UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-4019
Exact name of registrant as specified in charter: USAA INVESTMENT TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: MARK S. HOWARD
USAA INVESTMENT TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-0226
Date of fiscal year end: MAY 31, 2003
Date of reporting period: MAY 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
USAA BALANCED STRATEGY FUND - MAY 31, 2003
[LOGO OF USAA]
USAA(R)
USAA BALANCED
STRATEGY Fund
[GRAPHIC OF USAA BALANCED STRATEGY FUND]
A n n u a l R e p o r t
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MAY 31, 2003
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
INVESTMENT OVERVIEW & MANAGERS' COMMENTARY 5
FINANCIAL INFORMATION
Distributions to Shareholders 14
Independent Auditors' Report 15
Portfolio of Investments 16
Notes to Portfolio of Investments 28
Financial Statements 30
Notes to Financial Statements 33
DIRECTORS' INFORMATION 45
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2003, USAA. All rights reserved.
2
M E S S A G E
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from the PRESIDENT
"
... ADHERE TO YOUR ASSET ALLOCATION
[PHOTO OF CHRISTOPHER W. CLAUS] AND DIVERSIFICATION STRATEGY - AND
WORK WITH SKILLED PROFESSIONALS
WHO CAN HELP ....
"
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Lowest interest rates in decades. New tax cuts. Jobless
recovery. Dow breaks 9000.
Headlines such as these are designed to grab our attention.
But sometimes the hype can make it easy to forget the
investing lessons we've learned over the last few years.
That's why it's so important to have a plan. It can keep you
from making emotional decisions and help you ride out the
inevitable ups and downs of the markets. An asset allocation
and diversification strategy based on your goals, needs, and
appetite for risk should be at the heart of your plan. After
all, you don't want to take on more risk than you can
tolerate. Do you want to try to get more return on your
principal, or do you want to be assured of the return of your
principal? It is a classic question of risk versus reward.
Investors seem to be trading where there is price momentum
rather than on fundamental valuations. This is a rotation of
investment styles called "momentum investing" in which people
put money into whatever is going up, hoping to make a profit,
and then move on to the next opportunity.
While stock and bond market performance improved dramatically
during the spring, it is important to remember that the markets
3
. . . C O N T I N U E D
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tend to overreact in the short term, reverting to the mean
over the long term. Right now, stock prices are high by
historical standards. For prices to stay high, interest rates
need to remain low and corporate profits must show consistent
strength. In the bond market, investors have been moving from
sector to sector, looking for ways to make money. Recently,
they piled in, then out of, longer-term Treasuries.
A more prudent approach is to adhere to your asset allocation
and diversification strategy, and call on our team of skilled
professionals who can help you develop and stick to your plan.
At USAA, we remain committed to providing you with outstanding
resources - a market-tested portfolio management team,
world-class service, and pure no-load mutual funds, without
excessive fees, sales loads, or contractual plans, and with
competitive expense ratios. Once again, and on behalf of the
entire team at USAA Investment Management Company, I would
like to thank you for your business.
Sincerely,
/s/ Christopher W. Claus
Christopher W. Claus
President and Vice Chairman of the Board
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
FOR MORE COMPLETE INFORMATION ABOUT USAA MUTUAL FUNDS,
INCLUDING CHARGES AND OPERATING EXPENSES, REQUEST A PROSPECTUS
FROM USAA INVESTMENT MANAGEMENT COMPANY (USAA). READ IT
CAREFULLY BEFORE YOU INVEST.
MUTUAL FUND OPERATING EXPENSES APPLY AND CONTINUE THROUGHOUT
THE LIFE OF THE FUND.
5
I N V E S T M E N T
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OVERVIEW
USAA BALANCED STRATEGY FUND
OBJECTIVE
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High total return, with reduced risk over time, through an
asset allocation strategy that seeks a combination of
long-term growth of capital and current income.
TYPES OF INVESTMENTS
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Using preset target ranges, the Fund's strategy is to invest
its assets in a combination of stocks on the one hand and
bonds and money market instruments on the other.
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5/31/03 5/31/02
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Net Assets $350.8 Million $327.6 Million
Net Asset Value Per Share $13.35 $14.20
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AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/03
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1 YEAR 5 YEARS SINCE INCEPTION ON 9/1/95
-2.71% 4.45% 8.21%
TOTAL RETURN EQUALS INCOME YIELD PLUS SHARE PRICE CHANGE AND
ASSUMES REINVESTMENT OF ALL DIVIDENDS AND REALIZED CAPITAL
GAIN DISTRIBUTIONS. NO ADJUSTMENT HAS BEEN MADE FOR TAXES
PAYABLE BY SHAREHOLDERS ON THEIR REINVESTED INCOME DIVIDENDS
AND REALIZED CAPITAL GAIN DISTRIBUTIONS. THE PERFORMANCE DATA
QUOTED REPRESENT PAST PERFORMANCE AND ARE NOT AN INDICATION OF
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF AN
INVESTMENT WILL FLUCTUATE, AND AN INVESTOR'S SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
. . . C O N T I N U E D
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OVERVIEW
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CUMULATIVE PERFORMANCE COMPARISON
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[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA BALANCED LEHMAN BROTHERS LIPPER LIPPER
RUSSELL 3000 STRATEGY U.S. AGGREGATE BALANCED BALANCED
S&P 500 INDEX INDEX FUND BOND INDEX FUNDS INDEX FUNDS AVERAGE
------------- ------------ ------------- --------------- ----------- -------------
08/31/95 $10000.00 $10000.00 $10000.00 $10000.00 $10000.00 $10000.00
09/30/95 10421.78 10387.49 10040.00 10097.29 10238.83 10229.94
10/31/95 10384.54 10297.79 9870.00 10228.60 10212.88 10215.74
11/30/95 10839.89 10754.50 10060.00 10381.87 10530.28 10533.12
12/31/95 11048.70 10930.17 10324.29 10527.57 10696.02 10688.82
01/31/96 11424.31 11247.42 10334.38 10597.48 10889.09 10888.50
02/29/96 11530.59 11413.33 10304.13 10413.27 10894.34 10915.26
03/31/96 11641.60 11528.06 10515.68 10340.89 10935.43 10951.53
04/30/96 11813.08 11746.65 10586.67 10282.73 11007.82 11047.33
05/31/96 12117.22 12047.26 10637.37 10261.85 11120.63 11188.63
06/30/96 12163.41 12008.36 10648.38 10399.66 11157.30 11206.73
07/31/96 11626.33 11379.75 10300.92 10428.12 10870.17 10900.37
08/31/96 11871.94 11724.97 10546.18 10410.64 11041.82 11092.08
09/30/96 12539.53 12363.10 10975.62 10592.07 11451.38 11511.31
10/31/96 12885.24 12589.10 11233.02 10826.70 11693.67 11736.70
11/30/96 13858.35 13477.10 11734.44 11012.14 12238.63 12275.04
12/31/96 13583.83 13314.78 11713.31 10909.75 12092.06 12141.58
01/31/97 14432.02 14051.60 12004.58 10943.16 12465.99 12504.57
02/28/97 14545.33 14066.96 12077.40 10970.38 12512.26 12522.13
03/31/97 13948.79 13430.42 11868.62 10848.81 12148.59 12153.40
04/30/97 14780.78 14091.98 12120.03 11011.21 12513.80 12513.11
05/31/97 15684.44 15054.44 12685.70 11115.31 13026.25 13059.15
06/30/97 16381.71 15680.29 13031.61 11247.24 13458.04 13460.75
07/31/97 17684.86 16909.54 13705.37 11550.54 14224.61 14237.05
08/31/97 16694.86 16223.71 13417.40 11452.02 13773.71 13848.63
09/30/97 17608.66 17143.65 13854.99 11620.91 14322.73 14391.71
10/31/97 17021.24 16567.81 13575.74 11789.50 14061.93 14161.14
11/30/97 17808.54 17202.16 13822.77 11843.79 14320.23 14414.20
12/31/97 18114.16 17546.73 13944.80 11963.04 14546.47 14628.02
01/31/98 18314.32 17637.67 13922.91 12116.62 14649.84 14720.00
02/28/98 19634.46 18899.38 14481.14 12107.49 15231.47 15339.05
03/31/98 20639.11 19836.05 14919.09 12149.10 15697.21 15779.30
04/30/98 20850.45 20031.08 14985.15 12212.51 15807.16 15888.25
05/31/98 20492.56 19536.77 14820.00 12328.36 15647.34 15712.19
06/30/98 21324.34 20197.37 14828.06 12432.91 15935.89 15964.41
07/31/98 21098.98 19830.64 14304.70 12459.36 15749.20 15754.67
08/31/98 18050.67 16792.85 12902.28 12662.13 14392.39 14360.61
