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[USAA Magazine Article August/September 2002 issue]
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investing
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LEADING MONEY MANAGERS TO ADVISE
USAA EQUITY FUNDS
COMPETITIVE AT
EVERY POSITION
QUALITY, VALUE AND SERVICE. An ongoing commitment to these principles had made
USAA Investments a trusted provider of investment vehicles to USAA members. On
June 28, the company took a major step in its approach to the management of its
equity mutual funds. We spoke with USAA Investments President Chris Claus on
what this means for current, and potential, shareholders in the USAA Family of
Mutual Funds.
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THIS COMMUNICATION IS BEING MADE ON BEHALF OF USAA MUTUAL FUND, INC. AND USAA
INVESTMENT TRUST. SHAREHOLDERS OF THE AFFECTED USAA MUTUAL FUNDS WILL RECEIVE A
PROXY STATEMENT ON THESE MATTERS. SHAREHOLDERS SHOULD READ THE PROXY STATEMENT
WHEN IT BECOMES AVAILABLE BECAUSE IT CONTAINS IMPORTANT INFORMATION.
SHAREHOLDERS MAY OBTAIN AN ADDITIONAL FREE COPY OF THE PROXY STATEMENT AND ANY
OTHER RELEVANT DOCUMENTS WHEN THEY BECOME AVAILABLE FROM USAA INVESTMENT
MANAGEMENT COMPANY OR THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
AUGUST/SEPTEMBER 2002 USAA MAGAZINE 27
[graphic of bull/bear on seesaw]
USAA MAGAZINE: WHY CHANGE EQUITY FUND MANAGEMENT?
CLAUS: Like all USAA companies, our commitment is to deliver quality, value and
service to our members. With USAA's mutual funds, this translates into achieving
and maintaining a competitive position in our equity, fixed-income and money
market funds among our peers when it comes to performance. We believe we have
achieved this goal in our money market and fixed-income funds over the past
three- and five-year periods, but our equity fund performance, while improving,
was not hitting the mark.* Therefore, we've gone out and carefully selected
managers who have consistently met our performance criteria and other important
standards.
USAA MAGAZINE: WHY DO YOU BELIEVE THIS APPROACH TO EQUITY FUND MANAGEMENT IS
SUPERIOR?
CLAUS: Within the equity fund universe, you have many individual asset classes,
including U.S. and international, growth and value, and small-, mid- and
large-cap, just to name some. There are very few investment managers who stand
out as strong performers across all of these asset classes. We want to retain
investment managers who specialize in each asset class and have managed to
consistently stay in a competitive position in their peer groups through up
markets and down markets. If you look at the USAA Family of Mutual Funds as a
team, this enables us to be competitive at every position.
USAA MAGAZINE: WOULD IT HAVE BEEN POSSIBLE TO BUILD THIS CAPABILITY IN-HOUSE
INSTEAD OF USING OUTSIDE MANAGERS?
CLAUS: While possible, the costs of such a move would have been prohibitive. The
bottom line is that our approach has resulted in a dramatic increase in the
depth, experience and specialization of the investment management team working
on behalf of USAA equity fund shareholders. We've gone from 15 research analysts
in San Antonio to 150 around the world. Instead of four traders (who handle buy
and sell orders), we now have 50. And the number of portfolio managers has
jumped from 11 to 33. To have built in-house the high-quality team of managers
we've assembled would have taken a long time.
USAA MAGAZINE: WILL FUND EXPENSES INCREASE AS A RESULT OF THE CHANGEOVER?
CLAUS: No. Our lower-than-average fees will remain the same.
USAA MAGAZINE: HOW WERE THE NEW MANAGERS SELECTED?
CLAUS: It was a very deliberate process, both quantitatively and qualitatively.
The most important factor was consistency. We wanted managers who had
USAA MUTUAL FUND SUB-ADVISER
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AGGRESSIVE GROWTH FUND Marsico Capital Management
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BALANCED STRATEGY FUND Wellington Management Company
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CAPITAL GROWTH FUND Batterymarch Financial Management
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CORNERSTONE STRATEGY FUND Wellington Management Company
MFS Investment Management
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EMERGING MARKETS FUND The Boston Company
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FIRST START GROWTH FUND Marsico Capital Management
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GROWTH FUND Dresdner RCM Global Advisors
Marsico Capital Management
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GROWTH & INCOME FUND Wellington Management Company
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GROWTH & TAX STRATEGY FUND Dresdner RCM Global Advisors
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INCOME STOCK FUND The Boston Company
Westwood Management Corporation
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INTERNATIONAL FUND MFS Investment Management
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SCIENCE & TECHNOLOGY FUND Wellington Management Company
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SMALL CAP STOCK FUND Eagle Asset Management
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VALUE FUND Westwood Management Corporation
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WORLD GROWTH FUND MFS Investment Management
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[footnotes]
For more complete information about USAA mutual funds, including charges and
operating expenses, request or download a prospectus from USAA Investment
Management Company (USAA Investments). Read it carefully before you invest. o
Past performance is no guarantee of future results. References to performance
may represent composite portfolio performance, which is not necessarily
representative of mutual fund performance. o An investment in a money market
fund is not insured or guaranteed by the FDIC or any other government agency.
