redeemed | 66 | |||||
Accrued expenses | + | 33,205 | ||||
Total liabilities | 1,770,752 | |||||
Net Assets | ||||||
Total assets | 108,391,042 | |||||
Total liabilities | − | 1,770,752 | ||||
Net assets | $106,620,290 | |||||
Net Assets by Source | ||||||
Capital received from investors | 99,170,911 | |||||
Net investment income not yet distributed | 1,520,135 | |||||
Net realized capital losses | (80,678 | ) | ||||
Net unrealized capital appreciation | 6,009,922 | |||||
Net Asset Value (NAV) |
Shares | ||||||||||||
Net Assets | ÷ | Outstanding | = | NAV | ||||||||
$106,620,290 | 8,170,364 | $13.05 |
See financial notes 9
Schwab VIT Growth Portfolio
Statement of
Operations
For the period January 1, 2014 through December 31, 2014
Investment Income | ||||||
Dividends received from affiliated underlying funds | $1,852,443 | |||||
Dividends received from unaffiliated underlying funds | 190,667 | |||||
Interest | + | 810 | ||||
Total investment income | 2,043,920 | |||||
Expenses | ||||||
Investment adviser and administrator fees | 438,249 | |||||
Professional fees | 41,741 | |||||
Transfer agent fees | 22,059 | |||||
Shareholder reports | 13,172 | |||||
Independent trustees’ fees | 12,766 | |||||
Portfolio accounting fees | 8,152 | |||||
Custodian fees | 7,796 | |||||
Other expenses | + | 1,262 | ||||
Total expenses | 545,197 | |||||
Expense reduction by CSIM | − | 22,059 | ||||
Net expenses | − | 523,138 | ||||
Net investment income | 1,520,782 | |||||
Realized and Unrealized Gains (Losses) | ||||||
Net realized gains on sales of affiliated underlying funds | 28,588 | |||||
Net realized losses on sales of unaffiliated underlying funds | + | (31,717 | ) | |||
Net realized losses | (3,129 | ) | ||||
Net change in unrealized appreciation (depreciation) on affiliated underlying funds | 2,511,811 | |||||
Net change in unrealized appreciation (depreciation) on unaffiliated underlying funds | + | (417,843 | ) | |||
Net change in unrealized appreciation (depreciation) | + | 2,093,968 | ||||
Net realized and unrealized gains | 2,090,839 | |||||
Increase in net assets resulting from operations | $3,611,621 |
10 See financial notes
Schwab VIT Growth Portfolio
Statement of
Changes in Net Assets
For the current and prior report periods
Operations | ||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||
Net investment income | $1,520,782 | $780,381 | ||||||||
Net realized losses | (3,129 | ) | (70,842 | ) | ||||||
Net change in unrealized appreciation (depreciation) | + | 2,093,968 | 3,890,812 | |||||||
Increase in net assets from operations | 3,611,621 | 4,600,351 | ||||||||
Distributions to Shareholders | ||||||||||
Distributions from net investment income | (780,922 | ) | (7,298 | ) | ||||||
Distributions from net realized gains | + | (5,297 | ) | — | ||||||
Total distributions | ($786,219 | ) | ($7,298 | ) |
Transactions in Fund Shares
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | VALUE | SHARES | VALUE | |||||||||||||||
Shares sold | 2,461,736 | $31,697,774 | 6,160,749 | $73,353,144 | ||||||||||||||
Shares reinvested | 59,114 | 786,219 | 634 | 7,200 | ||||||||||||||
Shares redeemed | + | (398,632 | ) | (5,197,010 | ) | (167,721 | ) | (2,042,197 | ) | |||||||||
Net transactions in fund shares | 2,122,218 | $27,286,983 | 5,993,662 | $71,318,147 | ||||||||||||||
Shares Outstanding and Net Assets | ||||||||||||||||||
1/1/14-12/31/14 | 1/1/13-12/31/13 | |||||||||||||||||
SHARES | NET ASSETS | SHARES | NET ASSETS | |||||||||||||||
Beginning of period | 6,048,146 | $76,507,905 | 54,484 | $596,705 | ||||||||||||||
Total increase | + | 2,122,218 | 30,112,385 | 5,993,662 | 75,911,200 | |||||||||||||
End of period | 8,170,364 | $106,620,290 | 6,048,146 | $76,507,905 | ||||||||||||||
Net investment income not yet distributed | $1,520,135 | $780,275 |
See financial notes 11
Schwab VIT Growth Portfolio
Financial Notes
1. Business Structure of the Fund:
Schwab VIT Growth Portfolio (the “fund”) is a series of Schwab Annuity Portfolios (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 Annuity Portfolios (organized January 21, 1994) | ||||
Schwab Money Market Portfolio | ||||
Schwab MarketTrack Growth Portfolio II | ||||
Schwab S&P 500 Index Portfolio | ||||
Schwab VIT Balanced Portfolio | ||||
Schwab VIT Balanced with Growth Portfolio | ||||
Schwab VIT Growth Portfolio | ||||
The fund is a “fund of funds” which primarily invests in affiliated Schwab exchange traded funds (“ETFs”) and unaffiliated third-party ETFs. The fund may also invest in affiliated Schwab and Laudus Funds and unaffiliated third-party mutual funds (all such ETFs and mutual funds referred to as “underlying funds”). The fund may also invest directly in equity or fixed income securities and cash equivalents, including money market securities, to achieve its investment objectives.