09/30/98 19208.01 17938.37 13113.85 12958.63 15013.59 14985.29
10/31/98 20768.00 19300.01 13836.75 12890.11 15575.27 15617.44
11/30/98 22026.19 20480.43 14548.35 12963.27 16145.37 16222.17
12/31/98 23294.62 21782.13 15156.72 13002.24 16741.02 16809.83
01/31/99 24268.35 22522.11 15701.28 13095.04 17008.72 17101.90
02/28/99 23514.23 21724.36 15349.59 12866.45 16599.88 16638.64
03/31/99 24454.76 22521.48 16052.52 12937.75 17009.63 17052.74
04/30/99 25401.75 23538.06 16291.43 12978.73 17566.78 17561.77
05/31/99 24802.58 23090.70 15950.13 12865.05 17295.91 17310.43
06/30/99 26175.30 24257.61 16725.61 12824.07 17774.11 17810.99
07/31/99 25361.55 23522.07 16417.15 12769.47 17441.69 17455.96
08/31/99 25236.00 23254.61 16382.88 12762.97 17258.68 17235.07
09/30/99 24545.03 22660.24 16120.26 12911.14 17037.56 17007.04
10/31/99 26097.59 24081.63 16854.56 12958.78 17530.87 17518.49
11/30/99 26628.07 24755.59 17221.71 12957.85 17719.50 17746.00
12/31/99 28194.22 26335.19 18021.46 12895.37 18243.80 18314.59
01/31/00 26777.84 25302.82 17549.03 12853.14 17785.48 17817.93
02/29/00 26271.48 25537.35 17514.47 13008.59 17742.64 17854.07
03/31/00 28839.93 27537.91 18493.42 13179.96 18787.31 18851.36
04/30/00 27972.57 26567.46 17961.40 13142.22 18443.01 18475.79
05/31/00 27399.13 25821.27 17649.13 13136.18 18269.48 18223.18
06/30/00 28073.92 26585.78 18042.66 13409.48 18561.08 18600.26
07/31/00 27635.40 26115.87 17826.03 13531.20 18510.50 18551.99
08/31/00 29350.99 28052.68 18523.41 13727.32 19336.74 19443.37
09/30/00 27801.85 26782.52 17900.05 13813.63 18929.79 18958.44
10/31/00 27683.73 26401.18 17715.51 13905.04 18913.05 18881.73
11/30/00 25502.93 23967.74 16891.25 14132.40 18226.52 18103.18
12/31/00 25628.04 24370.52 17211.05 14394.56 18679.53 18543.04
01/31/01 26536.75 25204.21 18484.57 14629.96 19075.97 18976.46
02/28/01 24118.64 22901.35 18051.82 14757.41 18335.50 18115.39
03/31/01 22591.57 21408.50 17755.71 14831.49 17743.38 17462.07
04/30/01 24345.77 23125.36 18502.27 14769.93 18488.02 18224.94
05/31/01 24509.10 23311.09 18950.20 14859.02 18652.69 18360.56
06/30/01 23912.79 22881.26 18777.43 14915.17 18366.88 18103.14
07/31/01 23677.30 22504.16 19040.49 15248.63 18353.59 18074.75
08/31/01 22196.55 21175.60 18652.17 15423.25 17831.27 17514.60
09/30/01 20404.27 19307.38 17464.73 15602.97 16974.37 16561.04
10/31/01 20793.58 19756.59 17817.56 15929.47 17258.46 16916.60
11/30/01 22388.19 21278.30 18876.02 15709.85 17945.58 17616.95
12/31/01 22584.43 21578.22 19097.83 15610.09 18075.00 17727.51
01/31/02 22255.03 21307.64 18925.42 15736.45 17916.47 17549.53
02/28/02 21825.74 20871.92 18567.34 15888.95 17794.73 17359.67
03/31/02 22646.69 21787.05 19098.35 15624.62 18183.81 17737.90
04/30/02 21274.28 20644.01 18791.60 15927.62 17747.44 17306.51
05/31/02 21118.10 20404.83 18938.31 16062.95 17739.16 17227.54
06/30/02 19614.38 18936.00 17872.18 16201.84 16982.39 16438.92
07/31/02 18085.80 17430.53 16999.38 16397.34 16111.99 15639.37
08/31/02 18204.20 17512.87 17173.94 16674.20 16277.29 15797.10
09/30/02 16227.74 15672.78 16406.97 16944.24 15305.47 14860.06
10/31/02 17654.48 16920.75 16947.12 16867.06 15943.47 15432.84
11/30/02 18692.59 17944.65 17689.82 16862.58 16590.27 16006.32
12/31/02 17595.00 16930.14 17167.90 17210.89 16143.07 15554.25
01/31/03 17134.96 16515.88 16852.01 17225.58 15901.25 15323.69
02/28/03 16877.48 16244.16 16783.34 17463.93 15782.00 15219.83
03/31/03 17040.89 16414.98 16755.87 17450.47 15846.41 15283.60
04/30/03 18443.90 17755.40 17566.20 17594.46 16703.95 16097.38
05/31/03 19414.73 18827.19 18424.40 17922.51 17442.75 16824.40
[END CHART]
DATA SINCE INCEPTION ON 9/1/95 THROUGH 5/31/03.
THE RUSSELL 3000 INDEX REPLACED THE S&P 500 INDEX AS THE
FUND'S COMPARABLE BROAD-BASED SECURITIES INDEX, BECAUSE THE
RUSSELL 3000 INDEX IS AN INDEX OF MULTI-CAP GROWTH AND VALUE
STOCKS, AND THUS PROVIDES A MORE APPROPRIATE COMPARISON FOR
THE STOCK PORTION OF THE FUND, WHICH FOCUSES ON MULTI-CAP
(SMALL-, MID-, AND LARGE-CAP) GROWTH AND VALUE STOCKS, THAN
THE S&P 500 INDEX, WHICH IS AN INDEX OF LARGE-CAP GROWTH AND
VALUE STOCKS.
NO ADJUSTMENT HAS BEEN MADE FOR TAXES PAYABLE BY SHAREHOLDERS
ON THEIR REINVESTED INCOME DIVIDENDS AND REALIZED CAPITAL GAIN
DISTRIBUTIONS.
7
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The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA Balanced Strategy Fund to the following
benchmarks:
o The S&P 500 Index, an unmanaged index representing the
weighted average performance of a group of 500 widely held,
publicly traded stocks. It is not possible to invest
directly in the S&P 500 Index.
o The Russell 3000 Index measures the performance of the
3,000 largest U.S. companies based on total market
capitalization, which represents approximately 98% of the
investable U.S. equity market.
o The Lehman Brothers U.S. Aggregate Bond Index, covers the
U.S. investment grade fixed-rate bond market, including
government and credit securities, agency mortgage pass-
through securities, asset-backed securities, and commercial
mortgage-backed securities that have remaining maturities of
more than one year.
o The Lipper Balanced Funds Index, which tracks the total
return performance of the 30 largest funds within the Lipper
Balanced Funds category.
o The Lipper Balanced Funds Average, an average of all
balanced funds, reported by Lipper Inc., an independent
organization that monitors the performance of mutual funds.
8
M A N A G E R S '
==================--------------------------------------------------------------
COMMENTARY on the Fund
MATTHEW E. MEGARGEL, CFA MARGARET "DIDI" WEINBLATT, Ph.D., CFA
Wellington Management Company, LLP USAA Investment Management Company
(Stocks) (Bonds)
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
The USAA Balanced Strategy Fund had a total return of -2.71%
for the year ended May 31, 2003. This compares to a -2.28%
return for the average fund in the Lipper Balanced Funds
category, -8.07% for the S&P 500 Index, -7.73% for the Russell
3000 Index, and 11.58% for the Lehman Brothers U.S. Aggregate
Bond Index.
[LOGO OF LIPPER LEADER] [LOGO OF LIPPER LEADER]
TOTAL RETURN CONSISTENT RETURN
Lipper named the Fund a Lipper Leader for total return and
consistent return within the Lipper Balanced Funds category
for the three-year period ending May 31, 2003.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS.
LIPPER RATINGS FOR TOTAL RETURN REFLECT FUNDS' HISTORICAL
TOTAL RETURN PERFORMANCE RELATIVE TO PEERS AS OF MAY 31, 2003.
LIPPER RATINGS FOR CONSISTENT RETURN REFLECT FUNDS' HISTORICAL
RISK-ADJUSTED RETURNS, ADJUSTED FOR VOLATILITY, RELATIVE TO
PEERS AS OF MAY 31, 2003. THE RATINGS ARE SUBJECT TO CHANGE
EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF
PERCENTILE RANKS FOR THE TOTAL RETURN AND CONSISTENT RETURN
METRICS OVER THREE-, FIVE-, AND 10-YEAR PERIODS (IF
APPLICABLE). THE HIGHEST 20% OF FUNDS IN EACH PEER GROUP ARE
NAMED LIPPER LEADERS, THE NEXT 20% RECEIVE A SCORE OF 2, THE
MIDDLE 20% ARE SCORED 3, THE NEXT 20% ARE SCORED 4, AND THE
LOWEST 20% ARE SCORED 5.
9
. . . C O N T I N U E D
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* * * *
THE FUND'S PERFORMANCE RECEIVED AN OVERALL MORNINGSTAR
RATING(TM) OF 4 STARS IN THE MODERATE ALLOCATION FUNDS
CATEGORY (598 FUNDS IN CATEGORY) FOR THE PERIOD ENDING
MAY 31, 2003.
HOW WERE THE FUND'S ASSETS ALLOCATED BETWEEN STOCKS AND BONDS?
We began the period with roughly 55% of assets in stocks and
45% in fixed-income securities. In late September 2002, and
again in early October 2002, we took steps to increase the
Fund's allocation to stocks to above 60% of assets. In April
2003, we slightly reduced the stock allocation back to just
above 60%.
WHAT WAS THE REASONING BEHIND THESE SHIFTS?
In the fall, following a 12-month period in which long-term
government bonds had outperformed stocks by approximately 35%,
we took a more positive view about the prospects for economic
recovery, corporate profits and, therefore, stock prices.
Additionally, the market gave us classic technical signals
that a shift could be
THE USAA BALANCED STRATEGY FUND IN LIPPER'S BALANCED FUNDS
CATEGORY WAS RATED FOR 3 YEARS AMONG 412 FUNDS, FOR 5 YEARS
AMONG 339 FUNDS, AND FOR 10 YEARS AMONG 98 FUNDS FOR TOTAL
RETURN; FOR 3 YEARS AMONG 381 FUNDS, FOR 5 YEARS AMONG 318
FUNDS, AND FOR 10 YEARS AMONG 63 FUNDS FOR CONSISTENT RETURN.
LIPPER RATINGS ARE NOT INTENDED TO PREDICT FUTURE RESULTS, AND
LIPPER DOES NOT GUARANTEE THE ACCURACY OF THIS INFORMATION.