Although the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund.
*BASED ON INTERNAL ASSET-WEIGHTED PERFORMANCE COMPUTATIONS.
28 USAA MAGAZINE AUGUST/SEPTEMBER 2002
================================================================================
[photo of I can look at any USAA member and tell him or her to invest
Chris Claus] in any fund we offer with confidence, knowing that each fund
is being managed by a leader in the business and offers
significant value in terms of price, service and track
record.
-- Chris Claus
================================================================================
solid performance in good markets as well as bad. This eliminated managers who
may have had good five-year performance based on great returns in the bull
market but who lagged badly in down markets.
We made certain that the managers were disciplined and had effective
risk-control procedures in place. While there can be no assurance of future
results, we made sure that the factors behind their consistent performance could
be replicated. We looked for businesses that are financially sound and whose
focus is solely on investment management as opposed to investment banking or
other activities.
We wanted the senior managers of these firms to have a stake in
performance, and we also had to see a good cultural fit. Because of the size of
the assets we were bringing, we were able to interest the leading money managers
in the country, and I'm very pleased with the team we've assembled.
USAA MAGAZINE: HOW WILL YOU MONITOR AND MEASURE THESE MANAGERS?
CLAUS: Much as we would with a portfolio manager who is an employee of USAA
Investments, we will tell these external portfolio managers exactly how the fund
should be run in terms of investment objectives and strategies. Their job is
creating and managing portfolios of stocks based on fund objectives.
Each fund is still a USAA fund that is monitored, controlled, reconciled
and audited by USAA Investments' personnel. Each investment management firm has
designated a relationship manager to work with USAA Investments, who will
provide regular written reports for review and have ongoing contact with us. Of
course, we will ensure that each complies with regulatory requirements and
USAA's investment policies.
USAA MAGAZINE: DID YOU CONSIDER SUB-ADVISING THE FIXED-INCOME FUNDS?
CLAUS: No. The USAA Investments teams managing our fixed-income and money market
funds are meeting our performance criteria. We found we were better off with
in-house management.
USAA MAGAZINE: WHAT MESSAGE DOES THIS CHANGE OF MANAGEMENT APPROACH SEND AT THIS
TIME?
CLAUS: We can't control the markets, but we can make sure we have the investment
managers in place who have as their goal to deliver performance for our members
in both the good times and the bad. We can retain these investment managers
while we keep our lower-than-average fund expenses and continue to build upon
the tradition of legendary USAA customer service.
We're giving USAA members a compelling reason to have their investment
business with us. I can look at any USAA member and tell him or her to invest in
any fund we offer with confidence, knowing that each fund is being managed by a
leader in the business and offers significant value in terms of price, service
and track record.
USAA MAGAZINE: DO YOU HAVE ANY GUIDANCE FOR INVESTING IN THIS MARKET?
CLAUS: Needless to say, the last several years have been very difficult for all
investors, but market corrections are normal and, unfortunately, something that
all investors have to live with. While it's hard to offer relevant guidance in a
forum like this because a lot of investors have different needs, situations and
risk tolerance, I would offer the following points:
o Don't panic. Most of the losses may have already occurred, but we could see
additional downside volatility. Sell selectively for tax considerations, to
shift your allocation between stocks and bonds, or to have less market risk.
o Even though money market fund yields are low, return of principal is always
more important than return on your principal. If you can't sleep at night,
that's a good sign that you should make a move and position your investments
to your level of comfort.
o If you want exposure to equities, look for stocks and mutual funds that have
above-average dividend yields, in which you can generate investment income
while you remain patient for the next major upturn in the market.
o Stay diversified--that is critical--and remain patient. The psychology of
the markets and investors will need time to improve.
Above all, please remember that we're just a phone call away. Our investment
professionals are on salary, not commission, and can provide information and
help deciding on your best course of action in this--or any--market.
For more information about the USAA Family of Mutual Funds, call (800) 358-0429.
AUGUST/SEPTEMBER 2002 USAA MAGAZINE 29