The fund offers one share class. Shares are bought and sold 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 fund’s Board of Trustees (the “Board”) may authorize the issuance of as many shares as necessary.
The fund is intended as an investment vehicle for variable annuity contracts and variable life insurance policies to be offered by separate accounts of participating life insurance companies and for pension and retirement plans qualified under the Internal Revenue Code of 1986, as amended. At December 31, 2014, 100% of the fund’s shares were held through one insurance company. Subscriptions and redemptions of these insurance separate accounts could have a material impact on the fund.
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 (FASB) 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 http://www.sec.gov or at the SEC’s Public Reference Room in Washington D.C.
(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. ETFs traded on a recognized securities exchange are valued at the last reported sale price that day or the official closing price, if applicable. | |
• | 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, a fund may fair value a security when it is |
12
Schwab VIT Growth Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
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 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 fund pursuant to the valuation procedures. |
• | Short-term securities (60 days or less to maturity): Short-term securities may be valued at amortized cost, which approximates market value. |
In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the fund discloses the fair value of its investments in a hierarchy that prioritizes the 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 and ETFs. 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. As investments whose values are classified as Level 2 prices include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. | |
• | Level 3 — significant unobservable inputs (including the 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. |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
13
Schwab VIT Growth Portfolio
Financial Notes (continued)
2. Significant Accounting Policies (continued):
The levels associated with valuing the fund’s investments as of December 31, 2014 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 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. 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) 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.
(g) Federal Income Taxes:
The fund intends to meet federal income and excise tax requirements for regulated investment companies. Accordingly, the fund distributes substantially all of its net investment income and realized net capital gains, if any, to the participating insurance company’s (shareholders) separate accounts each year. As long as the fund meets the tax requirements, it is not required to pay federal income tax.
(h) 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.
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.
Affiliated Fund Risk. The investment adviser’s authority to select and substitute underlying funds from a variety of affiliated and unaffiliated ETFs and mutual funds may create a conflict of interest because the fees paid to it by some underlying funds are
14
Schwab VIT Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
higher than the fees paid by other underlying funds. However, the portfolio manager is a fiduciary to the fund and is legally obligated to act in the fund’s best interests when selecting underlying funds, without taking fees into consideration.
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 fund will fluctuate, which means that an investor could lose money.
ETFs 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 an ETF can result in its value being more volatile than the underlying portfolio of securities.
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. The risks below summarize certain principal investment risks of the underlying funds that are also principal investment risks to which the fund is subject because of the fund’s investment allocation in the underlying funds and the underlying funds’ asset allocation.