MORE INFORMATION IS AVAILABLE AT WWW.LIPPERLEADERS.COM. LIPPER
LEADER COPYRIGHT 2003, REUTERS, ALL RIGHTS RESERVED.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH
FUND WITH AT LEAST A THREE-YEAR HISTORY, MORNINGSTAR
CALCULATES A MORNINGSTAR RATING(TM) BASED ON A MORNINGSTAR
RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A
FUND'S MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES
CHARGES, LOADS, AND REDEMPTION FEES), PLACING MORE EMPHASIS ON
DOWNWARD VARIATIONS AND REWARDING CONSISTENT PERFORMANCE. THE
TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS RECEIVE 5
STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3
STARS, THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10%
RECEIVE 1 STAR. THE OVERALL MORNINGSTAR RATING FOR A FUND IS
DERIVED FROM A WEIGHTED AVERAGE OF THE PERFORMANCE FIGURES
ASSOCIATED WITH ITS THREE-, FIVE-, AND 10-YEAR (IF APPLICABLE)
MORNINGSTAR RATING METRICS. THE USAA BALANCED STRATEGY FUND
WAS RATED AGAINST THE FOLLOWING NUMBER OF MODERATE ALLOCATION
FUNDS OVER THE FOLLOWING TIME PERIODS ENDING 5/31/03: 598
FUNDS IN THE LAST THREE YEARS AND 469 FUNDS IN THE LAST FIVE
YEARS. WITH RESPECT TO THE MODERATE ALLOCATION FUNDS, THE USAA
BALANCED STRATEGY FUND RECEIVED A MORNINGSTAR RATING OF 4
STARS FOR THE THREE- AND FIVE-YEAR PERIODS.
10
. . . C O N T I N U E D
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COMMENTARY on the Fund
under way from a cyclical bear market to a cyclical bull
market. By April 2003, with the economy still sluggish and
the war creating uncertainty about economic prospects, we felt
it was prudent to take a slightly more conservative approach
until the impact of the war on the economy became clearer.
We've since seen several positive developments that give us
confidence in the economy. These include strong returns from
stocks, a weak dollar that helps manufacturers, a narrowing of
credit spreads that helps borrowers raise capital, the
stimulative effect of the recent tax cuts, and post-war
economic data reflecting positive economic growth. Together,
these developments lead us to believe that economic growth
will pick up moderately over the next couple of quarters. We
also finally got the signals we had been expecting to confirm
our belief in a shift to a cyclical bull market.
HOW DID YOU MANAGE THE U.S. STOCK PORTION OF THE FUND?
While the stock portion of the Fund at times took on a
somewhat defensive posture, by the end of the reporting year
we had adjusted the portfolio in anticipation of improving
economic developments. Among the areas of strength during the
reporting year was information technology, where we were
overweight and counted Hewlett-Packard Co. and IBM Corp. among
our top contributors to performance. We benefited from strong
stock selection in financials, led by our holdings in
Citigroup, Inc. and Legg Mason, Inc. An overweight position in
energy also helped performance, spurred by strong stock
selection within the sector. We were held back by stock
selection in the consumer staples sector, with Kimberly-Clark
Corp. and Safeway, Inc. detracting from performance, and
health care, as holdings Baxter and HCA, Inc. underperformed.
Additionally, our underweight position in telecommunications
proved detrimental, because this group performed second best,
behind technology.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-27.
KIMBERLY-CLARK CORP. AND BAXTER WERE SOLD OUT OF THE PORTFOLIO
PRIOR TO MAY 31, 2003.
11
. . . C O N T I N U E D
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WHAT'S YOUR OUTLOOK FOR THE U.S. STOCK MARKET?
The breadth of the recent gains is telling us that the worst
of the three-year bear market is most likely behind us. Our
biggest concerns are jobs and income. Low interest rates and
tax cuts help, but people must have income in an economy where
consumer spending represents 70% of activity. Our view is that
unemployment and aggregate income must stabilize, and we
expect to see sequential improvement in both by early next
year. In this environment, we're controlling risk by avoiding
companies with high debt levels and high fixed-cost structures
and focusing on those that can deliver revenue growth despite
slower overall economic growth. We are positive on the
prospects for materials companies, believing they will benefit
as the economy improves and demand for materials rises. We
also have a good outlook for health care thanks to demographic
trends, the use of technology, and advances in pharmaceuticals
that save money by keeping people out of the hospital. We
think the technology industry will continue to grow over time
and be an engine for the economy.
WHAT ABOUT THE BOND PORTION OF THE FUND?
The bond portion of the Fund had strong performance and
provided a positive return and outperformed our peer group
averages. In light of the sluggish economy, interest rates
continued to fall throughout the reporting year, and are now
at 45-year lows. Such an environment resulted in a good year
for those bonds with the highest interest-rate sensitivity (or
duration) that could not be called or prepaid. Corporate
bonds rallied sharply in the second half of the reporting year
along with the stock market as investors took a more positive
view and credit risk decreased. In this environment, the Fund
benefited from our investment in corporate bonds and in
Treasury inflation-protected securities (TIPS). TIPS are
unique among fixed-income securities because their principal
is indexed to inflation, so they protect against rising
inflation while also giving us beneficial exposure to the
Treasury market. In the face of deflation fears, we reduced
our exposure to TIPS at the end of the reporting period to
lock in profits after their strong performance run.
12
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
The U.S. economy has yet to show signs that a sustainable
recovery is under way, so we were not surprised that the
Federal Reserve Board cut interest rates again in June. Given
today's historically low rates and the stimulative effect of
the government's monetary and fiscal (tax) policies, it's also
important to maintain protection against rising interest
rates. So we're attempting to strike the right balance while
using our strong credit research and analysis capabilities to
select and monitor individual corporate bonds for the Fund.
We will continue to work hard on your behalf, and thank you
for the confidence you've placed in us.
HISTORICAL YIELD CURVE*
[CHART OF HISTORICAL YIELD CURVE]
5/31/02 5/30/03 CHANGE
--------- --------- --------
3 MONTHS 1.720% 1.098% -0.6226%
6 MONTHS 1.883 1.083 -0.7994
2 YEAR 3.193 1.322 -1.8711
3 YEAR 3.680 1.565 -2.1152
5 YEAR 4.353 2.289 -2.0640
10 YEAR 5.043 3.370 -1.6728
30 YEAR 5.615 4.376 -1.2384
[END CHART]
* YIELD OF TREASURY BILLS, NOTES, AND BONDS.
13
P O R T F O L I O
==================--------------------------------------------------------------
HIGHLIGHTS
- ----------------------------------------------------------
TOP 10 EQUITY HOLDINGS
(% of Net Assets)
- ----------------------------------------------------------
Microsoft Corp. 2.3%
Pfizer, Inc. 2.1%
Citigroup, Inc. 1.9%
General Electric Co. 1.7%
Exxon Mobil Corp. 1.6%
American International Group, Inc. 1.5%
AOL Time Warner, Inc. 1.2%
Wyeth 1.2%
Abbott Laboratories 1.1%
SBC Communications, Inc. 1.1%
- ----------------------------------------------------------
ASSET ALLOCATION
5/31/03
[PIE CHART OF ASSET ALLOCATION]
Corporate Obligations 12.9%
Asset-Backed & Mortgage-Backed Securities 3.5%
U.S.Government Agency Issues 4.3%
U.S.Government Agency Mortgage-Backed Securities 12.9%
Municipal Bond 0.3%
Money Market Instruments 6.7%
Stocks 60.3%
[END PIE CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 16-27.
14
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA BALANCED STRATEGY FUND
The following federal tax information related to the Fund's
fiscal year ended May 31, 2003, is provided for information
purposes only and should not be used for reporting to federal
or state revenue agencies. Federal tax information for the
calendar year will be reported to you on Form 1099-DIV in
January 2004.
34.13% of ordinary income distributions qualifies for the
dividends-received deductions eligible to corporations.
15
I N D E P E N D E N T
======================----------------------------------------------------------
AUDITORS' Report
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA BALANCED STRATEGY FUND:
We have audited the accompanying statement of assets and
liabilities of USAA Balanced Strategy Fund (a portfolio of
USAA Investment Trust), including the portfolio of
investments, as of May 31, 2003, and the related statement of
