Quarterly Commentary on SMRT™ & SIRT™

Transcript of the video:

INGA RACHWALD: Hello, and welcome to our Third Quarter Schwab Target Date Collective Investment Trust Update. I’m Inga Rachwald. I’m an investment portfolio strategist for Schwab Asset Management, and I want to talk you through how our Schwab Managed Retirement Trusts and Schwab Index Retirement Trusts, which we refer to as SMRT and SIRT, are performing, and highlight some key long-term components that stand out for us.

So let’s first start by discussing some key asset allocation drivers. First, so performance versus peers was mixed this quarter. You had longer-dated trusts benefiting from higher equity exposure, while lower equity allocations in the shorter-dated trusts lagged. Being underweight in international equities also detracted from performance in the shorter-dated trusts, while you had a heavier tilt towards small-cap in REITs dragging on performance in the longer-dated trusts.

So within equities, let’s talk about two interest rate-sensitive asset classes, US small-caps and REITs, which have been under pressure, and they have negatively impacted the target-date trust during this rate cycle, particularly in the longer-dated series. So performance challenges here have really prompted some tough conversations about their roles in diversified portfolios, compounded by this concentration component we’ve seen in US large-caps, but we continue to believe that this strong diversification benefit exists within these asset classes. So for example, in recent months, we have already seen signs of a catch-up trade in small-caps, with Russell 2000 hitting new highs. This rally has generally been led by lower quality stocks, which is a trend that is typical in an early cycle recovery, but we do think this trend could shift and broaden out to higher quality names, particularly if the broader economy does not slide into recession. REITs have also been under pressure this rate cycle. However, from a diversification perspective, REITs do offer low correlation, around .5 relative to global equities over a five-year period and even lower over a 10-year period. We’ve also seen the composition of rates evolve over time, now comprising smaller percentages of those historically traditional areas like office space and malls, and now into next generation areas like data centers and cold storage, for example. All of this to say we are seeing early indications of these rate-sensitive equities recovering, and we believe it’s not time to abandon diversification, as it does serve to balance upside potential and protect against that downside risk.

Passive index funds performed well compared to actively managed funds during the quarter, and this helps SIRT achieve some stronger relative peer rankings. Within the Active Passive Blend SMRT series, several active managers did face some challenges, particularly as a result of that persistently concentrated US equity market, with technology and several Magnificent 7 stocks performing exceptionally well. In addition, we did have some concentration within the European banking sector, which has risen some 50% year-to-date.

Lastly, it is important to shift our mindset away from this pure performance and peer rank conversation, and focus on the primary goal of our target date series, which is to allocate assets over time, to support risk control of accumulation, and to generate sustainable withdrawals for at least 20 years in retirement. We believe both SMRT and SIRT are delivering on those key objectives.

Thank you for joining our third quarter update. For questions, contact your Schwab representative, or visit our website at schwabtrustbankcollectives.com for more information about the trusts. Hope to see you on our next update.

Disclosures

Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

The material in this presentation is based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete. Errors and omissions can occur. None of the information constitutes a recommendation or a solicitation of an offer to buy or sell any pro duct or service from Schwab Trust Bank or any of its affiliates. Please review the trust and participation agreement, Schwab Trust Bank CIT Fact Sheets and other disclosure materials before making any decision to invest in the Trusts.

The Schwab Managed Retirement™ Trust Funds, Schwab Indexed Retirement™ Trust Funds, and Schwab Institutional Trust™ Funds (each a “Trust”, collectively the “Trusts” or “Collective Investment Trusts (CITs)”) are collective investment trusts maintained by Charles Schwab Trust Bank (CSTB), as trustee. They are available for investment only by eligible retirement plans and entities. Charles Schwab Trust Bank’s Collective Investment Trusts are not insured by FDIC or any other type of deposit insurance; are not deposits or other obligations of and are not guaranteed by CSTB or any of its affiliates; and involve investment risks, including possible loss of principal invested. The Trusts are not mutual funds and are exempt from registration and regulation under the Investment Company Act of 1940 (the “1940 Act”), and their units are not registered under the Securities Act of 1933, or applicable securities laws of any state or other jurisdiction. Unit holders of the Trusts are not entitled to the protections of the 1940 Act. The Declaration of Trust and Participation Agreement contain important information about Trust fees and investment objectives, risks, and expenses of the underlying investments in the Collective Investment Trusts maintained by CSTB and should be read carefully before investing. The decision to invest in the Trusts should be carefully considered. The Trusts’ unit values will fluctuate and may be worth more or less when redeemed, so unit holders may lose money. The Trusts are not sold by prospectus and are not available for investment by the public. The Trusts’ prices are not quoted in newspapers.

Trust Affiliations

The Charles Schwab Corporation provides services to retirement and other employee benefit plans and participants through its separate but affiliated companies and subsidiaries: Charles Schwab Trust Bank (CSTB); Charles Schwab & Co., Inc.; Schwab Asset Management®, the dba name for Charles Schwab Investment Management, Inc.; and Schwab Retirement Plan Services, Inc. Trust, custody, and deposit products and services are available through CSTB, Member FDIC. Brokerage products and services are offered by Charles Schwab & Co., Inc. (Member SIPC). Schwab Retirement Plan Services, Inc. is not a fiduciary to retirement plans or participants and only provides recordkeeping and related services to retirement plans. Schwab Asset Management is an investment adviser registered with the Securities and Exchange Commission and provides investment research, advice, and fund administration services to CSTB and the Funds.

Schwab Asset Management®, the dba name for Charles Schwab Investment Management, Inc., is the investment advisor for Schwab Funds. Schwab Asset Management also provides non-discretionary advisory services to the Charles Schwab Trust Bank (CSTB) Collective Investment Trusts (CITs). Schwab Funds are distributed by Charles Schwab & Co., Inc., Member SIPC. Schwab Asset Management, Charles Schwab & Co., Inc., and CSTB are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation.

The Charles Schwab Trust Bank CITs™ select investments based on advice received from, or products offered by industry-recognized investment management firms (“sub- advisors”). The Trusts access investment strategies through various investment vehicles including, but not limited to, collective investment trusts, mutual funds, and/or exchange- traded funds and may also access strategies through sub-advisors engaged by Charles Schwab Trust Bank to advise one or more separate accounts of a Trust. The Trusts may invest in securities directly managed by Schwab Asset Management, including Schwab ETFs, and from which Schwab Asset Management earns advisory fees. Exposure to some strategies may be indirect through investment in other Charles Schwab Trust Bank CITs. The Schwab Managed Retirement Trust™ invests in the Schwab Institutional Large Cap Value Trust™, Schwab Institutional Large Cap Growth Trust™, Schwab Institutional Small Cap Trust™, Schwab Institutional Diversified International Trust™, and Schwab Institutional Core Plus Fixed Income Trust™.