• | 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. | |
• | 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 mid- or 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 — bonds or large-cap stocks, for instance — an underlying fund’s performance also will lag those investments. | |
• | 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 negatively impact the value or liquidity of the underlying fund’s investments, and could impair the underlying 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. To the extent an underlying fund’s investment in a single country or a limited number of countries represents a large percentage of the underlying fund’s assets, the underlying 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 Market Risk. An underlying fund’s investments in securities of emerging market countries may involve certain risks that are greater than those associated with investments in securities of developed countries. 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 an underlying fund’s investments in emerging market countries and, at times, it may be difficult to value such investments. | |
• | Currency Risk. As a result of an underlying 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, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency hedged. In either event, the dollar value of an investment in an underlying fund would be adversely affected. |
15
Schwab VIT Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
• | Growth Investing Risk. Certain of the underlying funds pursue a “growth style” of investing. Growth investing focuses on a company’s prospects for growth of revenue and earnings. If a company’s earnings or revenues fall short of expectations, its stock price may fall dramatically. Growth stocks also can perform differently from the market as a whole and other types of stocks and can be more volatile than other types of stocks. Since growth companies usually invest a high portion of earnings in their business, they may lack the dividends of value stocks that can cushion stock prices in a falling market. Growth stocks may also be more expensive relative to their earnings or assets compared to value or other stocks. | |
• | Value Investing Risk. Certain of the underlying funds may pursue a “value style” of investing. Value investing focuses on companies whose stocks appear undervalued in light of factors such as the company’s earnings, book value, revenues or cash flow. If an underlying fund’s investment adviser’s (or sub-adviser’s) assessment of a company’s value or prospects for exceeding earnings expectations or market conditions is wrong, the underlying fund could suffer losses or produce poor performance relative to other funds. In addition, “value stocks” can continue to be undervalued by the market for long periods of time. | |
• | Debt Securities Risk. Bond prices generally fall when interest rates rise. Bonds with longer maturities tend to be more sensitive to this risk. Underlying fund performance also could be affected if an issuer or guarantor of a bond held by the fund fails to make timely principal or interest payments or otherwise honor its obligations. Lower-quality bonds are considered speculative with respect to their issuer’s ability to make timely payments or otherwise honor their obligations. In addition, prices of lower-quality bonds tend to be more volatile than those of investment-grade bonds, and may fall based on bad news about the issuer, an industry or the overall economy. | |
• | 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, an 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 interest rates also may affect an underlying fund’s share price: a sharp rise in interest rates could cause the underlying 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. Because interest rates in the United States are at, or near, historically low levels, a change in a central bank’s monetary policy (e.g., tapering of the Federal Reserve Board’s quantitative easing program) or improving economic conditions may result in an increase in interest rates. | |
• | Credit Risk. Certain of the underlying funds are subject to the risk that a decline in the credit quality of a portfolio investment could cause the underlying fund’s share price to fall. 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. Securities rated below investment grade (junk bonds) involve greater risk of price declines than investment grade securities due to actual or perceived changes in the issuer’s creditworthiness. | |
• | Prepayment and Extension Risk. An underlying fund’s investments in fixed income securities are subject to the risk that the securities may be paid off earlier or later than expected. Either situation could cause the underlying fund to hold securities paying lower-than-market rates of interest, which could hurt the underlying fund’s yield or share price. | |
• | U.S. Government Securities Risk. Some of the U.S. government securities that the underlying funds invest in are not backed by the full faith and credit of the U.S. government, which means they are neither issued nor guaranteed by the U.S. Treasury. Certain securities such as those issued by the Federal Home Loan Banks are supported by limited lines of credit maintained by their issuers with the U.S. Treasury. Securities issued by other issuers, such as the Federal Farm Credit Banks Funding Corporation, are supported solely by the credit of the issuer. There can be no assurance that the U.S. government will provide financial support to securities of its agencies and instrumentalities if it is not obligated to do so under law. Also, any government guarantees on securities the underlying funds own do not extend to shares of the underlying funds themselves. | |
• | Real Estate Investment Risk. An underlying fund in which the portfolio may invest may have a policy of concentrating its investments in real estate companies and companies related to the real estate industry. Such an underlying fund is subject to risks associated with the direct ownership of real estate securities and a portfolio’s investment in such an underlying fund is subject to risks associated with the direct ownership of real estate securities and an investment in the underlying fund will be closely linked to the performance of the real estate markets. These risks include, among others, declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds or |