operations, statement of changes in net assets, and financial
highlights for the year then ended. These financial statements
and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on
our audit. The statement of changes in net assets for the year
ended May 31, 2002, and the financial highlights for each of
the periods presented through May 31, 2002, were audited by
other auditors, whose report dated July 5, 2002, expressed an
unqualified opinion on the statement and financial highlights.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of May
31, 2003, by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2003 financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of USAA Balanced Strategy
Fund at May 31, 2003, the results of its operations, changes
in its net assets, and financial highlights for the year then
ended in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
July 11, 2003
16
P O R T F O L I O
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of INVESTMENTS
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
STOCKS (60.3%)
ADVERTISING (0.6%)
23,800 Catalina Marketing Corp. * $ 443
24,100 Omnicom Group, Inc. 1,683
-------
2,126
-------
AEROSPACE & DEFENSE (1.3%)
50,200 Boeing Co. 1,539
41,600 Lockheed Martin Corp. 1,931
13,300 United Technologies Corp. 908
-------
4,378
-------
AIR FREIGHT & LOGISTICS (0.8%)
47,400 EGL, Inc. * 742
34,700 FedEx Corp. 2,220
-------
2,962
-------
AIRLINES (0.1%)
7,900 JetBlue Airways Corp. * 267
-------
ALUMINUM (0.6%)
91,900 Alcoa, Inc. 2,262
-------
APPAREL, ACCESSORIES, & LUXURY GOODS (0.3%)
26,300 Liz Claiborne, Inc. 891
-------
APPAREL RETAIL (0.7%)
15,600 American Eagle Outfitters, Inc. * 265
35,600 Chico's FAS, Inc. * 762
55,900 Gap, Inc. 950
18,200 Pacific Sunwear of California, Inc. * 409
-------
2,386
-------
APPLICATION SOFTWARE (0.8%)
36,530 Cadence Design Systems, Inc. * 508
24,100 Intuit, Inc. * 1,111
15,800 Manhattan Associates, Inc. * 424
32,400 Siebel Systems, Inc. * 304
23,400 Verity, Inc. * 487
-------
2,834
-------
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
ASSET MANAGEMENT & CUSTODY BANKS (0.6%)
34,500 Legg Mason, Inc. $ 2,229
-------
BIOTECHNOLOGY (0.9%)
63,700 Albany Molecular Research, Inc. * 864
15,100 Gilead Sciences, Inc. * 796
38,800 IDEC Pharmaceuticals Corp. * 1,481
-------
3,141
-------
BROADCASTING & CABLE TV (1.1%)
97,400 Comcast Corp. "A" * 2,807
33,300 Univision Communications, Inc. "A" * 994
-------
3,801
-------
BUILDING PRODUCTS (0.5%)
69,000 Masco Corp. 1,697
-------
CASINOS & GAMING (0.1%)
5,300 International Game Technology, Inc. * 467
-------
CATALOG RETAIL (0.5%)
41,500 USA Interactive, Inc. * 1,596
-------
COMMUNICATIONS EQUIPMENT (0.9%)
201,200 Cisco Systems, Inc. * 3,276
-------
COMPUTER & ELECTRONIC RETAIL (0.1%)
5,600 CDW Computer Centers, Inc. * 228
-------
COMPUTER HARDWARE (1.8%)
150,800 Hewlett-Packard Co. 2,941
39,200 IBM Corp. 3,451
-------
6,392
-------
CONSUMER FINANCE (0.5%)
17,500 Countrywide Credit Financial Corp. 1,289
59,300 Providian Financial Corp. * 536
-------
1,825
-------
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
DATA PROCESSING & OUTSOURCED SERVICES (0.9%)
22,800 Automatic Data Processing, Inc. $ 796
17,000 CheckFree Corp. * 416
88,100 SunGard Data Systems, Inc. * 2,026
-------
3,238
-------
DISTILLERS & VINTNERS (0.3%)
33,800 Constellation Brands, Inc. "A" * 932
-------
DIVERSIFIED BANKS (2.4%)
42,900 Bank of America Corp. 3,183
71,100 Bank One Corp. 2,656
64,500 Wachovia Corp. 2,592
-------
8,431
-------
DIVERSIFIED CHEMICALS (0.5%)
54,700 Dow Chemical Co. 1,739
-------
DIVERSIFIED COMMERCIAL SERVICES (0.1%)
21,500 ARAMARK Corp. "B" * 451
-------
DRUG RETAIL (0.4%)
48,700 CVS Corp. 1,271
-------
ELECTRIC UTILITIES (1.2%)
19,200 CINergy Corp. 729
34,400 Exelon Corp. 1,971
20,000 FPL Group, Inc. 1,329
-------
4,029
-------
ELECTRONIC EQUIPMENT MANUFACTURERS (0.4%)
102,300 Sanmina-SCI Corp. * 585
25,400 Waters Corp. * 721
-------
1,306
-------
ENVIRONMENTAL SERVICES (0.6%)
82,900 Waste Management, Inc. 2,111
-------
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
FOOD RETAIL (0.1%)
17,700 Safeway, Inc. * $ 333
-------
GENERAL MERCHANDISE STORES (0.2%)
16,300 Target Corp. 597
-------
HEALTH CARE DISTRIBUTORS (0.5%)
12,500 Cardinal Health, Inc. 721
10,100 Henry Schein, Inc. * 497
16,300 Laboratory Corp. of America Holdings * 524
-------
1,742
-------
HEALTH CARE EQUIPMENT (0.4%)
4,600 Diagnostic Products Corp. 175
29,200 Guidant Corp. * 1,234
-------
1,409
-------
HEALTH CARE FACILITIES (0.6%)
32,200 HCA, Inc. 1,063
42,400 Triad Hospitals, Inc. * 1,097
-------
2,160
-------
HEALTH CARE SERVICES (0.3%)
17,200 Quest Diagnostics, Inc. * 1,090
-------
HEALTH CARE SUPPLIES (0.3%)
37,700 Edwards Lifesciences Corp. * 1,143
-------
HOME FURNISHINGS (0.1%)
8,100 Mohawk Industries, Inc. * 467
-------
HOME IMPROVEMENT RETAIL (0.8%)
91,300 Home Depot, Inc. 2,966
-------
HOMEBUILDING (0.3%)
35,600 D.R. Horton, Inc. 936
-------
HOUSEHOLD PRODUCTS (0.7%)
27,400 Procter & Gamble Co. 2,516
-------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
HYPER MARKETS & SUPER CENTERS (1.0%)
67,300 Wal-Mart Stores, Inc. $ 3,541
-------
INDUSTRIAL CONGLOMERATES (2.1%)
10,500 3M Co. 1,328
205,400 General Electric Co. 5,895
-------
7,223
-------
INDUSTRIAL MACHINERY (0.5%)
28,100 ITT Industries, Inc. 1,761
-------
INSURANCE BROKERS (0.9%)
25,300 Arthur J. Gallagher & Co. 690
47,600 Marsh & McLennan Companies, Inc. 2,386
-------
3,076
-------
INTEGRATED OIL & GAS (2.4%)
41,512 ChevronTexaco Corp. 2,945
154,100 Exxon Mobil Corp. 5,609
-------
8,554
-------
INTEGRATED TELECOMMUNICATION SERVICES (1.1%)
151,600 SBC Communications, Inc. 3,860
-------
INVESTMENT BANKING & BROKERAGE (1.0%)
76,700 Merrill Lynch & Co., Inc. 3,321
-------
IT CONSULTING & OTHER SERVICES (0.6%)
113,800 Accenture Ltd. "A" * 1,994
-------
LEISURE PRODUCTS (0.1%)
7,100 Polaris Industries, Inc. 427
-------
MANAGED HEALTH CARE (0.4%)
4,800 Anthem, Inc. * 352
26,000 Caremark Rx, Inc. * 587
12,000 Oxford Health Plans, Inc. * 445
-------
1,384
-------
METAL & GLASS CONTAINERS (0.3%)
57,700 Pactiv Corp. * 1,128
-------
21
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
MOVIES & ENTERTAINMENT (1.2%)
273,900 AOL Time Warner, Inc. * $ 4,169
-------
MULTI-LINE INSURANCE (1.5%)
93,500 American International Group, Inc. 5,412
-------
OIL & GAS DRILLING (0.1%)
11,200 GlobalSantaFe Corp. 279
-------
OIL & GAS EQUIPMENT & SERVICES (0.6%)
44,600 Schlumberger Ltd. 2,168
-------
OIL & GAS EXPLORATION & PRODUCTION (0.9%)
80,100 Chesapeake Energy Corp. 818
42,900 EOG Resources, Inc. 1,849
49,300 Swift Energy Co. * 584
-------
3,251
-------
OTHER DIVERSIFIED FINANCIAL SERVICES (2.0%)
165,539 Citigroup, Inc. 6,790
38,800 E-Trade Group, Inc. * 297
-------
7,087
-------
PACKAGED FOODS & MEAT (0.5%)
40,900 General Mills, Inc. 1,913
-------
PAPER PACKAGING (0.2%)
55,700 Smurfit-Stone Container Corp. * 825
-------
PAPER PRODUCTS (0.5%)
44,600 International Paper Co. 1,636
-------
PERSONAL PRODUCTS (0.8%)
81,800 Gillette Co. 2,749
-------
PHARMACEUTICALS (6.3%)
89,800 Abbott Laboratories 4,001
51,500 Eli Lilly & Co. 3,078
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
53,700 King Pharmaceuticals, Inc. * $ 769
233,700 Pfizer, Inc. 7,249
128,900 Schering-Plough Corp. 2,378
18,331 Watson Pharmaceuticals, Inc. * 679
92,300 Wyeth 4,047
--------
22,201
--------
PROPERTY & CASUALTY INSURANCE (1.2%)
13,200 Ambac Financial Group, Inc. 880
41,500 St. Paul Companies, Inc. 1,518
108,700 Travelers Property Casualty Corp. "B" 1,758
--------
4,156
--------
PUBLISHING (0.5%)
22,800 Gannett Co., Inc. 1,801
--------
REGIONAL BANKS (0.8%)
16,400 Bank Hawaii Corp. 573
38,700 Banknorth Group, Inc. 991
32,300 UnionBanCal Corp. 1,365
--------
2,929
--------
RESTAURANTS (1.0%)
51,200 Brinker International, Inc. * 1,783
25,800 Darden Restaurants, Inc. 511
72,200 McDonald's Corp. 1,353
--------
3,647
--------
SEMICONDUCTOR EQUIPMENT (0.6%)
67,600 Applied Materials, Inc. * 1,052
16,100 Cabot Microelectronics Corp. * 744
9,400 Novellus Systems, Inc. * 326
--------
2,122
--------
SEMICONDUCTORS (2.0%)
1 Agere Systems, Inc. "B" * -
23,300 Analog Devices, Inc. * 898
49,900 Fairchild Semiconductor International, Inc. "A" * 698
20,100 Integrated Circuit Systems, Inc. * 524
168,800 Intel Corp. 3,518
49,000 International Rectifier Corp. * 1,283
22,000 Lattice Semiconductor Corp. * 200
--------
7,121
--------
23
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ------------------------------------------------------------------------
SOFT DRINKS (2.1%)
71,300 Coca-Cola Co. $ 3,249
62,800 Coca-Cola Enterprises, Inc. 1,177
64,000 PepsiCo, Inc. 2,829
---------
7,255
---------
SPECIALTY CHEMICALS (0.0%)(h)
6,300 Cambrex Corp. 134
---------
SPECIALTY STORES (0.6%)
12,700 Linens `n Things, Inc. * 292
27,400 Michaels Stores, Inc. * 1,031
27,300 O'Reilly Automotive, Inc. * 833
---------
2,156
---------
SYSTEMS SOFTWARE (2.4%)
322,500 Microsoft Corp. 7,937
12,800 VERITAS Software Corp. * 355
---------
8,292
---------
TECHNOLOGY DISTRIBUTORS (0.3%)
29,300 Comverse Technology, Inc. * 446
43,200 Tekelec, Inc. * 618
---------
1,064
---------
THRIFTS & MORTGAGE FINANCE (0.3%)
57,300 Sovereign Bancorp, Inc. 935
---------
TOBACCO (0.2%)
13,500 Altria Group, Inc. 558
---------
Total Stocks (cost: $203,960) 211,754
---------
24
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------
BONDS (33.9%)
CORPORATE OBLIGATIONS (12.9%)
AEROSPACE & DEFENSE (0.6%)
$1,000 Boeing Capital Corp. 5.40% 11/30/2009 $ 1,064
1,000 Bombardier, Inc.(a) 6.75 5/01/2012 935
-------
1,999
-------
BROADCASTING & CABLE TV (0.6%)
1,000 Comcast Cable Communications, Inc. 6.88 6/15/2009 1,158
1,000 Cox Communications, Inc. 4.63 6/01/2013 1,002
-------
2,160
-------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.3%)
1,000 John Deere Capital Corp. 1.59 8/20/2003 1,000
-------
CONSUMER FINANCE (1.6%)
1,000 Ford Motor Credit Co. 7.60 8/01/2005 1,062
2,000 Household Finance Corp. 6.38 10/15/2011 2,283
2,000 SLM Corp. 5.38 1/15/2013 2,193
-------
5,538
-------
DATA PROCESSING & OUTSOURCED SERVICES (0.3%)
1,000 Fiserv, Inc.(a) 4.00 4/15/2008 1,038
-------
DIVERSIFIED METALS & MINING (0.7%)
2,000 Brascan Corp. 8.13 12/15/2008 2,394
-------
ELECTRIC UTILITIES (2.7%)
2,000 El Paso Electric Co.(b) 9.40 5/01/2011 2,331
2,000 Empire District Electric Co. 7.70 11/15/2004 2,183
1,000 Entergy Mississippi, Inc. 5.15 2/01/2013 1,049
1,000 Pepco Holdings, Inc. 4.00 5/15/2010 1,009
2,000 Pinnacle One Partners, L.P.(a) 8.83 8/15/2004 2,080
800 Teco Energy, Inc. 10.50 12/01/2007 914
-------
9,566
-------
ENVIRONMENTAL SERVICES (0.7%)
1,000 Waste Management, Inc. 6.50 11/15/2008 1,151
1,000 Waste Management, Inc. 7.38 8/01/2010 1,200
-------
2,351
-------
25
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------
GAS UTILITIES (1.2%)
$1,000 Enbridge Energy Partners LP(a) 4.75% 6/01/2013 $ 1,005
1,000 Peoples Energy Corp. 6.90 1/15/2011 1,145
2,000 Texas Gas Transmission, LLC(a) 4.60 6/01/2015 2,023
--------
4,173
--------
INDUSTRIAL CONGLOMERATES (0.3%)
1,000 Hutchison Whampoa International(a) 6.50 2/13/2013 1,071
--------
INTEGRATED OIL & GAS (0.3%)
1,000 Occidental Petroleum Corp. 5.88 1/15/2007 1,110
--------
INVESTMENT BANKING & BROKERAGE (1.7%)
2,050 First Union Corp.(b) 6.82 8/01/2026 2,612
1,000 Imperial Bancorp 8.50 4/01/2009 1,183
1,000 Nordea Bank Sweden AB(a) 5.25 11/30/2012 1,091
1,000 Union Planters Bank, N.A.(b) 6.50 3/15/2008 1,124
--------
6,010
--------
METAL & GLASS CONTAINERS (0.3%)
1,000 Pactiv Corp. 7.20 12/15/2005 1,103
--------
OIL & GAS EXPLORATION & PRODUCTION (0.3%)
1,000 Devon Financing Corp., ULC 6.88 9/30/2011 1,187
--------
PACKAGED FOODS & MEAT (0.3%)
1,000 Tyson Foods, Inc. 8.25 10/01/2011 1,162
--------
REAL ESTATE INVESTMENT TRUSTS (1.0%)
1,000 Nationwide Health Properties, Inc. 7.60 5/10/2007 1,105
2,000 Pan Pacific Retail Properties, Inc. 7.95 4/15/2011 2,417
--------
3,522
--------
Total corporate obligations (cost: $40,948) 45,384
--------
26
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------
ASSET-BACKED & MORTGAGE-BACKED SECURITIES (3.5%)
$1,000 Capital One Bank(g) 4.32% 4/15/2009 $ 995
4,000 Consumers Funding, LLC 5.43 4/20/2015 4,491
1,000 Credit Suisse First Boston Mortgage Capital, LLC 7.17 1/17/2012 1,116
1,000 Detroit Edison Securitization Funding, LLC 6.42 3/01/2015 1,195
2,000 First Auto Receivables Group Trust(a) 1.32 5/15/2004 2,002
2,559 Norwest Asset Security Corp. 6.75 9/25/2028 2,573
--------
Total asset-backed & mortgage-backed
securities (cost: $11,503) 12,372
--------
U.S. GOVERNMENT & AGENCY ISSUES (17.2%)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION NOTES (4.1%)
4,939 I, Pool# 603868 5.50 1/15/2033 5,171
1,000 Series 1999-14 VD 6.00 3/20/2014 1,082
1,631 Series 1999-11 VC 6.50 5/20/2014 1,701
2,000 Series 2001-49 VB 7.00 11/16/2016 2,155
2,870 II, Pool# 781494 6.50 8/20/2031 2,996
1,379 I, Pool# 587184 7.00 4/15/2032 1,453
--------
14,558
--------
FANNIE MAE NOTES (4.4%)
2,000 Subordinate Note 5.25 8/01/2012 2,205
5,000 Benchmark Note 5.38 11/15/2011 5,697
2,000 Series 1999-25 VB 6.00 4/25/2016 2,075
2,000 Series 2001-20 VB 6.00 9/25/2017 2,122
1,000 Series 2001-25 D 6.00 2/25/2014 1,059
2,000 Series 2001-29 VB 6.50 8/25/2016 2,137
--------
15,295
--------
FREDDIE MAC NOTES (6.6%)
1,765 Series 2369 VG 6.50 11/15/2011 1,789
3,000 Pool# C79394 5.50 4/01/2033 3,111
4,000 Series 2389 VH 6.00 12/01/2031 4,195
1,831 Series 2412 VA 6.50 11/15/2012 1,875
2,748 Series 2413 VA 6.50 11/15/2012 2,843
4,000 Series 2427 VL 6.50 11/15/2017 4,232
2,779 Series 2435 VG 6.00 2/15/2013 2,976
2,000 Series 2445 VD 6.50 4/15/2018 2,115
--------
23,136
--------
27
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------
U.S. TREASURY INFLATION-INDEXED NOTE (2.1%)(d)
$ 6,349 U.S. Treasury Inflation-Indexed Note 3.50% 1/15/2011 $ 7,236
--------
Total U.S. government & agency issues
(cost: $56,581) 60,225
--------
MUNICIPAL BOND (0.3%)
ELECTRIC UTILITIES (0.3%)
1,000 Ohio Edison Co., Water Development
Authority(b) (cost: $1,000) 2.25 6/01/2033 1,000
--------
Total bonds (cost: $110,032) 118,981
--------
NUMBER
OF SHARES
---------
MONEY MARKET INSTRUMENTS (6.7%)
MONEY MARKET FUNDS (1.7%)
385,614 AIM Short-Term Investment Co.
Liquid Assets Portfolio(f) 1.25(e) - 386
477,481 Merrill Lynch Premier Institutional Fund(f) 1.23(e) - 477
6,443 SSgA Money Market Fund 0.90(e) - 6
4,991,678 SSgA Prime Money Market Fund 1.09(e) - 4,992
--------
Total money market funds (cost: $5,861) 5,861
--------
PRINCIPAL
AMOUNT
(000)
---------
OTHER (5.0%)
$ 1,985 145 Associates Ltd. (LOC)(c) 2.32 10/01/2020 1,985
5,547 Gotham Funding Corp. CP(a) 1.37 6/02/2003 5,547
5,000 Lockhart Funding LLC CP(a) 1.32 6/02/2003 5,000
4,999 UBS Finance, Inc. CP 1.35 6/02/2003 4,999
--------
Total other (cost: $17,531) 17,531
--------
Total money market instruments (cost: $23,392) 23,392
--------
TOTAL INVESTMENTS (COST: $337,384) $354,127
========
28
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA BALANCED STRATEGY FUND
MAY 31, 2003
GENERAL NOTES
- --------------------------------------------------------------------------------
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The percentages shown represent the percentages of the investments to
net assets and, in total, may not equal 100%.
PORTFOLIO DESCRIPTION ABBREVIATIONS
CP Commercial Paper
CREDIT ENHANCEMENTS - add the financial strength of the provider of
the enhancement to support the issuer's ability to repay the principal
when due. A high-quality bank, insurance company or other corporation,
or a collateral trust may provide the enhancement.
(LOC) Enhanced by a bank letter of credit
29
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) RESTRICTED SECURITY - not registered under the Securities Act
of 1933. A resale of this security in the United States may
occur in an exempt transaction to a qualified institutional buyer
as defined by Rule 144A, and as such is generally deemed by USAA
Investment Management Company (the Manager) to be liquid under
guidelines approved by the Board of Trustees.
(b) PUT BONDS - provide the right to sell the bond at face value
at specific tender dates prior to final maturity. The put feature
shortens the effective maturity of the security.
(c) VARIABLE-RATE DEMAND NOTES (VRDNS) - provide the right, on
any business day, to sell the security at face value on either
that day or in seven days. The interest rate is adjusted at a
stipulated daily, weekly, or monthly interval to a rate that
reflects current market conditions. The effective maturity is the
next put date.
(d) TREASURY INFLATION-PROTECTED SECURITIES - trade at the
prevailing real, or after inflation, interest rates. The
principal value adjusts periodically to the rate of inflation.
The U.S. Treasury guarantees repayment of these securities of at
least their face value in the event of sustained deflation or a
drop in prices. Inflation adjustments to the face value of these
securities are included in interest income.
(e) Rate represents the money market fund annualized seven-day
yield at May 31, 2003.
(f) Investment was purchased with the cash collateral proceeds
received from securities loaned.
(g) At May 31, 2003, the cost of securities purchased on a
when-issued basis was $993,000.
(h) Represents less than 0.1% of net assets.