16
Schwab VIT Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
other limits to accessing the credit or capital markets; defaults by borrowers or tenants, particularly during an economic downturn; and changes in interest rates. |
• | Real Estate Investment Trust (REIT) Risk. An underlying fund may invest in REITs. An underlying fund’s investments in 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, equity REITs may be affected by changes in the value of the underlying properties owned by the trusts, and mortgage REITs may be affected by the quality of any credit extended. Further, REITs are dependent upon specialized management skills 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 for the underlying fund. In addition, REITs have their own expenses, and the underlying fund will bear a proportionate share of those expenses. | |
• | 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 to its agencies or instrumentalities where it was not obligated to do so. Mortgage-backed securities 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. Because of prepayment and extension risk, mortgage-backed securities react differently to changes in interest rates than other bonds. Small movements in interest rates — both increases and decreases — may quickly and significantly affect the value of certain mortgage-backed securities. 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 because of an adverse market action, expenses, or delays in connection with the purchase or sale of the pools of mortgage pass-through securities specified in the TBA transaction. | |
• | 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. | |
• | Commodity Risk. To the extent that an underlying fund invests in commodity-linked derivative instruments, it may subject the underlying fund to greater volatility than investments in traditional securities. Also, commodity-linked investments may be more volatile and less liquid than the underlying commodity. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and other regulatory and market developments. The use of leveraged commodity-linked derivatives creates an opportunity for increased return, but also creates the possibility for a greater loss. | |
• | Liquidity Risk. A particular investment may be difficult to purchase or sell. An underlying fund may be unable to sell illiquid securities at an advantageous time or price. | |
• | 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 and could cause the fund to lose more than the principal amount invested. | |
• | Management Risk. An underlying fund may be an actively managed mutual fund. Any actively managed mutual fund is subject to the risk that its investment adviser (or sub-adviser(s)) will select investments or allocate assets in a manner 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. | |
• | Investment Style Risk. Certain underlying funds seek to track the performance of various segments of the stock market, as measured by their respective indices. Such underlying funds follow these stocks during upturns as well as downturns. Because of their indexing strategy, these underlying funds do not take steps to reduce market exposure or to lessen the |
17
Schwab VIT Growth Portfolio
Financial Notes (continued)
3. Risk Factors (continued):
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. |
• | Tracking Error Risk. An underlying fund may seek to track the performance of its benchmark index, 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. | |
• | Concentration Risk. To the extent that an underlying fund’s portfolio is concentrated in the securities of issuers in a particular market, industry, group of industries, sector 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 or asset class. | |
• | Money Market Risk. Although an underlying money market fund seeks to maintain a stable $1 net asset value, it is possible to lose money by investing in a money market fund. In addition, a money market fund is not designed to offer capital appreciation. |
Direct Investment Risk. The fund may invest directly in individual securities to maintain its allocations. 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 securities and instruments.
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 (“Advisory Agreement”) between CSIM and the trust.
For its advisory and administrative services to the fund, CSIM is entitled to receive an annual fee, payable monthly, equal to 0.45% of the fund’s average daily net assets.
CSIM and its affiliates have made an additional agreement with the fund, for so long as CSIM serves as the investment adviser to the fund, which may only be amended or terminated with approval of the fund’s Board, to limit the total annual fund operating expenses charged, excluding interest, taxes and certain non-routine expenses of the fund to 0.58%.
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 ETFs and mutual funds. As of December 31, 2014, the Schwab VIT Growth Portfolio’s ownership percentages of other related funds’ shares are:
Schwab U.S. Large-Cap ETF | 0.8% | |||
Schwab U.S. Small-Cap ETF | 0.3% | |||
Schwab International Equity ETF | 0.8% | |||
Schwab International Small-Cap Equity ETF | 1.4% | |||
Schwab Emerging Markets Equity ETF | 0.8% | |||
Schwab U.S. REIT ETF | 0.5% | |||
Schwab U.S. TIPS ETF | 0.1% | |||
Schwab Intermediate-Term U.S. Treasury ETF | 1.9% | |||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 0.0% | * |
* | Less than 0.1% |
18
Schwab VIT Growth Portfolio
Financial Notes (continued)
4. Affiliates and Affiliated Transactions (continued):
Below is a summary of the fund’s transactions with its affiliated underlying funds during the period ended December 31, 2014.
Realized | Distributions | |||||||||||||||||||||||||||
Balance of | Balance of | Market | Gains (Losses) | Received* | ||||||||||||||||||||||||
Shares Held | Gross | Gross | Shares Held | Value at | 01/01/14 to | 01/01/14 to | ||||||||||||||||||||||
Underlying Funds | at 12/31/13 | Purchases | Sales | at 12/31/14 | 12/31/14 | 12/31/14 | 12/31/14 | |||||||||||||||||||||
Schwab U.S. Large-Cap ETF | 512,021 | 183,511 | (52,684 | ) | 642,848 | $31,531,695 | $61,780 | $550,750 | ||||||||||||||||||||
Schwab U.S. Small-Cap ETF | 101,699 | 49,105 | (16,613 | ) | 134,191 | 7,396,608 | 10,014 | 104,338 | ||||||||||||||||||||
Schwab International Equity ETF | 515,008 | 261,117 | (25,127 | ) | 750,998 | 21,711,352 | (32,016 | ) | 614,244 | |||||||||||||||||||
Schwab International Small-Cap Equity ETF | 122,392 | 72,425 | (9,156 | ) | 185,661 | 5,356,320 | (11,128 | ) | 132,923 | |||||||||||||||||||
Schwab Emerging Markets Equity ETF | 256,221 | 140,455 | (30,302 | ) | 366,374 | 8,756,339 | (35,792 | ) | 234,079 | |||||||||||||||||||
Schwab U.S. REIT ETF | 150,302 | 53,400 | (33,283 | ) | 170,419 | 6,637,820 | 46,205 | 145,966 | ||||||||||||||||||||
Schwab U.S. TIPS ETF | 10,065 | 3,943 | (549 | ) | 13,459 | 730,016 | (2,321 | ) | 8,951 | |||||||||||||||||||
Schwab Intermediate-Term U.S. Treasury ETF | 61,338 | 33,294 | (6,505 | ) | 88,127 | 4,723,607 | (8,154 | ) | 60,920 | |||||||||||||||||||
Schwab Value Advantage Money Fund, Institutional Prime Shares | 2,178,000 | 900,254 | — | 3,078,254 | 3,078,254 | — | 272 | |||||||||||||||||||||
Total | $89,922,011 | $28,588 | $1,852,443 | |||||||||||||||||||||||||
* | 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 fund may enter into interfund borrowing and lending transactions with other Schwab Funds. All loans are for temporary or emergency purposes only. The interest rate to be charged on a loan is the average of the overnight repurchase agreement rate and the short-term bank loan rate. The interfund lending facility is subject to the oversight and periodic review 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:
The fund has access to custodian overdraft facilities, a committed line of credit of $150 million with State Street Bank and Trust Company (“State Street”), an uncommitted line of credit of $100 million with Bank of America, N.A. and an uncommitted line of credit of $50 million with Brown Brothers Harriman & Co. The fund pays interest on the amount it borrows at rates that are negotiated periodically. The fund also pays an annual fee to State Street for the committed line of credit.
There were no borrowings from the lines of credit by the fund during the period. However, the fund may have utilized its 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 December 31, 2014, purchases and sales/maturities of securities (excluding short-term obligations) were as follows:
Purchases of Securities | Sales/Maturities of Securities | |||||
$35,292,578 | $8,095,746 |
19
Schwab VIT Growth Portfolio
Financial Notes (continued)
8. Federal Income Taxes:
As of December 31, 2014, the components of distributable earnings on a tax-basis were as follows:
Undistributed ordinary income | $1,568,139 | |||
Undistributed long-term capital gains | 123,267 | |||
Unrealized appreciation on investments | 7,815,497 | |||
Unrealized depreciation on investments | (2,057,524 | ) | ||
Net unrealized appreciation (depreciation) | $5,757,973 | |||
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 December 31, 2014, the fund had no capital loss carryforwards.
For tax purposes, realized net capital losses and late-year ordinary losses incurred after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2014, the fund had no capital losses deferred and no capital loss carryforwards utilized.
The tax-basis components of distributions paid during the current and prior fiscal years were as follows:
Current period distributions | ||||
Ordinary income | $786,219 | |||
Long-term capital gains | — | |||
Return of capital | — | |||
Prior period distributions | ||||
Ordinary income | $7,298 | |||
Long-term capital gains | — | |||
Return of capital | — |
Distributions paid to the participating insurance company’s separate accounts are based on net investment income and net realized gains determined on a tax basis, which may differ from net investment income and net realized gains for financial reporting purposes. These differences are due primarily to differing treatment for items such as short-term capital gains and losses, capital losses related to wash sales and income on certain investments. The fiscal year in which amounts are distributed may differ from the year in which the net investment income and net realized gains are recorded by the fund for financial reporting purposes. The fund may also designate a portion of the amount paid to redeeming participating insurance company’s separate accounts as a distribution for tax purposes.
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 December 31, 2014, no such reclassifications were required.
As of December 31, 2014, 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 December 31, 2014, the fund did not incur any interest or penalties.
9. 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.
20
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of:
Schwab VIT Growth Portfolio
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 VIT Growth Portfolio (one of the portfolios constituting Schwab Annuity Portfolios, hereafter referred to as the “Fund”) at December 31, 2014, 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 periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the 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 December 31, 2014 by correspondence with the custodian, brokers and the transfer agent of the underlying funds, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 16, 2015
21
Other Federal Tax Information (unaudited)
For corporate shareholders, 25.45% of the fund’s dividend distributions paid during the fiscal year ended December 31, 2014, qualify for the corporate dividends received deduction.
22
Trustees and Officers
The tables below give information about the trustees and officers of Schwab Annuity Portfolios, which includes the funds covered in this report. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab Capital Trust, Schwab Investments, Schwab Annuity Portfolios, Schwab Strategic Trust, Laudus Trust and Laudus Institutional Trust. The Fund Complex includes 95 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 1-800-435-4000.