* Non-income-producing security for the year ended May 31, 2003.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
ASSETS
Investments in securities, at market value (including securities on
loan of $842) (identified cost of $337,384) $354,127
Cash 145
Receivables:
Capital shares sold 619
Dividends and interest 1,273
Securities sold 3,761
USAA Investment Management Company 500
--------
Total assets 360,425
--------
LIABILITIES
Payable upon return of securities loaned 864
Securities purchased (when-issued of $993) 8,167
Capital shares redeemed 163
USAA Investment Management Company 225
USAA Transfer Agency Company 95
Accounts payable and accrued expenses 69
--------
Total liabilities 9,583
--------
Net assets applicable to capital shares outstanding $350,842
========
NET ASSETS CONSIST OF:
Paid-in capital $361,705
Accumulated undistributed net investment income 1,253
Accumulated net realized loss on investments (28,859)
Net unrealized appreciation of investments 16,743
--------
Net assets applicable to capital shares outstanding $350,842
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 26,288
========
Net asset value, redemption price, and offering price per share $ 13.35
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA BALANCED STRATEGY FUND
YEAR ENDED MAY 31, 2003
NET INVESTMENT INCOME
Income:
Dividends (net of foreign taxes withheld of $1) $ 2,655
Interest 7,109
Fees from securities loaned 9
---------
Total income 9,773
---------
Expenses:
Management fees 2,389
Administrative and servicing fees 460
Transfer agent's fees 1,121
Custodian's fees 153
Postage 101
Shareholder reporting fees 164
Trustees' fees 7
Registration fees 39
Professional fees 62
Other 4
---------
Total expenses 4,500
Expenses reimbursed (1,432)
Expenses paid indirectly (20)
---------
Net expenses 3,048
---------
Net investment income 6,725
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (27,490)
Change in net unrealized appreciation/depreciation 13,186
---------
Net realized and unrealized loss (14,304)
---------
Decrease in net assets resulting from operations $ (7,579)
=========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA BALANCED STRATEGY FUND
YEARS ENDED MAY 31,
2003 2002
----------------------
FROM OPERATIONS
Net investment income $ 6,725 $ 5,685
Net realized gain (loss) on investments (27,490) 5,191
Change in net unrealized appreciation/depreciation
of investments 13,186 (10,390)
----------------------
Increase (decrease) in net assets resulting
from operations (7,579) 486
----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (7,028) (5,188)
----------------------
Net realized gains (3,389) (10,073)
----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 96,568 175,556
Shares issued for dividends reinvested 10,283 15,089
Cost of shares redeemed (65,576) (33,284)
----------------------
Increase in net assets from
capital share transactions 41,275 157,361
----------------------
Net increase in net assets 23,279 142,586
NET ASSETS
Beginning of period 327,563 184,977
----------------------
End of period $350,842 $327,563
======================
Accumulated undistributed net investment income:
End of period $ 1,253 $ 1,399
======================
CHANGE IN SHARES OUTSTANDING
Shares sold 7,605 12,182
Shares issued for dividends reinvested 813 1,069
Shares redeemed (5,197) (2,314)
----------------------
Increase in shares outstanding 3,221 10,937
======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA BALANCED STRATEGY FUND
MAY 31, 2003
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST (the Trust), registered under the Investment
Company Act of 1940, as amended, is a diversified, open-end management
investment company organized as a Massachusetts business trust
consisting of nine separate funds. The information presented in this
annual report pertains only to the USAA Balanced Strategy Fund (the
Fund). The Fund's investment objective is to seek high total return,
with reduced risk over time, through an asset allocation strategy that
seeks a combination of long-term growth of capital and current income.
A. SECURITY VALUATION - The value of each security is determined
(as of the close of trading on the New York Stock Exchange on each
business day the exchange is open) as set forth below:
1. Portfolio securities, except as otherwise noted, traded
primarily on a domestic securities exchange are valued at the
last sales price on that exchange. Portfolio securities traded
primarily on foreign securities exchanges are generally valued
at the closing values of such securities on the exchange where
primarily traded. If no sale is reported, the average of the
bid and asked prices is generally used depending upon local
custom or regulation.
2. Over-the-counter equity securities are generally priced
using the Nasdaq Official Closing Price (NOCP) or, if not
available, the average of the bid and asked prices.
3. Securities purchased with maturities of 60 days or less are
stated at amortized cost, which approximates market value.
4. Other debt and government securities are valued each
business day by a pricing service (the Service) approved by the
Trust's Board of Trustees. The Service uses the mean between
quoted bid and asked prices or the last sales price to price
securities when, in the Service's judgment, these prices are
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
readily available and are representative of the securities'
market values. For many securities, such prices are not readily
available. The Service generally prices these securities based
on methods that include consideration of yields or prices of
securities of comparable quality, coupon, maturity, and type;
indications as to values from dealers in securities; and
general market conditions.
5. Securities that cannot be valued by the methods set forth
above, and all other assets, are valued in good faith at fair
value, using methods determined by the Manager, an affiliate of
the Fund, and if applicable, in consultation with the Fund's
investment subadviser, under valuation procedures approved by
the Trust's Board of Trustees.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
income to its shareholders. Therefore, no federal income tax
provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted
for on the date the securities are purchased or sold (trade date).
Gain or loss from sales of investment securities is computed on
the identified cost basis. Dividend income, less foreign taxes, if
any, is recorded on the ex-dividend date. If the ex-dividend date
has passed, certain dividends from foreign securities are recorded
upon notification. Interest income is recorded on the accrual
basis. Discounts and premiums on securities are amortized over the
life of the respective securities, using the effective yield
method for long-term securities and the straight-line method for
short-term securities.
D. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be
invested in the securities of foreign issuers. Since the Fund's
accounting records are maintained in U.S. dollars, foreign
currency amounts are translated into U.S. dollars on the following
basis:
35
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
1. Market value of securities, other assets, and liabilities at
the mean between the bid and asked translation rates of such
currencies against U.S. dollars on a daily basis.
2. Purchases and sales of securities, income, and expenses at
the rate of exchange obtained from an independent pricing
service on the respective dates of such transactions.
Net realized and unrealized foreign currency gains/losses
occurring during the holding period of investments are a component
of realized gain/loss on investments and unrealized
appreciation/depreciation on investments, respectively.
Net realized foreign currency gains/losses arise from sales of
foreign currency, currency gains/losses realized between the trade
and settlement dates on security transactions, and from the
difference between amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent of the amounts received. Net realized foreign
currency gains/losses have been reclassified from accumulated net
realized gain/loss to accumulated undistributed net investment
income on the statement of assets and liabilities as such amounts
are treated as ordinary income/loss for tax purposes. Net
unrealized foreign currency exchange gains/losses arise from
changes in the value of assets and liabilities other than
investments in securities resulting from changes in the exchange
rate.
E. EXPENSES PAID INDIRECTLY - A portion of the brokerage
commissions that the Fund pays may be reimbursed and used to
reduce the Fund's expenses. In addition, through other fee-offset
arrangements with certain of the Fund's service providers,
realized credits, if any, are used to reduce the Fund's expenses.
For the year ended May 31, 2003, these fee-offset arrangements
reduced the Fund's expenses by $20,000.
F. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS - Delivery and
payment for securities that have been purchased by the Fund on
36
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
a when-issued basis can take place a month or more after the trade
date. During the period prior to settlement, these securities do
not earn interest, are subject to market fluctuation, and may
increase or decrease in value prior to their delivery. The Fund
maintains segregated assets with a market value equal to or
greater than the amount of its purchase commitments. The purchase
of securities on a when-issued basis may increase the volatility
of the Fund's net asset value to the extent that the Fund makes
such purchases while remaining substantially fully invested. As of
May 31, 2003, net outstanding when-issued commitments for the Fund
were $993,000.
G. USE OF ESTIMATES - The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that may affect the reported amounts in the financial
statements.
(2) LINES OF CREDIT
- --------------------------------------------------------------------------------
The Fund participates with other USAA funds in two joint, short-term,
revolving, committed loan agreements totaling $500 million: $400
million with USAA Capital Corporation (CAPCO), an affiliate of the
Manager, and $100 million with Bank of America. The purpose of the
agreements is to meet temporary or emergency cash needs, including
redemption requests that might otherwise require the untimely
disposition of securities.
Subject to availability under its agreement with CAPCO, the Fund may
borrow from CAPCO an amount up to 5% of the Fund's total assets at
CAPCO's borrowing rate with no markup. Subject to availability under
its agreement with Bank of America, the Fund may borrow from Bank of
America, at Bank of America's borrowing rate plus a markup, an amount
which, when added to outstanding borrowings under the CAPCO agreement,
does not exceed 25% of the Fund's total assets.
37
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
The USAA funds that are party to the loan agreements are assessed
facility fees in aggregate by Bank of America in an annual amount equal
to 0.09% of the $100 million loan agreement, whether used or not, and
by CAPCO based on the funds' assessed proportionate share of CAPCO's
operating expenses related to obtaining and maintaining CAPCO's funding
programs in total (in no event to exceed 0.09% annually of the $400
million loan agreement). The facility fees are allocated among the
funds based on their respective average net assets for the period. The
Fund had no borrowings under either of these agreements during the year
ended May 31, 2003.
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The character of distributions made during the year from net investment
income or net realized gains is determined in accordance with federal
tax regulations and may differ from those determined in accordance with
accounting principles generally accepted in the United States. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between book and
tax basis accounting resulted in reclassifications made to the
statement of assets and liabilities to decrease paid-in capital by
$2,000, increase accumulated undistributed net investment income by
$157,000, and increase accumulated net realized loss on investments by
$155,000. This reclassification has no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2003 and 2002, was as follows:
2003 2002
---------------------------
Ordinary income* $10,417,000 $7,124,000
Long-term realized capital gains $ - $8,137,000
* INCLUDES DISTRIBUTION OF SHORT-TERM REALIZED CAPITAL GAINS, IF ANY,
WHICH ARE TAXABLE AS ORDINARY INCOME.
38
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
For the fiscal year ended May 31, 2003, certain dividends paid by the
Fund may be subject to a maximum tax rate of 15%, as provided for by
the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund
intends to designate the maximum amount allowable as taxed at a maximum
rate of 15%. Complete information will be reported in conjunction with
your 2003 Form 1099-DIV.
As of May 31, 2003, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 1,253,000
Accumulated capital and other losses (28,399,000)
Unrealized appreciation 16,283,000
Distributions of net investment income are made quarterly.
Distributions of realized gains from security transactions not offset
by capital losses are made annually in the succeeding fiscal year or as
otherwise required to avoid the payment of federal taxes. At May 31,
2003, the Fund had capital loss carryovers of $28,399,000 for federal
income tax purposes, which if not offset by subsequent capital gains,
will expire in 2011. It is unlikely that the Trust's Board of Trustees
will authorize a distribution of capital gains realized in the future
until the capital loss carryovers have been utilized or expire.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2003, were
$356,993,000 and $334,691,000, respectively.
The cost of securities at May 31, 2003, for federal income tax
purposes, was $337,844,000.