Independent Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served1) | During the Past Five Years | the Trustee | Other Directorships | |||
Mariann Byerwalter 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman of JDN Corporate Advisory LLC (advisory services firm) (Oct. 2001 – present). | 74 | Director, WageWorks, Inc. (2010 – present) Director, Redwood Trust, Inc. (1998 – present) | |||
John F. Cogan 1947 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | 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 – present). | 74 | Director, Gilead Sciences, Inc. (2005 – present) | |||
David L. Mahoney 1954 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Private Investor. | 74 | Director, Symantec Corporation (2003 – present) Director, Corcept Therapeutics Incorporated (2004 – present) Director, Adamas Pharmaceuticals, Inc. (2009 – present) | |||
Kiran M. Patel 1948 Trustee (Trustee of Schwab Annuity Portfolios since 2011.) | Retired. Executive Vice President and General Manager of Small Business Group, Intuit, Inc. (financial software and services for consumers and small businesses) (Dec. 2008 – Sept. 2013). | 74 | Director, KLA-Tencor Corporation (2008 – present) | |||
Charles A. Ruffel 1956 Trustee (Trustee of Schwab Annuity Portfolios since 2015.) | Managing Partner and Co-Founder, Kudu Advisors, LLC (financial services) (May 2009 – present); Director, Asset International, Inc. (publisher of financial services information) (Jan. 2009 – Nov. 2014). | 95 | None. | |||
Gerald B. Smith 1950 Trustee (Trustee of Schwab Annuity Portfolios since 2000.) | Chairman, Chief Executive Officer and Founder of Smith Graham & Co. (investment advisors) (Mar. 1990 – present). | 74 | 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 Schwab Annuity Portfolios since 2008.) | Senior Consultant, Goldman Sachs & Co., Inc. (investment banking and securities firm) (Jan. 2008 – present); Partner, Colgin Partners, LLC (vineyards) (February 1998 – present). | 74 | Board Member and Chairman of the Audit Committee, Isis Pharmaceuticals (1994 – present) | |||
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Interested Trustees
Name, Year of Birth, | Number of | |||||
and Position(s) with | Portfolios in | |||||
the trust; (Terms of | Fund Complex | |||||
office, and length of | Principal Occupations | Overseen by | ||||
Time Served) | During the Past Five Years | the Trustee | Other Directorships | |||
Charles R. Schwab2 1937 Chairman and Trustee (Chairman and Trustee of Schwab Annuity Portfolios since 1994.) | Chairman and Director, The Charles Schwab Corporation (1986 – present); Chairman and Director of Charles Schwab & Co., Inc. (1971 – present); Chairman and Director of Charles Schwab Investment Management, Inc. (1989 – present); Chairman and Director of Charles Schwab Bank (2003 – present); Chairman and Chief Executive Officer of Schwab (SIS) Holdings Inc. I and Schwab International Holdings, Inc. (1996 – present); and Director, Chairman and Chief Executive Officer, Schwab Holdings, Inc. (1979 – present). | 74 | Chairman and Director, The Charles Schwab Corporation (1986 – present) Director, Yahoo! Inc. (2014 – present) | |||
Walter W. Bettinger II2 1960 Trustee (Trustee of Schwab Annuity Portfolios since 2008.) | Director, President and Chief Executive Officer, The Charles Schwab Corporation and Charles Schwab & Co., Inc. (2008 – present); Director, Charles Schwab Bank (2006 – present); and Director Schwab Holdings, Inc. (2008 – present). | 95 | Director, The Charles Schwab Corporation (2008 – present) | |||
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 Chandoha 1961 President and Chief Executive Officer (Officer of Schwab Annuity Portfolios since 2010.) | Director, President and Chief Executive Officer (Dec. 2010 – present), Chief Investment Officer (Sept. 2010 – Oct. 2011), Charles Schwab Investment Management, Inc.; 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 (January 2011 – present); Global Head of Fixed Income Business Division, BlackRock, Inc. (formerly Barclays Global Investors) (March 2007 – August 2010). | |
George Pereira 1964 Treasurer and Principal Financial Officer (Officer of Schwab Annuity Portfolios since 2004.) | Senior Vice President and Chief Financial Officer (Nov. 2004 – present), Chief Operating Officer (Jan. 2011 – present), Charles Schwab Investment Management, Inc.; Treasurer and Chief Financial Officer, Laudus Funds (2006 – present); Treasurer and Principal Financial Officer, Schwab Funds (Nov. 2004 – present) and Schwab ETFs (Oct. 2009 – present); Director, Charles Schwab Worldwide Funds plc and Charles Schwab Asset Management (Ireland) Limited (April 2005 – present). | |
Omar Aguilar 1970 Senior Vice President and Chief Investment Officer – Equities (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Equities, Charles Schwab Investment Management, Inc. (April 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 – April 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 Schwab Annuity Portfolios since 2011.) | Senior Vice President and Chief Investment Officer – Fixed Income, Charles Schwab Investment Management, Inc. (April 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 (April 2006 – Jan. 2008). | |
24
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 | |
David Lekich 1964 Chief Legal Officer and Secretary (Officer of Schwab Annuity Portfolios since 2011.) | Senior Vice President (Sept. 2011 – present), Vice President (March 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 (April 2011 – present) and Chief Legal Officer (Dec. 2011 – present), Schwab Funds; Vice President and Assistant Clerk, Laudus Funds (April 2011 – present); Secretary (May 2011 – present) and Chief Legal Officer (Nov. 2011 – present), Schwab ETFs. | |
Catherine MacGregor 1964 Vice President and Assistant Secretary (Officer of Schwab Annuity Portfolios since 2005.) | Vice President, Charles Schwab & Co., Inc., Charles Schwab Investment Management, Inc. (July 2005 – present); Vice President (Dec. 2005 – present), Chief Legal Officer and Clerk (March 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 | Trustees remain in office until they resign, retire or are removed by shareholder vote. The Schwab Funds retirement policy requires that independent trustees retire at age 72 or after twenty years as a trustee, whichever comes first. In addition, the retirement policy requires any independent trustee of Schwab Funds who also serves as an independent trustee of the Laudus Funds to retire from the Boards of the Schwab Funds upon their required retirement date from either the Boards of Trustees of the Schwab Funds or the Laudus Funds, whichever comes first. | |
2 | Mr. Schwab and Mr. Bettinger 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 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. |
25
Glossary
Barclays U.S. Aggregate Bond Index A broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-back securities (agency fixed-rate and hybrid ARM passthroughs), asset-backed securities, and commercial mortgage-backed securities.
Barclays U.S. Credit Index An index that comprises the Barclays U.S. Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.
Barclays U.S. Mortgage-Backed Securities (MBS): Agency Fixed Rate MBS Index An index that measures agency mortgage-backed pass-through fixed-rate securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
Barclays U.S. TIPS Index (Series-L) A rules-based, market value-weighted index that tracks inflation-protected securities issued by the U.S. Treasury that have at least one year remaining to maturity, are rated investment grade and have $250 million or more of outstanding face value.
Barclays 3 − 10 Year U.S. Treasury Bond Index An index that measures the performance of U.S. Treasury securities that have a remaining maturity of greater than or equal to three years and less than 10 years.
Barclays U.S. Treasury Bills: 1 − 3 Months Index An index that includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value.
Bloomberg Commodity Index A broadly diversified index composed of futures contracts on physical commodities. The total return index reflects the return on fully collateralized positions in the underlying commodity futures.
Citigroup Non-U.S. Dollar World Government Bond Index An index that measures the total rate of return performance for the government bonds of 23 countries, excluding the U.S., with a remaining maturity of at least one year.
Dow Jones U.S. Large-Cap Total Stock Market Index An index that is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the largest 750 stocks and is float-adjusted market cap weighted.
Dow Jones U.S. Select REIT Index A float-adjusted market capitalization weighted index comprised of real estate investment trusts (REITs).
Dow Jones U.S. Small-Cap Total Stock Market Index An index that is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the stocks ranked 751-2500 by full market capitalization and is float-adjusted market cap weighted.
Dow Jones U.S. Total Stock Market Index An index that measures all U.S. equity securities with readily available prices.
FTSE Developed ex US Index An index that comprises large and mid cap stocks providing coverage of developed markets (23 countries) excluding the US. The index is derived from the FTSE Global Equity Index Series (GEIS), which covers 98% of the world’s investable market capitalization.
FTSE Developed Small Cap ex-US Liquid Index An index that comprises small-cap companies in developed countries excluding the United States, as defined by the index provider. The index defines the small-cap universe as approximately the bottom 10% of the eligible universe with a minimum free float capitalization of $150 million.
FTSE Emerging Index An index comprised of large- and mid-cap companies in emerging countries, as defined by the index provider. The index defines the large and mid-cap universe as approximately the top 90% of the eligible universe. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes.
MSCI EAFE Index A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
MSCI Emerging Markets Index A free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Net version of the index reflects reinvested dividends net of withholding taxes, but reflects no deductions for expenses or other taxes; returns are calculated applying dividend withholding rates applicable to non-resident persons who do not benefit from double taxation treaties.
Russell 2000 Index An index that measures the performance of the small-cap segment of the U.S. equity universe.