Gross unrealized appreciation and depreciation of investments as of May
31, 2003, for federal income tax purposes, were $23,263,000
39
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
and $6,980,000, respectively, resulting in net unrealized appreciation
of $16,283,000.
(5) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund may lend its securities to qualified financial institutions,
such as certain broker-dealers, to earn additional income. The
borrowers are required to secure their loan continuously with cash
collateral in an amount at least equal, at all times, to the fair value
of the securities loaned. Cash collateral is invested in high-quality
short-term investments. The Fund retains a portion of income from the
investment of cash received as collateral. Risks to the Fund in
securities-lending transactions are that the borrower may not provide
additional collateral when required or return the securities when due,
and that the value of the short-term investments will be less than the
amount of cash collateral required to be returned to the borrower. As
of May 31, 2003, the Fund loaned securities having a fair market value
of approximately $842,000 and received cash collateral of $864,000 for
the loans. Of this amount, $863,000 was invested in securities, as
noted in the Fund's portfolio of investments, and $1,000 remained in
cash.
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's investment
policies, directly manages a portion of the Fund's portfolio, and
provides portfolio management oversight of the Fund's assets
managed by a subadviser. Beginning with the month ended July 31,
2002, the investment management fee for the Fund is composed of a
base fee and a performance adjustment that increases or decreases
the base fee depending upon the performance of the Fund relative
to the performance of the Lipper Balanced Funds Index, which
tracks the total return performance of the 30 largest funds in the
Lipper
40
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
Balanced Funds category. The Fund's base fee is accrued daily and
paid monthly at an annualized rate of 0.75% of the Fund's average
net assets.
The performance adjustment is calculated monthly by comparing the
Fund's performance to that of the Lipper index over the
performance period. For the month ended May 31, 2003, the
performance period consisted of the previous 22-month period. A
new month is added to the performance period each month thereafter
until the performance period consists of the previous 36 months.
Thereafter, the performance period will consist of the current
month plus the previous 35 months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance period,
which is then multiplied by a fraction, the numerator of which is
the number of days in the month and the denominator of which is
365 (366 in leap years). The resulting amount is then added to (in
the case of overperformance) or subtracted from (in the case of
underperformance) the base fee, as referenced in the following
chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
For the year ended May 31, 2003, the Fund incurred total
management fees, paid or payable to the Manager, of $2,389,000,
which included a performance adjustment of $89,000.
41
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with Wellington Management
Company, LLP (Wellington Management), under which Wellington
Management directs the investment and reinvestment of the portion
of the Fund's assets invested in equity securities (as allocated
from time to time by the Manager). The Manager (not the Fund) pays
Wellington Management a subadvisory fee.
C. ADMINISTRATIVE AND SERVICING FEES - The Manager provides
certain administrative and shareholder servicing functions for the
Fund. For such services, the Manager receives a fee accrued daily
and paid monthly at an annualized rate of 0.15% of the Fund's
average net assets. For the year ended May 31, 2003, the Fund
incurred administrative and servicing fees, paid or payable to the
Manager, of $460,000.
D. EXPENSE LIMITATION - The Manager has voluntarily agreed to
limit the annual expenses of the Fund to 1.00% of its average
annual net assets, excluding the effect of any fee-offset
arrangements, and will reimburse the Fund for all expenses in
excess of that amount. This agreement may be modified or
terminated at any time. For the year ended May 31, 2003, the Fund
incurred reimbursable expenses of $1,432,000.
E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a
USAA Shareholder Account Services, an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket expenses.
For the year ended May 31, 2003, the Fund incurred transfer
agent's fees, paid or payable to USAA Transfer Agency Company, of
$1,121,000.
F. UNDERWRITING SERVICES - The Manager provides exclusive underwriting
and distribution of the Fund's shares on a continuing best-efforts
basis. The Manager receives no commissions or fees for this
service.
42
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
(7) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors, officers,
and/or employees of the Manager. None of the affiliated trustees or
Fund officers received any compensation from the Fund.
(8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2003, in accordance with affiliated
transaction procedures approved by the Trust's Board of Trustees,
security transactions were executed between the Fund and the following
affiliated USAA funds at the then current market price with no
brokerage commissions incurred. In most cases, the transactions
involved multiple USAA funds as purchasers or sellers.
NET REALIZED
COST TO GAIN (LOSS)
SELLER PURCHASER PURCHASER TO SELLER
- --------------------------------------------------------------------------------------------------
USAA Balanced Strategy Fund Multiple USAA funds $12,169,000 (645,000)
USAA Balanced Strategy Fund USAA Life Income Fund 1,060,000 107,000
Multiple USAA funds USAA Balanced Strategy Fund 18,535,000 849,000
43
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
(9) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------------
Net asset value at beginning of period $ 14.20 $ 15.25 $ 15.26 $ 14.02 $ 13.46
----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .28 .35(a,c) .33 .27 .25
Net realized and unrealized gain (loss) (.70) (.40)(a,c) .77 1.22 .74
----------------------------------------------------------------------
Total from investment operations (.42) (.05)(a) 1.10 1.49 .99
----------------------------------------------------------------------
Less distributions:
From net investment income (.29) (.34) (.32) (.25) (.27)
From realized capital gains (.14) (.66) (.79) - (.16)
----------------------------------------------------------------------
Total distributions (.43) (1.00) (1.11) (.25) (.43)
----------------------------------------------------------------------
Net asset value at end of period $ 13.35 $ 14.20 $ 15.25 $ 15.26 $ 14.02
======================================================================
Total return (%)* (2.71) (.06) 7.37 10.65 7.63
Net assets at end of period (000) $ 350,842 $ 327,563 $ 184,977 $ 148,153 $ 95,755
Ratio of expenses to average net assets (%)** 1.00(d) 1.02(b,d) 1.23(d) 1.25 1.25
Ratio of expenses to average net assets,
excluding reimbursements (%)** 1.47(d) 1.35(d) N/A 1.26 1.31
Ratio of net investment income to average
net assets (%)** 2.19 2.41 (c) 2.30 1.92 1.88
Portfolio turnover (%) 113.80 42.34 80.60 87.11 63.39
* Assumes reinvestment of all dividend income and realized capital gain distributions during the period.
** For the year ended May 31, 2003, average net assets were $306,931,000.
(a) Calculated using average shares.
(b) Effective August 1, 2001, the Manager voluntarily agreed to limit the Fund's expense ratio to 1.00% of the Fund's
average annual net assets. Prior to this date, the voluntary expense ratio limit was 1.25% of the Fund's average annual
net assets.
(c) In 2001, a change in amortization method was made as required by an accounting pronouncement. This change had no
effect on these amounts.
(d) Reflects total expenses excluding any fee-offset arrangements, which decreased these ratios as follows:
(.01%) - - N/A N/A
44
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2003
(10) CHANGE OF INDEPENDENT AUDITORS (UNAUDITED)
- --------------------------------------------------------------------------------
On May 29, 2002, based on the recommendation of the Trust's Audit
Committee, the Trust's Board of Trustees determined not to retain KPMG
LLP (KPMG) as the Fund's independent auditors and voted to appoint
Ernst & Young LLP for the fiscal year ended May 31, 2003. KPMG served
as the Fund's independent auditors since the Fund's inception on
September 1, 1995. From that date through the fiscal year ended May 31,
2002, KPMG's audit reports contained no adverse opinion or disclaimer
of opinion; nor were KPMG's reports qualified or modified as to
uncertainty, audit scope, or accounting principle. Further, through
May 29, 2002, there were no disagreements between the Fund and KPMG on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
45
D I R E C T O R S '
====================------------------------------------------------------------
INFORMATION
DIRECTORS* AND OFFICERS OF THE COMPANY
- --------------------------------------------------------------------------------
The Board of Directors of the Company consists of seven Directors.
These Directors and the Company's Officers supervise the business
affairs of the USAA family of funds. The Board of Directors is
responsible for the general oversight of the Funds' business and for
assuring that the Funds are managed in the best interests of each
Fund's respective shareholders. The Board of Directors periodically
reviews the Funds' investment performance as well as the quality of
other services provided to the Funds and their shareholders by each
of the Fund's service providers, including USAA Investment Management
Company (IMCO) and its affiliates. The term of office for each
Director shall be fifteen (15) years or until the Director reaches
age 70. All members of the Board of Directors shall be presented to
shareholders for election or reelection, as the case may be, at least
once every five years. Vacancies on the Board of Directors can be
filled by the action of a majority of the Directors, provided that at
least two-thirds of the Directors have been elected by the
shareholders.
Set forth below are the Directors and Officers of the Company, their
respective offices and principal occupations during the last five
years, length of time served, and information relating to any other
directorships held. Each serves on the Board of Directors of the USAA
family of funds consisting of four registered investment companies
offering 39 individual Funds as of May 31, 2003. Unless otherwise
indicated, the business address of each is 9800 Fredericksburg
Road, San Antonio, TX 78288.
If you would like more information about the Funds' Directors, you
may call 1-800-531-8181 to request a free copy of the Funds'
statement of additional information (SAI).
* FOR SIMPLICITY THROUGHOUT THIS SECTION, THE BOARDS OF DIRECTORS
AND BOARDS OF TRUSTEES OF THE FOUR LEGAL ENTITIES THAT COMPRISE
THE USAA FAMILY OF FUNDS WILL BE IDENTIFIED AS THE BOARD OF
DIRECTORS, AND THE TRUST WILL BE IDENTIFIED AS THE COMPANY.
46
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INFORMATION
INTERESTED DIRECTORS(1)
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ROBERT G. DAVIS(2)
Director and Chairman of the Board of Directors
Born: November 1946
Year of Election or Appointment: 1996
Chairman, Chief Executive Officer, and President of United Services
Automobile Association (USAA) (10/02-present); President and Chief
Executive Officer of USAA (4/00-10/02); President and Chief Operating
Officer of USAA (6/99-3/00); Director of USAA (2/99-present); Deputy
Chief Executive Officer for Capital Management of USAA (6/98-5/99);
President, Chief Executive Officer, Director, and Chairman of the
Board of Directors of USAA Capital Corporation (CAPCO) and several of
its subsidiaries and affiliates (1/97-present); and President, Chief
Executive Officer, Director, and Chairman of the Board of Directors
of USAA Financial Planning Services (1/97-present). Mr. Davis serves
as a Director/Trustee and Chairman of the Boards of Directors/Trustees
of the USAA family of funds. He also serves as a Director and Chairman
of the Boards of Directors of USAA Investment Management Company, USAA
Life Insurance Company, USAA Federal Savings Bank, and USAA Real
Estate Company (RealCo).