Russell Microcap Index An index that measures the performance of the microcap segment of the U.S. equity market. Microcap stocks make up less than 3% of the U.S. equity market (by market cap) and consist of the smallest 1,000 securities in the small-cap Russell 2000® Index, plus the next smallest eligible securities by market cap.
S&P 500 Index A market capitalization index that is designed to measure the performance of 500 leading publicly held companies in leading industries of the U.S. economy.
VIT Growth Composite Index A custom blended index developed by CSIM based on a comparable portfolio asset allocation and calculated using the following portion allocations: 29% Dow Jones U.S. Large Cap Total Stock Market Index, 7% Dow Jones U.S. Small-Cap Total Stock Market Index, 2% Russell Microcap Index, 21% FTSE Developed ex-US Index (Net), 5% FTSE Developed Small Cap ex-US Liquid Index (Net), 8% FTSE Emerging Index (Net), 6% Dow Jones U.S. Select REIT Index, 4% Bloomberg Commodity Index, 1% Barclays U.S. TIPS Index (Series-L), 5% Barclays 3 − 10 Year U.S. Treasury Bond Index, 2% Barclays U.S. Credit Index, 5% Barclays U.S. MBS: Agency Fixed Rate MBS Index, 5% Barclays U.S. Treasury Bills: 1 − 3 Month Index. The index is maintained by CSIM. The components that make up the composite index may vary over time.
26
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 Mariann Byerwalter and Kiran Patel, each currently serving on its audit 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 committee is “independent” under the standards set forth in Item 3 of Form N-CSR.
The designation of each of Ms. Byerwalter and Mr. Patel as an “audit committee financial expert” pursuant to Item 3 of Form N-CSR does not (i) impose upon such individual any duties, obligations, or liability that are greater than the duties, obligations and liability imposed upon such individual as a member of Registrant’s audit committee or Board of Trustees in the absence of such designation; and (ii) affect the duties, obligations or liability of any other member of Registrant’s audit committee or Board of Trustees.
Item 4: | Principal Accountant Fees and Services. |
(a) Below are the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of Registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements.
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:
(a) Audit Fees | (b)Audit-Related Fees1 | (c) Tax Fees2 | (d) All Other Fees3 | |||||||||||||||||||||||||||
Fiscal Year 2014 | Fiscal Year 2013 | Fiscal Year 2014 | Fiscal Year 2013 | Fiscal Year 2014 | Fiscal Year 2013 | Fiscal Year 2014 | Fiscal Year 2013 | |||||||||||||||||||||||
$ | 194,697 | $ | 171,084 | $ | 0 | $ | 10,361 | $ | 14,200 | $ | 14,132 | $ | 61 | $ | 1,974 |
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, tax advice and tax planning. | |
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 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 committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X) that were approved by Registrant’s audit 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.
2014: $14,261 | 2013: $26,467 |
(h) During the past fiscal year, all non-audit services provided by Registrant’s principal accountant to either Registrant’s investment adviser or to any entity controlling, controlled by, or under common control with Registrant’s investment adviser that provides ongoing services to Registrant were pre-approved. Included in the audit committee’s pre-approval was the review and consideration as to whether the provision of these non-audit services is compatible with maintaining the principal accountant’s independence.
Item 5: | Audit Committee of Listed Registrants. |
Not applicable.
Item 6: | Schedule of Investments. |
The schedules of investments are included as part of the report to shareholders filed under Item 1 of this Form.
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 Principal Financial Officer, George Pereira, have concluded that Registrant’s disclosure controls and procedures are: (i) reasonably designed to ensure that information required to be disclosed in this report is appropriately communicated to Registrant’s officers to allow timely decisions regarding disclosures required in this report; (ii) reasonably designed to ensure that information required to be disclosed in this report is recorded, processed, summarized and reported in a timely manner; and (iii) are effective in achieving the goals described in (i) and (ii) above. | |
(b) | During the second fiscal quarter of the period covered by this report, there have been no changes in Registrant’s internal control over financial reporting that the above officers believe to have materially affected, or to be reasonably likely to materially affect, Registrant’s internal control over financial reporting. |
Item 12: | Exhibits. |
(a) (1) | Registrant’s code of ethics (that is the subject of the disclosure required by Item 2(a)) is attached. | |
(2) | Separate certifications for Registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the 1940 Act, are attached. | |
(3) | Not applicable. | |
(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 Annuity Portfolios | ||||
By: | /s/ Marie Chandoha | |||
Chief Executive Officer | ||||
Date: 02/10/2015 |
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 | |||
Chief Executive Officer | ||||
Date: 02/10/2015 | ||||
By: | /s/ George Pereira | |||
Principal Financial Officer | ||||
Date: 02/10/2015 |