CHRISTOPHER W. CLAUS(2)
Director, President, and Vice Chairman of the Board of Directors
Born: December 1960
Year of Election or Appointment: 2001
President and Chief Executive Officer, Director, and Vice Chairman of
the Board of Directors, IMCO (2/01-present). Senior Vice President of
Investment Sales and Service, IMCO (7/00-2/01); Vice President,
Investment Sales and Service, IMCO (12/94-7/00). Mr. Claus serves as
President, Director/Trustee, and Vice Chairman of the Boards of
Directors/Trustees of the USAA family of funds. He also serves as
President, Director, and Chairman of the Board of Directors of USAA
Shareholder Account Services. He also holds the Officer position of
Senior Vice President of USAA Life Investment Trust, a registered
investment company offering five individual funds.
47
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INFORMATION
NON-INTERESTED DIRECTORS
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BARBARA B. DREEBEN(3,4,5,6)
Director
Born: June 1945
Year of Election or Appointment: 1994
President, Postal Addvantage (7/92-present), a postal mail list
management service. Mrs. Dreeben serves as Director/Trustee of the
USAA family of funds. Mrs. Dreeben holds no other directorships of
any publicly held corporations or other investment companies outside
the USAA family of funds.
ROBERT L. MASON, PH.D.(3,4,5,6)
Director
Born: July 1946
Year of Election or Appointment: 1997
Institute Analyst, Southwest Research Institute (3/02-present); Staff
Analyst, Southwest Research Institute (9/98-3/02); Manager,
Statistical Analysis Section, Southwest Research Institute
(8/75-9/98), which focuses on the fields of technological research.
Dr. Mason serves as a Director/Trustee of the USAA family of funds.
Dr. Mason holds no other directorships of any publicly held
corporations or other investment companies outside the USAA family of
funds.
MICHAEL F. REIMHERR(3,4,5,6)
Director
Born: August 1945
Year of Election or Appointment: 2000
President of Reimherr Business Consulting (5/95-present), an
organization that performs business valuations of large companies to
include the development of annual business plans, budgets, and
internal financial reporting. Mr. Reimherr serves as a
Director/Trustee of the USAA family of funds. Mr. Reimherr holds no
other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
48
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INFORMATION
LAURA T. STARKS, PH.D.(3,4,5,6)
Director
Born: February 1950
Year of Election or Appointment: 2000
Charles E. and Sarah M. Seay Regents Chair Professor of Finance,
University of Texas at Austin (9/96-present); Sarah Meadows Seay
Regents Professor of Finance, University of Texas of Austin
(9/94-9/96). Dr. Starks serves as a Director/Trustee of the USAA
family of funds. Dr. Starks holds no other directorships of any
publicly held corporations or other investment companies outside the
USAA family of funds.
RICHARD A. ZUCKER(2,3,4,5,6)
Director
Born: July 1943
Year of Election or Appointment: 1992
Vice President, Beldon Roofing and Remodeling (7/85-present).
Mr. Zucker serves as a Director/Trustee of the USAA family of funds.
Mr. Zucker holds no other directorships of any publicly held
corporations or other investment companies outside the USAA family of
funds.
(1) INDICATES THOSE DIRECTORS WHO ARE EMPLOYEES OF USAA
INVESTMENT MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE
CONSIDERED "INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT
OF 1940.
(2) MEMBER OF EXECUTIVE COMMITTEE
(3) MEMBER OF AUDIT COMMITTEE
(4) MEMBER OF PRICING AND INVESTMENT COMMITTEE
(5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE
(6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE USAA
FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430.
49
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INFORMATION
INTERESTED OFFICERS(1)
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CLIFFORD A. GLADSON
Vice President
Born: November 1950
Year of Appointment: 2002
Senior Vice President, Fixed Income Investments, IMCO (9/02-present);
Vice President, Fixed Income Investments, IMCO (5/02-9/02); Vice
President, Mutual Fund Portfolios, IMCO (12/99-5/02); Assistant Vice
President, Fixed Income Investments, IMCO (11/94-12/99). Mr. Gladson
also holds the Officer position of Vice President of USAA Life
Investment Trust, a registered investment company offering five
individual funds.
STUART WESTER
Vice President
Born: June 1947
Year of Appointment: 2002
Vice President, Equity Investments, IMCO (1/99-present); Vice
President, Investment Strategy and Analysis, CAPCO (6/96-1/99).
Mr. Wester also holds the Officer position of Vice President of USAA
Life Investment Trust, a registered investment company offering five
individual funds.
MARK S. HOWARD
Secretary
Born: October 1963
Year of Appointment: 2002
Senior Vice President, Securities Counsel, USAA (12/02-present);
Senior Vice President, Securities Counsel & Compliance, IMCO
(1/02-12/02); Vice President, Securities Counsel & Compliance, IMCO
(7/00-1/02); and Assistant Vice President, Securities Counsel, USAA
(2/98-7/00). Mr. Howard also holds the Officer positions of Senior
Vice President, Secretary and Counsel for IMCO and USAA Shareholder
Account Services; and Assistant Secretary for USAA Financial Planning
Services and for USAA Life Investment Trust, a registered
investment company offering five individual funds.
EILEEN M. SMILEY
Assistant Secretary
Born: November 1959
Year of Appointment: 2003
Assistant Vice President, Securities Counsel, USAA (1/03-present);
Attorney, Morrision & Foerster, LLP (1/99-1/03); Senior Counsel,
50
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========================--------------------------------------------------------
INFORMATION
Division of Investment Management, U.S. Securities and Exchange
Commission (2/96-12/98). Ms. Smiley also holds the Officer position
of Assistant Secretary of USAA Life Investment Trust, a registered
investment company offering five individual funds.
DAVID M. HOLMES
Treasurer
Born: June 1960
Year of Appointment: 2001
Senior Vice President, Life/IMCO/Financial Planning Services Senior
Financial Officer, USAA (12/02-present); Senior Vice President,
Senior Financial Officer, IMCO (6/01-12/02); Vice President, Senior
Financial Officer, RealCo (12/97-5/01); Assistant Vice President,
Capital Markets, RealCo (1/96-12/97). Mr. Holmes is a Director of
USAA Life Insurance Company and also holds the Officer positions of
Treasurer of USAA Life Investment Trust, a registered investment
company offering five individual funds, and Senior Vice President,
Senior Financial Officer of USAA Life Insurance Company and USAA
Shareholder Account Services.
ROBERTO GALINDO, JR.
Assistant Treasurer
Born: November 1960
Year of Appointment: 2000
Assistant Vice President, Portfolio Accounting/Financial
Administration, USAA (12/02-present); Assistant Vice President, Mutual
Fund Analysis & Support, IMCO (10/01-12/02); Executive Director,
Mutual Fund Analysis & Support, IMCO (6/00-10/01); Director, Mutual
Fund Analysis, IMCO (9/99-6/00); Vice President, Portfolio
Administration, Founders Asset Management LLC (7/98-8/99); Assistant
Vice President, Director of Fund & Private Client Accounting, Founders
Asset Management LLC (7/93-7/98). Mr. Galindo also holds the Officer
position of Assistant Treasurer of USAA Life Investment Trust, a
registered investment company offering five individual funds.
(1) INDICATES THOSE OFFICERS WHO ARE EMPLOYEES OF USAA INVESTMENT
MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE CONSIDERED
"INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT OF 1940.
51
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TRUSTEES Robert G. Davis, CHAIRMAN OF THE BOARD
Christopher W. Claus, VICE CHAIRMAN OF THE BOARD
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Laura T. Starks, Ph.D.
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT AUDITORS Ernst & Young LLP
100 West Houston St., Suite 1900
San Antonio, Texas 78205
TELEPHONE Call toll free - Central time
ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m.
Saturday, 8:30 a.m. to 5 p.m.
Sunday, 10:30 a.m. to 7 p.m.
FOR ADDITIONAL 1-800-531-8181, in San Antonio 456-7200
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions
1-800-531-8448, in San Antonio 456-7202
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES 1-800-531-8066, in San Antonio 498-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE(R) For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
1-800-531-8777, in San Antonio 498-8777
INTERNET ACCESS USAA.COM
THROUGH OUR ONGOING EFFORTS TO REDUCE EXPENSES, YOUR REPORT MAILINGS ARE
STREAMLINED. WE DEVELOP MAILING LISTS USING CRITERIA SUCH AS ADDRESS, MEMBER
NUMBER, AND SURNAME TO SEND ONE REPORT TO EACH HOUSEHOLD INSTEAD OF SENDING A
REPORT TO EVERY REGISTERED OWNER. THIS PRACTICE IS DESIGNED TO REDUCE DUPLICATE
COPIES AND SAVE PAPER AND POSTAGE COSTS TO THE FUND. IF YOU PREFER NOT TO
PARTICIPATE IN STREAMLINING AND WOULD LIKE TO CONTINUE RECEIVING ONE REPORT PER
REGISTERED ACCOUNT OWNER, PLEASE CALL US AND WE WILL BEGIN YOUR INDIVIDUAL
DELIVERY WITHIN 30 DAYS OF YOUR REQUEST.
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- --------------------------------------------------------------------------------
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
26889-0703 (C)2003, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
Item not required because Registrant's fiscal year ended May 31, 2003. Initial
compliance with this disclosure item is required in annual reports for fiscal
years ending on or after July 15, 2003
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Item not yet required because Registrant's fiscal year ended on May 31, 2003.
Initial compliance with this disclosure item is required in annual reports for
fiscal years ending on or after July 15, 2003.
ITEM 4-8. (RESERVED)
ITEM 9. CONTROLS AND PROCEDURES
The chief executive officer and chief financial officer of USAA Investment Trust
(Trust) have concluded that the Trust's disclosure controls and procedures are
sufficient to ensure that information required to be disclosed by the Trust in
this Form N-CSR was recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
based upon such officers' evaluation of these controls and procedures as of a
date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation.