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
Date of reporting period: MAY 31, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
USAA INVESTMENT TRUST, CORNERSTONE STRATEGY FUND - ANNUAL REPORT FOR PERIOD
ENDING MAY 31, 2004
[LOGO OF USAA]
USAA(R)
USAA CORNERSTONE
STRATEGY Fund
[GRAPHIC OF USAA CORNERSTONE STRATEGY FUND]
A n n u a l R e p o r t
- --------------------------------------------------------------------------------
MAY 31, 2004
Table of CONTENTS
- --------------------------------------------------------------------------------
MESSAGE FROM THE PRESIDENT 2
INVESTMENT OVERVIEW & MANAGERS' COMMENTARY 5
FINANCIAL INFORMATION
Distributions to Shareholders 17
Report of Independent Registered Public Accounting Firm 18
Portfolio of Investments 19
Notes to Portfolio of Investments 38
Financial Statements 41
Notes to Financial Statements 44
DIRECTORS' AND OFFICERS' INFORMATION 58
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)2004, USAA. All rights reserved.
2
M E S S A G E
==============------------------------------------------------------------------
from the PRESIDENT
"
FIRST-QUARTER EARNINGS WERE STRONG . . .
[PHOTO OF CHRISTOPHER W. CLAUS] SECOND-QUARTER EARNINGS SHOULD
CONTINUE TO IMPRESS.
"
- --------------------------------------------------------------------------------
As I write to you in early June, the U.S. economy continues to
improve. The country has seen job growth for nine consecutive
months, including 248,000 new jobs created in May. The gross
domestic product (GDP) is also growing at a healthy pace - up
3.9% during the first quarter - and I expect the economy to be
reasonably strong throughout 2004. First-quarter earnings were
strong, exceeding expectations by a record number. Second-
quarter earnings should continue to impress.
Despite the good news, the financial markets have been volatile
and nervous. The primary concerns are the price of oil, Iraq,
the pending presidential election, inflation, and rising
interest rates. In the case of oil, demand is outstripping
supply, with buyers now paying a "terrorist premium." A
disruption in oil production would make oil prices spike, and
if oil costs more than $40 a barrel, the price increase could
wipe out about one-half percent of world GDP.
Iraq is likely to remain a difficult situation for years to
come as democracy in the Middle East strives to take root. And
while markets tend to perform fairly well during presidential
elections - perhaps an expression of voters' optimism - no one
knows quite what to expect this time around. On the inflation
front, our expectation is that inflation will remain moderate
and under control, even though the price of oil and some foods
may rise. The Federal Reserve Board (the Fed) is expected to
raise short-term interest rates, but we believe any rate
increases in the near future
3
. . . C O N T I N U E D
========================--------------------------------------------------------
will occur at a "measured pace." If inflation does rise above
the level expected, the Fed is likely to move more quickly and
aggressively in an effort to combat long-term inflation.
Going forward, we expect stock prices to end the year higher
than they are now. Short-term interest rates should rise,
making money market funds a more attractive choice for people
holding cash. Longer-term investors will feel the initial pinch
of rate increases, but should be rewarded in time with the
potential for higher yields and the compounding of interest
payments.
Regardless of what occurs in the coming months, we remain
committed to helping you achieve your investment goals. Our
market-tested portfolio management team will continue to
provide you with a range of resources, including quality
service and no-load mutual funds that have no sales loads,
12b-1 fees, or long-term contractual plans.
On behalf of everyone at USAA, thank you for your business.
Sincerely,
/s/ Christopher W. Claus
Christopher W. Claus
President and Vice Chairman of the Board
CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND
EXPENSES OF THE USAA MUTUAL FUNDS CAREFULLY BEFORE INVESTING.
CONTACT US FOR A PROSPECTUS CONTAINING THIS AND OTHER
INFORMATION ABOUT THE FUNDS FROM USAA INVESTMENT MANAGEMENT
COMPANY, DISTRIBUTOR. READ IT CAREFULLY BEFORE INVESTING.
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
PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE
FUND.
MUTUAL FUND OPERATING EXPENSES APPLY AND CONTINUE THROUGHOUT
THE LIFE OF THE FUND.
5
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA CORNERSTONE STRATEGY FUND
OBJECTIVE
- --------------------------------------------------------------------------------
Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving
purchasing power of shareholders' capital.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Using preset target ranges, the Fund's strategy is to invest
its assets mostly in stocks (divided into the categories of
U.S., international, real estate, and precious metals and
minerals) and, to a much lesser extent, in bonds and money
market instruments.
- --------------------------------------------------------------------------------
5/31/04 5/31/03
- --------------------------------------------------------------------------------
Net Assets $1,350.0 Million $1,132.5 Million
Net Asset Value Per Share $25.80 $22.22
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/04
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
17.08% 3.26% 7.18%
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS
NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE
HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. THE RETURN
AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE
MOST RECENT MONTH-END, VISIT USAA.COM.
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL NET INVESTMENT INCOME DIVIDEND AND REALIZED
CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED DO NOT
REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON
FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
6
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER GLOBAL LIPPER GLOBAL USAA
S&P 500 FLEXIBLE PORTFOLIO FLEXIBLE CORNERSTONE
INDEX FUNDS AVERAGE FUNDS INDEX STRATEGY FUND
------- ------------------ ------------- -------------
5/31/1994 $10,000.00 $10,000.00 $10,000.00 $10,000.00
6/30/1994 9,755.29 9,839.47 9,798.61 9,849.40
7/31/1994 10,075.39 10,014.60 9,988.45 10,014.62
8/31/1994 10,487.53 10,236.74 10,200.66 10,279.37
9/30/1994 10,231.28 10,121.49 10,074.35 10,201.77
10/31/1994 10,460.80 10,181.95 10,059.19 10,128.74
11/30/1994 10,080.31 9,909.34 9,774.79 9,752.12
12/31/1994 10,229.55 9,939.26 9,783.46 9,988.96
1/31/1995 10,494.65 9,880.11 9,653.53 9,697.38
2/28/1995 10,903.24 10,061.41 9,794.28 9,843.17
3/31/1995 11,224.46 10,293.79 10,018.04 10,064.20
4/30/1995 11,554.73 10,533.03 10,246.14 10,261.73
5/31/1995 12,015.86 10,792.80 10,500.22 10,642.66
6/30/1995 12,294.46 10,928.42 10,601.27 10,760.23
7/31/1995 12,701.99 11,261.37 10,884.94 11,014.91
8/31/1995 12,733.70 11,258.42 10,877.00 11,077.36
9/30/1995 13,270.78 11,478.44 11,067.56 11,312.74
10/31/1995 13,223.37 11,420.40 10,975.17 11,106.18
11/30/1995 13,803.20 11,681.53 11,212.65 11,404.45
12/31/1995 14,069.08 11,967.05 11,466.00 11,826.86
1/31/1996 14,547.37 12,167.84 11,746.07 12,171.38
2/29/1996 14,682.71 12,188.65 11,743.18 12,235.36
3/31/1996 14,824.07 12,301.70 11,835.91 12,348.56
4/30/1996 15,042.42 12,537.28 12,092.88 12,417.47
5/31/1996 15,429.70 12,664.30 12,169.61 12,535.59
6/30/1996 15,488.53 12,688.36 12,220.03 12,609.41
7/31/1996 14,804.62 12,383.30 11,921.94 12,300.35
8/31/1996 15,117.37 12,617.30 12,097.82 12,576.07
9/30/1996 15,967.46 13,014.79 12,437.34 12,928.39
10/31/1996 16,407.68 13,141.51 12,590.65 13,117.31
11/30/1996 17,646.81 13,664.35 13,126.62 13,687.76
12/31/1996 17,297.24 13,662.53 13,145.23 13,940.64
1/31/1997 18,377.31 13,897.38 13,388.59 14,150.36
2/28/1997 18,521.58 14,009.95 13,465.88 14,218.51
3/31/1997 17,761.98 13,789.82 13,245.78 13,998.31
4/30/1997 18,821.41 13,891.92 13,375.31 14,082.20
5/31/1997 19,972.10 14,518.89 13,937.68 14,658.91
6/30/1997 20,859.99 14,987.31 14,328.15 15,188.43
7/31/1997 22,519.37 15,643.23 14,917.40 15,899.90
8/31/1997 21,258.74 15,146.48 14,489.34 15,425.85
9/30/1997 22,422.35 15,955.68 15,106.72 16,308.57
10/31/1997 21,674.34 15,382.48 14,571.06 15,889.01
11/30/1997 22,676.87 15,503.34 14,616.41 15,954.39
12/31/1997 23,066.04 15,649.60 14,741.79 16,121.26
1/31/1998 23,320.91 15,815.92 14,777.77 16,115.52
2/28/1998 25,001.94 16,447.72 15,444.05 16,678.55
3/31/1998 26,281.23 16,966.53 15,962.29 17,207.12
4/30/1998 26,550.35 17,123.82 16,103.09 17,270.32
5/31/1998 26,094.61 16,991.15 15,965.18 17,172.65
6/30/1998 27,153.79 17,029.59 15,952.67 17,074.98
7/31/1998 26,866.81 16,864.10 15,796.69 16,682.73
8/31/1998 22,985.19 15,038.73 14,048.83 14,953.02
9/30/1998 24,458.91 15,377.26 14,273.71 15,245.28
10/31/1998 26,445.35 16,128.89 15,019.02 15,764.19
11/30/1998 28,047.50 16,802.66 15,691.51 16,217.50
12/31/1998 29,662.67 17,274.50 16,067.23 16,445.16
1/31/1999 30,902.60 17,452.56 16,258.01 16,426.43
2/28/1999 29,942.32 16,972.10 15,862.61 15,982.98
3/31/1999 31,139.96 17,476.91 16,379.13 16,132.87
4/30/1999 32,345.84 18,278.16 17,259.05 17,169.68
5/31/1999 31,582.87 17,994.39 16,984.11 17,044.76
6/30/1999 33,330.86 18,662.67 17,613.69 17,332.07
7/31/1999 32,294.65 18,745.59 17,601.56 17,149.93
8/31/1999 32,134.77 18,737.73 17,539.67 16,965.23
9/30/1999 31,254.91 18,741.87 17,443.81 16,734.37
10/31/1999 33,231.90 19,117.74 17,797.48 16,945.45
11/30/1999 33,907.39 19,841.64 18,422.34 17,097.16
12/31/1999 35,901.69 21,313.64 19,661.10 17,782.55
1/31/2000 34,098.11 20,936.14 19,259.36 17,276.04
2/29/2000 33,453.32 22,082.99 20,330.87 17,125.46
3/31/2000 36,723.91 22,177.80 20,232.11 18,179.54
4/30/2000 35,619.43 21,471.81 19,554.93 18,022.11
5/31/2000 34,889.23 21,049.40 19,247.80 17,981.05
6/30/2000 35,748.49 21,884.75 19,937.75 18,350.66
7/31/2000 35,190.09 21,302.83 19,691.54 18,203.39
8/31/2000 37,374.68 22,058.76 20,363.14 18,585.72
9/30/2000 35,402.04 21,419.53 19,762.38 18,090.10
10/31/2000 35,251.64 20,995.62 19,379.39 17,927.26
11/30/2000 32,474.67 20,276.19 18,630.60 17,601.56
12/31/2000 32,633.99 20,986.44 19,384.79 18,270.88
1/31/2001 33,791.11 21,460.16 19,635.38 18,592.93
2/28/2001 30,711.96 20,377.42 18,645.20 17,898.73
3/31/2001 28,767.43 19,497.30 17,725.47 17,297.58
4/30/2001 31,001.18 20,349.03 18,629.29 18,149.22
5/31/2001 31,209.15 20,264.27 18,486.79 18,084.81
6/30/2001 30,449.83 20,069.99 18,216.61 17,805.70
7/31/2001 30,149.96 19,811.30 17,958.70 17,848.64
8/31/2001 28,264.42 19,443.16 17,515.20 17,433.55
9/30/2001 25,982.18 17,891.22 16,360.41 16,224.08
10/31/2001 26,477.92 18,412.98 16,747.02 16,381.53
11/30/2001 28,508.45 19,233.82 17,352.06 17,168.76
12/31/2001 28,758.34 19,555.04 17,373.43 17,408.66
1/31/2002 28,338.89 19,217.16 17,261.05 17,125.72
2/28/2002 27,792.25 19,125.56 17,119.45 17,222.52
3/31/2002 28,837.62 19,851.26 17,595.00 17,803.30
4/30/2002 27,090.03 19,671.30 17,357.93 17,565.03
5/31/2002 26,891.15 19,676.68 17,562.10 17,550.14
6/30/2002 24,976.36 19,017.52 16,900.71 16,924.68
7/31/2002 23,029.92 17,671.64 15,900.27 15,964.15
8/31/2002 23,180.68 17,812.81 15,979.38 16,090.73
9/30/2002 20,663.92 16,642.76 14,996.45 15,174.88
10/31/2002 22,480.69 17,264.53 15,627.81 15,733.32
11/30/2002 23,802.59 18,165.29 16,254.96 16,388.57
12/31/2002 22,404.95 17,639.35 15,841.53 15,971.50
1/31/2003 21,819.15 17,344.98 15,590.41 15,525.29
2/28/2003 21,491.29 17,142.91 15,427.29 15,309.87
3/31/2003 21,699.36 17,121.98 15,410.93 15,302.18
4/30/2003 23,485.91 18,255.83 16,307.10 16,271.55
5/31/2003 24,722.14 19,482.01 17,179.70 17,094.74
6/30/2003 25,037.94 19,626.77 17,387.44 17,340.93
7/31/2003 25,479.60 19,761.42 17,523.23 17,471.72
8/31/2003 25,975.53 20,235.24 17,893.15 17,841.00
9/30/2003 25,700.49 20,586.30 18,166.73 17,848.69
10/31/2003 27,153.62 21,434.79 18,861.77 18,671.89
11/30/2003 27,392.26 21,728.22 19,164.34 18,964.24
12/31/2003 28,827.82 22,714.01 19,806.31 19,758.58
1/31/2004 29,356.85 23,164.66 20,254.08 20,006.82
2/29/2004 29,764.76 23,540.78 20,538.85 20,363.67
3/31/2004 29,315.77 23,683.49 20,631.19 20,193.01
4/30/2004 28,856.17 23,010.79 20,036.21 19,843.92
5/31/2004 29,251.37 23,122.38 20,128.84 20,014.58
[END CHART]
DATA FROM 5/31/94 THROUGH 5/31/04.
PAST PERFORMANCE DOES NOT PREDICT FUTURE PERFORMANCE, AND THE
CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION OF
TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES.
7
. . . C O N T I N U E D
========================--------------------------------------------------------
The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA Cornerstone 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 Lipper Global Flexible Portfolio Funds Average, an
average performance level of all global flexible portfolio
funds, reported by Lipper Inc., an independent organization
that monitors the performance of mutual funds.
o The Lipper Global Flexible Funds Index, which tracks the
total return performance of the 30 largest funds within the
Lipper Global Flexible Portfolio Funds category.
8
M A N A G E R S '
==================--------------------------------------------------------------
COMMENTARY on the Fund
MARK W. JOHNSON, CFA MATTHEW E. MEGARGEL, CFA
USAA Investment Management Company Wellington Management Company, LLP
Precious Metals and Minerals Securities U.S. Stocks
MARGARET "DIDI" WEINBLATT, Ph.D., CFA JAMES P. HOFFMANN
USAA Investment Management Company Wellington Management Company, LLP
Bonds and Money Market Instruments Real Estate Securities
ARNOLD J. ESPE, CFA DAVID R. MANNHEIM
USAA Investment Management Company MFS Investment Management
Bonds and Money Market Instruments International Stocks
MARCUS L. SMITH
MFS Investment Management
International Stocks
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
The USAA Cornerstone Strategy Fund had a total return of 17.08%
for the year ended May 31, 2004. This compares to a 17.18%
return for the Lipper Global Flexible Portfolio Funds Index, a
17.57% return for the Lipper Global Flexible Portfolio Funds
Average, and an 18.32% return for the S&P 500 Index for the
period.
* * * *
THE FUND'S PERFORMANCE RECEIVED AN OVERALL MORNINGSTAR
RATING(TM) OF 4 STARS IN THE LARGE BLEND FUNDS CATEGORY
(1,154 FUNDS IN CATEGORY) AS OF MAY 31, 2004. 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.
REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS.
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.
9
. . . C O N T I N U E D
========================--------------------------------------------------------
With respect to the large blend funds, the USAA Cornerstone
Strategy Fund received a Morningstar Rating of 5 stars for the
three- and five-year periods among 1,154 and 853 funds,
respectively, and 3 stars for the 10-year period among 270
funds through May 31, 2004. Ratings are based on risk-adjusted
returns.
HOW WERE THE FUND'S ASSETS ALLOCATED BETWEEN STOCKS AND BONDS?
We began the reporting year with roughly 47% of net assets in
U.S. stocks, 32% in bond and money market instruments, 24% in
international stocks, and 6% in precious metals and minerals
securities. In late-June 2003, we shifted roughly 5.7% of
assets from international stocks to U.S. stocks. In mid-August
2003, we eliminated our position in precious metals and
minerals securities and invested the proceeds in U.S. stocks.
In December 2003, we moved roughly 5% of assets from U.S.
stocks back to international stocks. As the result of these
shifts, market movements, and the performance of the Fund's
managers, we ended the period with roughly 56% of net assets in
U.S. stocks, 25% in international stocks, and 26% in bonds and
money market instruments.
WHAT WAS THE REASONING BEHIND THESE SHIFTS?
Our shift from international stocks to U.S. stocks in the first
half of the reporting year was driven by a greater comfort
level with economic growth and earnings progression in the
United States. The sale of precious metals and minerals
securities in August was driven by a desire to capture a large
gain in that sector and to finance a greater investment in U.S.
stocks. While we continued to be constructive on the U.S.
equity market, in December we moved some assets back to
international stocks simply because their valuations had become
so attractive relative to U.S. stocks.
10
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
HOW DID THE U.S. STOCKS PORTION OF THE FUND PERFORM?
The equity portion's good relative and absolute performance
were driven primarily by strong stock selection in information
technology, the financial sector, and health care. Sector
allocations helped performance because we had overweight
positions, relative to the Russell 3000 Index, in information
technology, industrials, and materials -- three of the best
performing sectors in the Russell 3000 Index. Offsetting these
positive results was somewhat weaker stock selection in the
industrials and energy sectors. In terms of individual stocks,
Intel Corp. and Cisco Systems, Inc. were the biggest
contributors to absolute performance, while Wyeth was the
largest detractor.
HOW WAS THE U.S. STOCKS PORTION POSITIONED AT THE END OF THE REPORTING PERIOD?
The equity portion continues to have a cyclical bias, with
ongoing overweight positions, relative to the Russell 3000
Index, in industrials and technology. We added to our position
in energy, because data continued to support higher average
commodity prices due to high demand and relatively tight supply
conditions over the long term. We had underweight positions in
the less cyclical sectors of telecommunications services and
utilities, and financials. Due to recent jobs data, we remain
optimistic about the economy's moving to a more durable
recovery, although we expect the actual rate of growth to
decelerate in the second half of 2004. This transition may
favor a gradual unwinding of our cyclical posture later in the
year in favor of more stable areas of the equity market.
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. WELLINGTON MANAGEMENT AND USAA UTILIZE THE
RUSSELL 3000 AS A FINANCIAL MARKET PERFORMANCE BENCHMARK IN
MANAGING THE U.S. STOCK PORTION OF THE FUND.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-37.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
HOW DID THE INTERNATIONAL STOCKS PORTION OF THE FUND PERFORM?
Through the end of 2003, lower-quality stocks with a high
degree of leverage to the global economic recovery led the
market higher, causing the Fund's international portion--with
its focus on higher-quality companies--to lag. As the period
progressed, investors focused increasingly on individual
company fundamentals, and this shift helped the international
portion outperform the MSCI-EAFE Index in the second half of
the reporting year.
HOW WAS STOCK SELECTION FOR THE INTERNATIONAL STOCKS PORTION OF THE FUND?
Overall, our stock selection contributed positively to
performance, while our sector allocations were slightly
negative. The biggest positive contributor to performance was
stock selection within the financial services sector, and we
were also helped by good stock selection within retailing. The
fact that we did not own Royal Dutch/Shell (U.K.) contributed
positively, because the large index holding suffered from
several downward restatements of its oil reserves. On the
negative side, our stock selection in utilities and
communications was a primary detractor from performance. In
the basic materials sector, one of our top holdings, L'Air
Liquide S.A. (France), lagged other stocks in its group, but
we continue to like the stock as a long-term investment.
THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND
FAR EAST (MSCI-EAFE) INDEX IS AN UNMANAGED INDEX WHICH
REFLECTS THE MOVEMENTS OF STOCK MARKETS IN EUROPE, AUSTRALIA,
AND THE FAR EAST BY REPRESENTING A BROAD SELECTION OF
DOMESTICALLY LISTED COMPANIES WITHIN EACH MARKET. MFS
INVESTMENT MANAGEMENT UTILIZES THE MSCI-EAFE AS A PERFORMANCE
BENCHMARK IN MANAGING THE INTERNATIONAL STOCKS PORTION OF THE
FUND.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
12
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
HOW WAS THE INTERNATIONAL STOCKS PORTION POSITIONED AT THE END OF THE REPORTING
YEAR?
On a sector level, our biggest overweight position was in
leisure, primarily through media companies. Our biggest
underweight position was in financial services. By country, we
ended the reporting year underweight in Japan and Great
Britain, and just slightly overweight in continental Europe.
We also had holdings in Canada and Latin America, which are
not represented in the MSCI-EAFE Index.
WHAT ABOUT THE BONDS AND MONEY MARKET INSTRUMENTS PORTION OF THE FUND?
Over the 12-month period, rising interest rates eroded bond
prices, but income from the Fund's bonds largely compensated
HISTORICAL YIELD CURVE*
[CHART OF HISTORICAL YIELD CURVE]
5/30/03 5/28/04 CHANGE
------- ------- ------
3 MONTH 1.098% 1.060% -0.0379%
6 MONTH 1.083 1.378 0.2946
2 YEAR 1.322 2.532 1.2106
3 YEAR 1.565 3.063 1.4985
5 YEAR 2.289 3.791 1.5017
10 YEAR 3.370 4.647 1.2770
30 YEAR 4.376 5.345 0.9683
[END CHART]
*YIELD OF TREASURY BILLS, NOTES, AND BONDS. SOURCE: BLOOMBERG
L.P.
13
. . . C O N T I N U E D
========================--------------------------------------------------------
for the fall in price. The reporting period began with
economic growth muted and the federal funds rate at 45-year
lows. In June 2003, longer-term rates bottomed at levels not
seen since Dwight Eisenhower was president. Over the next 11
months, yields moved higher as the bond market began to price
in an improving economy and future tightening by the Federal
Reserve Board (the Fed).
WHAT STRATEGIES DID YOU PURSUE IN THIS ENVIRONMENT?
With interest rates so low, we kept the Fund's interest-rate
sensitivity lower than that of the market. This was helpful
because bond prices fall when interest rates rise. During the
period, the Board of Trustees of the USAA Investment Trust
expanded the Fund's allowable bond and money market
instruments. While the Fund previously could purchase only
U.S. government securities, as of October 13, 2003, we were
allowed to purchase a wider array of investment-grade bonds
and money market instruments. Our primary reason for doing
this was to further the Fund's ability to diversify. This
added flexibility proved beneficial, because corporate bonds
posted excellent returns relative to Treasury bonds. We were
also able to invest in some corporate floating-rate notes and
short-term asset-backed securities that performed well in the
face of rising rates. Our investment in Treasury inflation
-protected securities (TIPS) also performed well as inflation
expectations rose.
WHAT'S YOUR OUTLOOK FOR THE BOND MARKET?
As expected, the Fed raised the federal funds rate at its
end-of-June meeting, in what we suspect is the first of a
series of rate hikes. However, the bond market has priced in
several rate hikes already. With the impact of easy monetary
(interest rate) and
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-37.
14
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
fiscal (tax rebates) policy now behind us, the question is
whether the economic expansion has enough momentum to sustain
itself, especially given the headwinds from higher long-term
rates and high energy prices. With more attractive
opportunities available than we have seen over the past two
years, we will look to make investments that increase the
Fund's yield when we believe it's prudent to do so.
HOW DID THE PRECIOUS METALS AND MINERALS SECURITIES PORTION OF THE FUND PERFORM?
During the time the Fund was invested in precious metals and
minerals, it performed well. The price of gold was fairly
volatile over the course of the reporting year, beginning on
June 1, 2003, at $364.45, rising as high as $431 on two
occasions, and ultimately ending on May 31, 2004, at $393.35.
HOW DID REAL ESTATE SECURITIES PERFORM?
The Wilshire Real Estate Securities Index had a total return
of 27.93% for the year ended May 31, 2004. The Fund had no
allocation to real estate securities during the year ended May
31, 2004.
All the managers of the USAA Cornerstone Strategy Fund thank
you for the confidence you have placed in us. We will continue
working hard on your behalf.
THE WILSHIRE REAL ESTATE SECURITIES INDEX MEASURES THE
PERFORMANCE OF PUBLICLY TRADED REAL ESTATE SECURITIES.
WELLINGTON MANAGEMENT COMPANY, LLP UTILIZES THE WILSHIRE REAL
ESTATE SECURITIES INDEX AS A PERFORMANCE BENCHMARK IN MANAGING
THE REAL ESTATE SECURITIES PORTION OF THE FUND.
15
P O R T F O L I O
==================--------------------------------------------------------------
HIGHLIGHTS
- --------------------------------------------------------------------------------
TOP 3 HOLDINGS*
IN EACH SECTOR
(% OF NET ASSETS)
- --------------------------------------------------------------------------------
INTERNATIONAL STOCKS
Reckitt Benckiser plc 0.9%
Vodafone Group plc 0.7%
AXA S.A. 0.6%
BONDS
Freddie Mac, Pool C01491 1.4%
Government National Mortgage Assn., Pool 781496 1.1%
U.S. Treasury Inflation-Indexed Notes, 3.38% 0.7%
U.S. STOCKS
Citigroup, Inc. 1.8%
Microsoft Corp. 1.8%
Bank of America Corp. 1.5%
- --------------------------------------------------------------------------------
*EXCLUDES MONEY MARKET INSTRUMENTS.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-37.
16
. . . C O N T I N U E D
========================--------------------------------------------------------
HIGHLIGHTS
ASSET ALLOCATION
5/31/04
[PIE CHART OF ASSET ALLOCATION]
U.S. Stocks 55.5%
International Stocks 24.9%
Bonds 17.6%
Money Market Instruments 8.6%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
- --------------------------------------------------------
TOP 10 INDUSTRIES*
(% OF NET ASSETS)
- --------------------------------------------------------
Pharmaceuticals 6.2%
Diversified Banks 4.2%
Communication Equipment 2.9%
Integrated Oil & Gas 2.9%
Industrial Conglomerates 2.7%
Integrated Telecommunication Services 2.3%
Other Diversified Financial Services 2.3%
Semiconductors 2.2%
Apparel Retail 2.1%
Multi-Line Insurance 2.1%
- --------------------------------------------------------
*EXCLUDES U.S. GOVERNMENT
17
D I S T R I B U T I O N S
=========================-------------------------------------------------------
to SHAREHOLDERS (unaudited)
USAA CORNERSTONE STRATEGY FUND
The following federal tax information related to the Fund's
fiscal year ended May 31, 2004, 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 2005.
50.32% of ordinary income distributions qualifies for the
dividends-received deductions eligible to corporations.
The Fund has designated a portion of the amount paid to
redeeming shareholders, in the amount of $884,000, as a
distribution for tax purposes.
18
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA CORNERSTONE STRATEGY FUND:
We have audited the accompanying statement of assets and
liabilities of the USAA Cornerstone Strategy Fund (a portfolio
of USAA Investment Trust), including the portfolio of
investments, as of May 31, 2004, and the related statement of
operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the
two years in the period 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 audits. 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 those statements and financial highlights.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements 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, 2004, by correspondence with
the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of USAA Cornerstone Strategy
Fund as of May 31, 2004, the results of its operations for the
year then ended, and the changes in its net assets and
financial highlights for each of the two years in the period
then ended, in conformity with U.S. generally accepted
accounting principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 9, 2004
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
U.S. STOCKS (55.5%)
ADVERTISING (0.5%)
175,400 Lamar Advertising Co.* $ 7,169
----------
AEROSPACE & DEFENSE (1.8%)
50,700 General Dynamics Corp. 4,849
138,500 Precision Castparts Corp. 6,494
135,400 Rockwell Collins, Inc. 4,067
107,900 United Technologies Corp. 9,130
----------
24,540
----------
AIR FREIGHT & LOGISTICS (0.4%)
82,200 FedEx Corp. 6,048
----------
ALUMINUM (0.4%)
186,300 Alcoa, Inc. 5,831
----------
APPAREL, ACCESSORIES, & LUXURY GOODS (0.6%)
34,500 Coach, Inc.* 1,505
69,300 Columbia Sportswear Co.* 3,749
68,400 Liz Claiborne, Inc. 2,346
----------
7,600
----------
APPAREL RETAIL (0.9%)
58,600 Chico's FAS, Inc.* 2,514
261,700 Gap, Inc. 6,320
167,500 Pacific Sunwear of California, Inc.* 3,643
----------
12,477
----------
APPLICATION SOFTWARE (0.1%)
124,450 Cadence Design Systems, Inc.* 1,722
----------
ASSET MANAGEMENT & CUSTODY BANKS (0.5%)
145,900 Federated Investors, Inc. "B" 4,345
34,500 Legg Mason, Inc. 3,026
----------
7,371
----------
AUTO PARTS & EQUIPMENT (0.2%)
49,600 Lear Corp. 2,938
----------
BIOTECHNOLOGY (0.4%)
43,400 Albany Molecular Research, Inc.* 549
110,400 Genzyme Corp.* 4,811
----------
5,360
----------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
CASINOS & GAMING (0.1%)
34,800 International Game Technology, Inc. $ 1,368
----------
COMMUNICATIONS EQUIPMENT (2.5%)
180,300 Brocade Communications Systems, Inc.* 1,080
405,500 Cisco Systems, Inc.* 8,982
727,800 Corning, Inc.* 9,018
273,600 Motorola, Inc. 5,409
372,000 Polycom, Inc.* 7,622
137,300 Tekelec, Inc.* 2,282
----------
34,393
----------
COMPUTER HARDWARE (1.4%)
138,000 Apple Computer, Inc.* 3,872
237,600 Dell, Inc.* 8,359
72,800 IBM Corp. 6,449
----------
18,680
----------
COMPUTER STORAGE & PERIPHERALS (0.1%)
56,600 SanDisk Corp.* 1,395
----------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.2%)
35,500 Caterpillar, Inc. 2,675
----------
CONSUMER FINANCE (0.3%)
79,000 American Express Co. 4,005
----------
DATA PROCESSING & OUTSOURCED SERVICES (1.1%)
38,700 CheckFree Corp.* 1,187
38,000 DST Systems, Inc.* 1,825
254,400 First Data Corp. 11,013
50,500 SunGard Data Systems, Inc.* 1,399
----------
15,424
----------
DISTILLERS & VINTNERS (0.1%)
25,600 Constellation Brands, Inc. "A"* 922
----------
DIVERSIFIED BANKS (2.2%)
250,000 Bank of America Corp. 20,783
172,700 Bank One Corp. 8,367
----------
29,150
----------
DIVERSIFIED CHEMICALS (0.7%)
207,000 Du Pont (E.I.) De Nemours & Co. 8,942
----------
21
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
DIVERSIFIED COMMERCIAL SERVICES (1.2%)
302,000 ARAMARK Corp. "B" $ 8,302
108,800 ChoicePoint, Inc.* 4,705
70,200 ITT Educational Services, Inc.* 2,872
----------
15,879
----------
ELECTRIC UTILITIES (0.3%)
104,000 Exelon Corp. 3,463
----------
ELECTRICAL COMPONENTS & EQUIPMENT (0.2%)
135,500 American Power Conversion Corp. 2,453
----------
ELECTRONIC EQUIPMENT MANUFACTURERS (0.4%)
94,800 Cognex Corp. 3,142
43,800 Waters Corp.* 2,018
----------
5,160
----------
EXCHANGE-TRADED FUNDS(1.2%)
139,900 iShares Trust, Russell 2000 Growth Index Fund(g) 8,472
67,900 MidCap SPDR Trust Series 1(g) 7,405
----------
15,877
----------
HEALTH CARE EQUIPMENT (1.3%)
100,700 Diagnostic Products Corp. 4,241
23,300 Guidant Corp. 1,266
220,700 Medtronic, Inc. 10,572
69,400 Viasys Healthcare, Inc.* 1,456
----------
17,535
----------
HEALTH CARE FACILITIES (0.4%)
156,200 Odyssey Healthcare, Inc.* 2,647
77,400 Triad Hospitals, Inc.* 2,737
----------
5,384
----------
HEALTH CARE SERVICES (0.6%)
25,700 Caremark Rx, Inc.* 802
202,000 Medco Health Solutions, Inc.* 7,076
----------
7,878
----------
HEALTH CARE SUPPLIES (0.6%)
36,500 Cooper Companies, Inc. 2,014
58,700 Edwards Lifesciences Corp.* 2,128
74,200 Fisher Scientific International, Inc.* 4,260
----------
8,402
----------
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
HOME IMPROVEMENT RETAIL (1.1%)
266,500 Lowe's Companies, Inc. $ 14,276
----------
HOMEBUILDING (0.3%)
154,250 D.R. Horton, Inc. 4,458
----------
HOUSEHOLD PRODUCTS (0.5%)
60,800 Procter& Gamble Co. 6,555
----------
HYPERMARKETS & SUPER CENTERS (0.9%)
213,900 Wal-Mart Stores, Inc. 11,921
----------
INDUSTRIAL CONGLOMERATES (2.7%)
81,500 3M Co. 6,892
565,100 General Electric Co. 17,586
386,100 Tyco International Ltd. 11,888
----------
36,366
----------
INSURANCE BROKERS (0.4%)
160,900 Arthur J. Gallagher & Co. 5,125
----------
INTEGRATED OIL & GAS (1.9%)
102,630 ChevronTexaco Corp. 9,278
363,900 Exxon Mobil Corp. 15,738
----------
25,016
----------
INTEGRATED TELECOMMUNICATION SERVICES (0.5%)
381,100 Sprint Corp. - FON Group 6,768
----------
INTERNET SOFTWARE & SERVICES (0.1%)
62,900 Yahoo!, Inc.* 1,929
----------
INVESTMENT BANKING & BROKERAGE (1.2%)
374,600 E-Trade Group, Inc.* 4,274
216,400 Merrill Lynch & Co., Inc. 12,292
----------
16,566
----------
MANAGED HEALTH CARE (0.7%)
50,300 Anthem, Inc.* 4,453
48,700 Coventry Health Care, Inc.* 2,244
114,900 Health Net, Inc.* 2,700
----------
9,397
----------
23
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
METAL & GLASS CONTAINERS (0.9%)
502,500 Pactiv Corp.* $ 11,849
----------
MOVIES & ENTERTAINMENT (1.3%)
997,300 Time Warner, Inc.* 16,994
----------
MULTI-LINE INSURANCE (1.2%)
229,600 American International Group, Inc. 16,830
----------
OIL & GAS DRILLING (0.2%)
104,000 Ensco International, Inc. 2,771
----------
OIL & GAS EQUIPMENT & SERVICES (0.6%)
145,200 Schlumberger Ltd. 8,301
----------
OIL & GAS EXPLORATION & PRODUCTION (0.8%)
159,300 Apache Corp. 6,429
354,500 Chesapeake Energy Corp. 4,680
----------
11,109
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (2.1%)
519,543 Citigroup, Inc. 24,123
123,900 Principal Financial Group, Inc. 4,330
----------
28,453
----------
PACKAGED FOODS & MEAT (0.2%)
165,400 Hain Celestial Group, Inc.* 2,928
----------
PAPER PACKAGING (0.3%)
246,600 Smurfit-Stone Container Corp.* 4,478
----------
PAPER PRODUCTS (0.4%)
139,100 International Paper Co. 5,832
----------
PERSONAL PRODUCTS (0.7%)
234,400 Gillette Co. 10,100
----------
PHARMACEUTICALS (3.9%)
252,500 Abbott Laboratories 10,405
133,600 Eli Lilly & Co. 9,842
24
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
158,800 King Pharmaceuticals, Inc.* $ 2,122
585,500 Pfizer, Inc. 20,692
250,200 Wyeth 9,007
----------
52,068
----------
PROPERTY & CASUALTY INSURANCE (1.0%)
67,800 Ambac Financial Group, Inc. 4,688
216,223 St. Paul Companies, Inc. 8,580
----------
13,268
----------
RAILROADS (0.9%)
160,100 CSX Corp. 5,059
282,400 Norfolk Southern Corp. 6,843
----------
11,902
----------
RESTAURANTS (0.1%)
57,500 Krispy Kreme Doughnuts, Inc.*(g) 1,235
----------
SEMICONDUCTOR EQUIPMENT (1.2%)
312,600 Applied Materials, Inc.* 6,239
96,100 KLA-Tencor Corp.* 4,630
66,800 Novellus Systems, Inc.* 2,224
84,200 Varian Semiconductor Equipment Associates, Inc.* 3,096
----------
16,189
----------
SEMICONDUCTORS (1.9%)
79,500 Fairchild Semiconductor International, Inc. "A"* 1,567
367,700 Intel Corp. 10,498
189,200 International Rectifier Corp.* 8,376
186,900 Texas Instruments, Inc. 4,880
----------
25,321
----------
SOFT DRINKS (1.0%)
245,800 PepsiCo, Inc. 13,118
----------
SPECIALTY STORES (1.6%)
184,500 Michaels Stores, Inc. 9,640
105,400 O'Reilly Automotive, Inc.* 4,736
219,800 PETsMART, Inc. 6,833
----------
21,209
----------
SYSTEMS SOFTWARE (1.8%)
945,300 Microsoft Corp. 24,909
----------
25
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
TECHNOLOGY DISTRIBUTORS (0.4%)
49,600 CDW Corp. $ 3,485
153,900 Ingram Micro, Inc. "A" * 2,224
----------
5,709
----------
THRIFTS & MORTGAGE FINANCE (0.5%)
109,899 Countrywide Financial Corp. 7,088
----------
TOBACCO (0.6%)
170,800 Altria Group, Inc. 8,193
----------
TRADING COMPANIES & DISTRIBUTORS (0.1%)
28,700 Fastenal Co. 1,486
----------
TRUCKING (0.3%)
101,300 Yellow Roadway Corp.* 3,617
----------
WIRELESS TELECOMMUNICATION SERVICES (0.5%)
279,100 Nextel Communications, Inc. "A"* 6,456
----------
Total U.S. stocks (cost: $648,362) 749,831
----------
INTERNATIONAL STOCKS (24.9%)
AUSTRALIA (1.0%)
789,116 News Corp. Ltd. (Movies & Entertainment) 7,243
635,243 QBE Insurance Group Ltd. (Property & Casualty Insurance) 5,671
----------
12,914
----------
AUSTRIA (0.4%)
36,600 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks) 5,656
----------
BRAZIL (0.5%)
92,600 Brasil Telecom Participacoes S.A. ADR (Preferred)
(Integrated Telecommunication Services) 2,668
92,100 Companhia Vale Do Rio Doce ADR (Diversified Metals & Mining) 4,669
----------
7,337
----------
CANADA (0.8%)
168,100 BCE, Inc. (Integrated Telecommunication Services)(g) 3,343
95,910 Canadian National Railway Co. (Railroads) 3,787
98,430 Encana Corp. (Integrated Oil & Gas) 3,853
----------
10,983
----------
26
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
CAYMAN ISLANDS (0.0%)(o)
1,331,000 Semiconductor Manufacturing International Corp. (Semiconductors)* $ 331
----------
FRANCE (3.9%)
411,400 AXA S.A. (Multi-Line Insurance) 8,443
202,981 Credit Agricole S.A. (Regional Banks)(g) 4,992
46,200 L'Air Liquide S.A. (Industrial Gases) 8,105
50,800 L'Oreal S.A. (Personal Products) 3,944
74,670 Sanofi-Synthelabo S.A. (Pharmaceuticals)(g) 4,935
104,238 Schneider Electric S.A. (Electrical Components & Equipment)(g) 7,017
81,170 Societe Television Francaise 1 (Broadcasting & Cable TV)(g) 2,522
42,080 Total S.A. (Integrated Oil & Gas)(g) 7,901
193,000 Veolia Environnement (Multi-Utilities & Unregulated Power)(g) 5,163
----------
53,022
----------
GERMANY (0.7%)
120,520 Bayerische Motoren Werke AG (Automobile Manufacturers) 5,109
70,300 Schering AG (Pharmaceuticals) 3,835
----------
8,944
----------
HONG KONG (0.5%)
6,398,500 CNOOC Ltd. (Oil& Gas Exploration & Production) 2,750
1,034,500 Esprit Holdings Ltd. (Apparel Retail) 4,539
----------
7,289
----------
HUNGARY (0.3%)
117,000 OTP Bank Ltd. GDR (Regional Banks)* 4,731
----------
IRELAND (0.6%)
379,000 Depfa Bank plc (Specialized Finance) 5,672
161,120 Irish Life & Permanent plc (Other Diversified Financial Services) 2,450
----------
8,122
----------
ITALY (0.3%)
201,200 RAS S.p.A. (Multi-Line Insurance) 3,611
----------
JAPAN (3.8%)
210,000 Bridgestone Corp. (Tires & Rubber) 3,516
146,000 Canon, Inc. (Electronic Equipment Manufacturers) 7,220
312,100 Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals) 4,744
27
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
297,000 Citizen Watch Co. (Apparel, Accessories, & Luxury Goods) $ 3,115
758 KDDI Corp. (Integrated Telecommunication Services) 4,430
83,400 Murata Manufacturing Co. Ltd. (Electrical Components & Equipment) 4,821
118,300 Seiko Epson Corp. (Office Electronics) 4,068
314,000 Sekisui Chemical Co. Ltd. (Homebuilding) 2,319
82,000 Shinsei Bank (Diversified Banks) 555
125,200 Tokyo Broadcasting System, Inc. (Broadcasting & Cable TV) 2,231
1,403,000 Tokyo Gas Co. Ltd. (Gas Utilities) 4,952
169,400 Toyota Motor Corp. (Automobile Manufacturers) 6,149
234,100 Yamaha Corp. (Consumer Electronics) 3,556
----------
51,676
----------
KOREA (0.6%)
9,430 Samsung Electronics Co. Ltd. (Semiconductors) 4,211
33,790 Samsung SDI Co. Ltd. (Computer Storage & Peripherals) 3,729
----------
7,940
----------
MEXICO (0.2%)
76,200 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 3,220
----------
NETHERLANDS (0.3%)
274,230 Reed Elsevier N.V. (Publishing) 3,829
----------
NORWAY (0.1%)
129,060 DNB Holdings ASA (Diversified Banks) 818
----------
SINGAPORE (0.6%)
318,000 DBS Group Holdings Ltd. (Diversified Banks) 2,639
3,099,000 Singapore Telecommunications Ltd. (Integrated Telecommunication
Services) 3,995
233,000 United Overseas Bank Ltd. (Diversified Banks) 1,783
----------
8,417
----------
SPAIN (1.0%)
258,600 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 3,425
175,550 Iberdrola S.A. (Electric Utilities) 3,543
449,198 Telefonica S.A. (Integrated Telecommunication Services)(g) 6,519
----------
13,487
----------
28
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
SWEDEN (1.7%)
126,800 Atlas Copco AB "A" (Industrial Machinery) $ 4,681
1,931,000 Ericsson LM "B" (Communications Equipment)* 5,392
287,900 Hennes & Mauritz AB "B" (Apparel Retail)(g) 7,130
150,100 Sandvik AB (Industrial Machinery) 5,097
----------
22,300
----------
SWITZERLAND (2.5%)
149,900 Credit Suisse Group (Diversified Banks)* 5,149
13,099 Nestle S.A. (Packaged Foods & Meat) 3,407
90,110 Novartis AG (Pharmaceuticals) 4,041
71,400 Roche Holdings AG (Pharmaceuticals) 7,520
8,340 Straumann AG (Health Care Supplies) 1,723
30,042 Syngenta AG (Specialty Chemicals)* 2,389
24,800 Synthes, Inc. (Health Care Equipment) 2,919
89,236 UBS AG (Diversified Banks) 6,401
----------
33,549
----------
TAIWAN (0.1%)
1,026,000 Compal Electronics, Inc. (Computer Hardware) 1,262
----------
UNITED KINGDOM (5.0%)
852,600 Amvescap plc (Investment Banking & Brokerage) 5,715
133,390 AstraZeneca plc (Pharmaceuticals) 6,212
223,000 BG Group plc (Oil & Gas Exploration & Production) 1,357
147,170 BOC Group plc (Diversified Chemicals) 2,401
450,900 British Sky Broadcasting Group plc (Broadcasting & Cable TV) 5,070
49,140 Capital Radio plc (Broadcasting & Cable TV) 409
407,260 Diageo plc (Distillers & Vintners) 5,404
1,136,840 Kingfisher plc (Home Improvement Retail) 5,959
138,710 Next plc (Apparel Retail) 3,524
429,120 Reckitt Benckiser plc (Household Products) 11,624
165,544 Royal Bank Scotland Group plc (Diversified Banks) 4,997
3,785,230 Vodafone Group plc (Wireless Telecommunication Services) 8,898
574,400 William Hill plc (Casinos & Gaming) 5,696
----------
67,266
----------
Total international stocks (cost: $272,485) 336,704
----------
29
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
BONDS (17.6%)
CORPORATE OBLIGATIONS (4.4%)
ALUMINUM (0.1%)
$ 2,000 Alcan, Inc., Notes(b) 1.52%(c) 12/08/2005 $ 2,005
----------
BROADCASTING & CABLE TV (0.2%)
2,000 Comcast Cable Communications, Inc.,
Senior Notes 6.88 6/15/2009 2,186
----------
CONSUMER FINANCE (0.3%)
2,000 American Honda Finance Corp., MTN(b) 1.34(c) 5/11/2007 1,999
2,000 General Motors Acceptance Corp., Notes 2.40(c) 10/20/2005 2,016
----------
4,015
----------
DIVERSIFIED BANKS (0.1%)
2,000 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 1,957
----------
DIVERSIFIED METALS & MINING (0.1%)
1,000 Glencore Funding LLC, Notes(b) 6.00 4/15/2014 917
----------
ELECTRIC UTILITIES (0.9%)
2,000 Oglethorpe Power Corp., Secured Series
Facility Bonds 6.97 6/30/2011 2,146
2,000 Pinnacle West Capital Corp., Senior Notes 1.98(c) 11/01/2005 2,002
2,000 Power Contract Financing, Senior Notes(b) 6.26 2/01/2010 2,052
2,000 PPL Capital Funding, Notes(b) 4.33 3/01/2009 1,938
2,000 Tampa Electric Co., Notes 6.38 8/15/2012 2,079
2,000 Tristate General & Transport Assoc., Notes(b) 6.04 1/31/2018 1,998
----------
12,215
----------
FOOD RETAIL (0.2%)
2,000 Safeway Inc., Notes 5.80 8/15/2012 2,014
----------
FOREST PRODUCTS (0.2%)
2,000 Weyerhaeuser Co., Notes 6.75 3/15/2012 2,164
----------
GAS UTILITIES (0.2%)
2,000 Noram Energy Corp., Debentures 6.50 2/01/2008 2,116
1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 1,020
----------
3,136
----------
HEALTH CARE FACILITIES (0.1%)
2,000 HCA, Inc., Notes 5.25 11/06/2008 1,971
----------
30
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
HOUSEWARES & SPECIALTIES (0.2%)
$ 2,000 Newell Rubermaid, Inc., MTN, Series A(e) 6.35% 7/15/2028 $ 2,124
----------
INTEGRATED TELECOMMUNICATION SERVICES (0.1%)
1,000 Citizens Communications Co., Notes 8.50 5/15/2006 1,068
----------
INVESTMENT BANKING & BROKERAGE (0.1%)
2,000 Morgan Stanley, Subordinated Notes 4.75 4/01/2014 1,842
----------
MOVIES & ENTERTAINMENT (0.2%)
2,000 AOL Time Warner, Notes 5.63 5/01/2005 2,059
----------
MULTI-UTILITIES & UNREGULATED POWER (0.1%)
1,000 Duke Capital Corp., Senior Notes 5.50 3/01/2014 953
----------
OIL & GAS EQUIPMENT & SERVICES (0.3%)
2,000 Cooper Cameron Corp., Senior Notes 2.65 4/15/2007 1,941
2,000 Halliburton Co., Senior Notes 2.65(c) 10/17/2005 2,023
----------
3,964
----------
OIL & GAS EXPLORATION & PRODUCTION (0.1%)
1,000 Nexen, Inc., Notes 5.05 11/20/2013 958
1,000 Southwestern Energy Co., MTN(e) 7.63 5/01/2027 1,040
----------
1,998
----------
OIL & GAS REFINING & MARKETING & TRANSPORTATION (0.2%)
2,000 Magellan Midstream Partners LP, Notes 6.45 6/01/2014 2,025
----------
PACKAGED FOODS & MEAT (0.2%)
2,000 Kraft Foods, Inc., Notes 4.63 11/01/2006 2,056
----------
PAPER PRODUCTS (0.1%)
2,000 MeadWestVaco Corp., Notes 1.70(c) 12/01/2005 2,002
----------
PROPERTY & CASUALTY INSURANCE (0.1%)
2,000 21st Century Insurance Group, Senior Notes(b) 5.90 12/15/2013 2,006
----------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
1,000 Istar Financial, Inc., Senior Notes(b) 5.13 4/01/2011 927
----------
REINSURANCE (0.1%)
2,000 Montpelier Re Holdings Ltd., Senior Notes 6.13 8/15/2013 2,004
----------
31
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE (0.1%)
$ 2,000 Independence Community Bank Corp., Notes(m) 3.50% 6/20/2013 $ 1,904
----------
Total corporate obligations (cost: $60,717) 59,512
----------
EURODOLLAR AND YANKEE OBLIGATIONS (0.6%)
FOREIGN GOVERNMENT (0.1%)
2,000 Republic of Poland, Notes (Poland) 5.25 1/15/2014 1,961
----------
INTEGRATED OIL & GAS (0.2%)
2,000 BP Capital plc, Company Guaranty Notes
(United Kingdom) 2.75 12/29/2006 1,992
----------
INTEGRATED TELECOMMUNICATION SERVICES (0.1%)
2,000 Telecom Italia Capital, Guaranteed Senior
Notes, Series A (Luxembourg)(b) 4.00 11/15/2008 1,965
----------
OIL & GAS EXPLORATION & PRODUCTION (0.2%)
2,000 Canadian Oil Sands Ltd., Notes (Canada)(b) 5.80 8/15/2013 1,968
----------
Total eurodollar and yankee obligations
(cost: $8,034) 7,886
----------
ASSET-BACKED SECURITIES (0.6%)
AIRLINES (0.2%)
1,447 America West Airlines, Inc., Pass-Through
Certificates, Series 1996-1, Class A, EETC 6.85 7/02/2009 1,462
1,732 Northwest Airlines Corp., Pass-Through
Certificates, Series 1999-2A, EETC(g) 7.58 3/01/2019 1,751
----------
3,213
----------
ASSET-BACKED FINANCING (0.4%)
2,000 DaimlerChrysler Auto Trust, Series 2003-B,
Class A2(b) 1.61 7/08/2006 1,999
2,000 Ford Credit Auto Owner Trust, Series 2004-A,
Class A2(f) 2.13 10/15/2006 1,999
1,439 Harley-Davidson Motorcycle Trust,
Series 2003-4, Class A1 1.47 4/15/2008 1,435
----------
5,433
----------
Total asset-backed securities (cost: $8,731) 8,646
----------
32
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES (0.3%)
COMMERICAL MORTGAGE-BACKED SECURITIES
$ 1,211 LB Commercial Conduit Mortgage Trust,
Series 1995-C2, Class C 7.76% 9/25/2025 $ 1,244
2,000 Merrill Lynch Mortgage Investors, Inc.,
Mortgage Pass-Through Certificates,
Series 1998-C1, Class A2 6.48 11/15/2026 2,125
----------
Total commercial mortgage securities
(cost: $3,429) 3,369
----------
U.S. GOVERNMENT AGENCY ISSUES (8.4%)(k)
ASSET-BACKED FINANCING (0.2%)
2,928 U.S. Small Business Administration,
Participation Certificates, Series 2003-20 F 4.07 6/01/2023 2,716
----------
DEBENTURES (1.3%)
Fannie Mae,(+)
5,000 CPI Floating Rate Note 2.83(c) 2/17/2009 4,964
5,000 Subordinated Note 5.25 8/01/2012 4,967
7,100 Benchmark Note 7.13 6/15/2010 8,046
----------
17,977
----------
MORTGAGE-BACKED PASS-THROUGH SECURITIES (5.5%)
Fannie Mae,(+)
8,775 Pool 706349 5.00 5/01/2033 8,452
1,132 Pool 610989 6.50 10/01/2016 1,196
2,258 Pool 253180 6.50 2/01/2030 2,345
995 Pool 535164 7.00 2/01/2030 1,050
350 Pool 547483 7.00 8/01/2030 369
Freddie Mac,(+)
7,218 Pool C79394 5.50 4/01/2033 7,168
18,449 Pool C01491 6.00 2/01/2033 18,783
Government National Mortgage Assn.,
3,062 Pool 780860 6.00 9/15/2028 3,129
2,539 Pool 603869 6.00 1/15/2033 2,590
533 Pool 340945 6.50 5/15/2023 558
731 Pool 352106 6.50 8/15/2023 766
296 Pool 366762 6.50 4/15/2024 310
2,339 Pool 781494 6.50 8/20/2031 2,429
1,487 Pool 577423 6.50 1/15/2032 1,547
13,946 Pool 781496 6.50 9/15/2032 14,515
2,413 Pool 575469 7.00 12/15/2031 2,554
1,642 Pool 583624 7.00 6/15/2032 1,737
33
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
Government National Mortgage Assn.,
$ 37 Pool 206743 7.50% 3/15/2017 $ 40
156 Pool 207904 7.50 3/15/2017 170
18 Pool 207950 7.50 3/15/2017 20
1,311 Pool 002934 7.50 6/20/2030 1,405
318 Pool 003070 7.50 4/20/2031 341
69 Pool 166093 8.00 6/15/2016 76
21 Pool 166108 8.00 6/15/2016 22
34 Pool 177786 8.00 9/15/2016 37
52 Pool 186000 8.00 11/15/2016 57
32 Pool 193968 8.00 12/15/2016 36
39 Pool 203822 8.00 3/15/2017 43
1,185 Pool 002958 8.00 8/20/2030 1,287
4 Pool 034140 8.50 9/15/2009 4
15 Pool 138007 8.50 6/15/2016 17
7 Pool 164021 8.50 6/15/2016 8
33 Pool 159980 8.50 7/15/2016 37
4 Pool 171477 8.50 9/15/2016 4
5 Pool 176311 8.50 9/15/2016 6
11 Pool 177247 8.50 9/15/2016 12
14 Pool 174005 8.50 12/15/2016 15
29 Pool 197279 8.50 12/15/2016 32
52 Pool 190671 8.50 1/15/2017 57
7 Pool 197400 8.50 1/15/2017 8
33 Pool 201986 8.50 1/15/2017 36
32 Pool 185270 8.50 2/15/2017 36
5 Pool 157116 9.00 6/15/2016 5
1 Pool 162801 9.00 7/15/2016 1
4 Pool 166282 9.00 7/15/2016 5
3 Pool 164502 9.00 8/15/2016 3
7 Pool 172663 9.00 9/15/2016 8
3 Pool 170810 9.00 10/15/2016 3
26 Pool 031433 9.50 6/15/2009 28
3 Pool 032271 9.50 6/15/2009 3
45 Pool 034679 9.50 6/15/2009 50
11 Pool 038310 9.50 6/15/2009 12
7 Pool 035052 9.50 9/15/2009 8
28 Pool 167971 9.50 7/15/2016 31
56 Pool 172771 9.50 9/15/2016 62
6 Pool 182369 9.50 11/15/2016 7
3 Pool 185417 9.50 11/15/2016 4
36 Pool 186335 9.50 11/15/2016 40
34
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
Government National Mortgage Assn.,
$ 16 Pool 187909 9.50% 11/15/2016 $ 18
1 Pool 184544 9.50 12/15/2016 1
7 Pool 190555 9.50 12/15/2016 8
97 Pool 189802 9.50 4/15/2017 109
28 Pool 214646 9.50 5/15/2017 32
16 Pool 225137 9.50 8/15/2017 18
42 Pool 037733 10.00 11/15/2009 46
10 Pool 037889 10.00 11/15/2009 11
28 Pool 037888 10.00 11/15/2009 31
25 Pool 036897 10.00 12/15/2009 28
13 Pool 059731 11.50 3/15/2013 15
----------
73,891
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.9%)
Freddie Mac,(+)
5,123 Series 2389 VH 6.00 12/01/2031 5,309
180 Series 2412 VA 6.50 11/15/2012 180
Government National Mortgage Assn.,
5,000 Series 2003-50 PC 5.50 3/16/2032 4,913
1,067 Series 1999-11VC 6.50 5/20/2014 1,077
1,000 Series 2001-49 VB 7.00 11/16/2016 1,055
----------
12,534
----------
OTHER U.S. GOVERNMENT AGENCIES (0.5%)
2,000 Perforadora Centrale S.A. de C.V. "A",
Guaranteed Bond, Series A, Title XI 5.24 12/15/2018 1,984
4,524 Rowan Companies, Inc., Guaranteed
Bond, Title XI 2.80 10/20/2013 4,202
----------
6,186
----------
Total U.S. government agency issues
(cost: $113,256) 113,304
----------
U.S. TREASURY SECURITIES (2.6%)
INFLATION-INDEXED NOTES (1.2%)(a)
8,441 3.38%, 1/15/2012(g) 9,409
6,459 3.50%, 1/15/2011 7,212
----------
16,621
----------
35
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
NOTES (1.4%)
$ 6,000 2.63%, 11/15/2006(g) $ 5,973
6,000 3.88%, 2/15/2013(g) 5,715
7,000 4.00%, 2/15/2014(g) 6,657
----------
18,345
----------
Total U.S. Treasury securities (cost: $33,723) 34,966
----------
MUNICIPAL BONDS (0.7%)
COMMUNITY SERVICE (0.2%)
2,000 Jicarilla Apache Nation, NM, RB 2.95% 12/01/2006 1,983
----------
ELECTRIC UTILITIES (0.1%)
1,000 Ohio State Water Development Auth.
PCRB, Series 2000A(e) 2.20 4/01/2024 1,000
----------
ENVIRONMENTAL SERVICES (0.3%)
2,000 California State Financing Auth. PCRB,
(Republic Services, Inc.)(e) 2.00 12/01/2033 1,998
2,500 Gulf Coast Waste Disposal Auth., TX,
RB, Series A(e) 2.50 5/01/2028 2,499
----------
4,497
----------
HOSPITAL (0.1%)
2,000 Rhode Island State Health & Education
RB, Series C (LOC - Citizens Bank of
Rhode Island)(e) 3.60 9/15/2033 1,983
----------
Total municipal bonds (cost: $9,500) 9,463
----------
Total bonds (cost: $237,390) 237,146
----------
Number
of Shares
- ---------
MONEY MARKET INSTRUMENTS (8.6%)
MONEY MARKET FUNDS (1.2%)
-------------------------
4,788,087 AIM Short-Term Investment Co. Liquid
Assets Portfolio(h,i) 1.01 - 4,788
6,004,976 Merrill Lynch Premier Institutional Fund(h,i) 0.99 - 6,005
6,004,080 SSgA Prime Money Market Fund(h) 0.91 - 6,004
----------
16,797
----------
36
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
VARIABLE-RATE DEMAND NOTES (0.2%)(n)
------------------------------------
ELECTRIC UTILITIES
$ 2,000 Sempra Energy ESOP, Series 1999
(NBGA-Sempra Energy)(b) 1.50% 11/01/2014 $ 2,000
----------
REPURCHASE AGREEMENTS (4.5%)
----------------------------
14,000 Banc One Capital Markets, Inc., 1.02%, acquired
on 5/28/2004 and due 6/01/2004 at $14,000
(collateralized by $20,114 of Fannie Mae
Notes(k,+), 0.99% - 5.00%, due 9/06/2005 -
5/25/2033; market value of $14,280)(i,j) 14,000
15,000 CS First Boston LLC, 1.03%, acquired on
5/28/2004 and due 6/01/2004 at $15,000
(collateralized by $50,830 of U.S.Treasury
STRIPS, 5.75%(l), due 8/15/2025; market
value of $15,301)(i,j) 15,000
17,500 Lehman Brothers, Inc., 1.01%, acquired on
5/28/2004 and due 6/01/2004 at $17,500
(collateralized by $12,755 of FICO STRIPS,
5.84%(l), due 5/11/2018; $8,220 of Freddie
Mac Notes(k,+), 1.62%, due 6/06/2008; and
$8,675 of Tennessee Valley Auth. Bonds,
6.05%(l), due 12/15/2017; combined market
value of $17,851)(i,j) 17,500
14,335 Morgan Stanley & Co. Inc., 1.01%, acquired on
5/28/2004 and due 6/01/2004 at $14,335
(collateralized by $15,020 of Fannie Mae Discount
Notes(+), due 2/04/2005; market value of $14,844)(i, j) 14,335
----------
60,835
----------
37
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (2.0%)
-----------------------
AGRICULTURAL PRODUCTS (0.4%)
$ 5,774 Dairy Farmers of America, Inc.(b,d) 1.09% 6/01/2004 $ 5,774
----------
ASSET-BACKED FINANCING (1.6%)
8,100 Beacon Funding LLC(i) 1.17 6/17/2004 8,096
13,000 Park Granada LLC(i) 1.12 6/01/2004 13,000
----------
21,096
----------
26,870
----------
DISCOUNT NOTE (0.7%)
--------------------
9,482 Federal Home Loan Bank(+) 0.81 6/01/2004 9,482
----------
Total money market instruments (cost: $115,984) 115,984
----------
TOTAL INVESTMENTS (COST: $1,274,221) $1,439,665
==========
38
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
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%.
ADR - American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
GDR - Global depositary receipts are receipts issued by a U.S. or
foreign bank evidencing ownership of foreign shares. Dividends are paid
in U.S. dollars.
PORTFOLIO DESCRIPTION ABBREVIATIONS
CPI Consumer Price Index
EETC Enhanced Equipment Trust Certificate
ESOP Employee Stock Ownership Plan
PCRB Pollution Control Revenue Bond
MTN Medium-Term Note
RB Revenue Bond
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) Principal and interest payments are guaranteed by a bank
letter of credit
(NBGA) Principal and interest payments are guaranteed by a nonbank
guarantee agreement.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) U.S. Treasury inflation-indexed notes - designed to provide a real
rate of return after being adjusted over time to reflect the impact
of inflation. Their principal value periodically adjusts to the
rate
39
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
of inflation. They trade at the prevailing real, or after
inflation, interest rates. 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.
(b) Restricted security that is 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 has been deemed liquid by USAA
Investment Management Company (the Manager) under guidelines
approved by the Board of Trustees, unless otherwise noted as
illiquid.
(c) Variable- or floating-rate security - interest rate is adjusted
periodically. The interest rate disclosed represents the current
rate at May 31, 2004.
(d) Commercial paper issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Unless this commercial paper is
subsequently registered, a resale of this commercial paper in the
United States must be effected in a transaction exempt from
registration under the Securities Act of 1933. Section 4(2)
commercial paper is normally resold to other investors through or
with the assistance of the issuer or an investment dealer who makes
a market in this security, and as such has been deemed liquid by
the Manager under guidelines approved by the Board of Trustees,
unless otherwise noted as illiquid.
(e) Security has a mandatory put, which shortens its effective maturity
date.
(f) Security was fair valued at May 31, 2004, by the Manager in
accordance with valuation procedures approved by the Board of
Trustees.
(g) The security or a portion thereof was out on loan as of May 31,
2004.
(h) Rate represents the money market fund annualized seven-day yield
at May 31, 2004.
40
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
(i) Investment was purchased with the cash collateral proceeds received
from securities loaned.
(j) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is marked-
to-market daily to ensure its market value is equal to or in excess
of the repurchase agreement price plus accrued interest.
(k) U.S. government agency issues - mortgage-backed securities issued
by Government National Mortgage Association (GNMA) and certain
other U.S. government agencies are supported by the full faith and
credit of the U.S. government. Securities issued by
government-sponsored enterprises (GSEs) indicated with "+" are
supported only by the credit of the issuing agency,
instrumentality, or corporation, and are neither issued nor
guaranteed by the U.S. government.
(l) Zero-coupon security. Rate represents the effective yield at date
of purchase.
(m) Callable security expected to be called prior to maturity due to a
scheduled change from a fixed to a floating interest rate, which is
likely to be uneconomical to the issuer.
(n) 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, monthly, or quarterly interval to a rate that
reflects current market conditions. VRDNs will normally trade as if
the maturity is the earlier put date, even though stated maturity
is longer.
(o) Represents less than 0.1% of net assets.
* Non-income-producing security for the year ended May 31, 2004.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
41
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
ASSETS
Investments in securities, at market value (including securites
on loan of $88,281) (identified cost of $1,274,221) $1,439,665
Cash 714
Cash denominated in foreign currencies (identified cost of $1,355) 1,369
Receivables:
Capital shares sold 227
USAA Investment Management Company 63
Dividends and interest 4,130
Securities sold 5,432
Other 125
----------
Total assets 1,451,725
----------
LIABILITIES
Payables:
Upon return of securities loaned 92,724
Securities purchased 7,438
Capital shares redeemed 533
Unrealized depreciation on foreign currency contracts held, at value 1
Accrued management fees 845
Accrued transfer agent's fees 5
Other accrued expenses and payables 135
----------
Total liabilities 101,681
----------
Net assets applicable to capital shares outstanding $1,350,044
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,142,780
Accumulated undistributed net investment income 7,333
Accumulated net realized gain on investments 34,459
Net unrealized appreciation of investments 165,444
Net unrealized appreciation on foreign currency translations 28
----------
Net assets applicable to capital shares outstanding $1,350,044
==========
Capital shares outstanding, unlimited number of shares authorized,
no par value 52,328
==========
Net asset value, redemption price, and offering price per share $ 25.80
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
42
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA CORNERSTONE STRATEGY FUND
YEAR ENDED MAY 31, 2004
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $887) $ 14,915
Interest 9,774
Securities lending 273
--------
Total income 24,962
--------
EXPENSES
Management fees 9,485
Administrative and servicing fees 1,897
Transfer agent's fees 2,607
Custody and accounting fees 555
Postage 289
Shareholder reporting fees 128
Trustees' fees 6
Registration fees 36
Professional fees 91
Other 29
--------
Total expenses 15,123
Expenses reimbursed (73)
Expenses paid indirectly (300)
--------
Net expenses 14,750
--------
NET INVESTMENT INCOME 10,212
--------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments (unaffiliated transactions) 92,881
Investments (affiliated transactions) 1,182
Foreign currency transactions (253)
Change in net unrealized appreciation/depreciation of:
Investments 89,628
Foreign currency translations (26)
--------
Net realized and unrealized gain 183,412
--------
Increase in net assets resulting from operations $193,624
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
43
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA CORNERSTONE STRATEGY FUND
YEARS ENDED MAY 31,
2004 2003
-------------------------
FROM OPERATIONS
Net investment income $ 10,212 $ 14,301
Net realized gain (loss) on investments 94,063 (25,601)
Net realized loss on foreign currency transactions (253) (83)
Change in net unrealized appreciation/depreciation of:
Investments 89,628 (22,114)
Foreign currency translations (26) (16)
-------------------------
Increase (decrease) in net assets resulting
from operations 193,624 (33,513)
-------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,866) (13,120)
Net realized gains - (21,185)
-------------------------
Distributions to shareholders (10,866) (34,305)
-------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 146,191 85,029
Shares issued for dividends reinvested 10,569 33,431
Cost of shares redeemed (122,018) (115,229)
-------------------------
Increase in net assets from capital
share transactions 34,742 3,231
-------------------------
Net increase (decrease) in net assets 217,500 (64,587)
NET ASSETS
Beginning of period 1,132,544 1,197,131
-------------------------
End of period $1,350,044 $1,132,544
=========================
Accumulated undistributed net investment income:
End of period $ 7,333 $ 6,516
=========================
CHANGE IN SHARES OUTSTANDING
Shares sold 5,904 4,055
Shares issued for dividends reinvested 416 1,600
Shares redeemed (4,956) (5,491)
-------------------------
Increase in shares outstanding 1,364 164
=========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
44
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
(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 Cornerstone Strategy Fund (the
Fund). The Fund's investment objective is to achieve a positive,
inflation-adjusted rate of return and a reasonably stable value of Fund
shares, thereby preserving the purchasing power of shareholders'
capital.
A. SECURITY VALUATION - The value of each security is determined
(as of the close of trading on the New York Stock Exchange
(NYSE) 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 or the Nasdaq
over-the-counter markets are valued at the last sales price
or official closing price on the exchange or primary market
on which they trade. Portfolio securities traded primarily
on foreign securities exchanges or markets are valued at the
last quoted sales price, or the most recently determined
official closing price calculated according to local market
convention, available at the time the Fund is valued. If no
last sale or official closing price is reported or
available, the average of the bid and asked prices is
generally used.
2. Securities trading in various foreign markets may take place
on days when the NYSE is closed. Further, when the NYSE is
open, the foreign markets may be closed. Therefore, the
calculation of the Fund's net asset value (NAV) may not take
place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE
on a day the Fund's NAV
45
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
is calculated will not be reflected in the value of the
Fund's foreign securities. However, USAA Investment
Management Company (the Manager), an affiliate of the Fund,
and the Fund's subadviser, if applicable, will monitor for
events that would materially affect the value of the Fund's
foreign securities and, if necessary, the Manager will value
the foreign securities in good faith, considering such
available information that the Manager deems relevant, under
valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign
market closing prices of foreign equity securities to
reflect what the Fund believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of
affected foreign equity securities may occur frequently
based on an assessment that events that occur on a fairly
regular basis (such as U.S. market movements) are
significant.
3. Investments in open-end investment companies are valued at
their net asset value at the end of each business day.
4. Debt securities purchased with maturities of 60 days or less
are stated at amortized cost, which approximates market
value. Repurchase agreements are valued at cost.
5. Other debt 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 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.
46
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
6. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by the Manager, in consultation with the Fund's
subadviser, if applicable, 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 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. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security
dealers. These agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the
U.S. government, its agencies, or its instrumentalities.
Government-sponsored enterprises (GSEs), such as Federal
National Mortgage Association (Fannie Mae) and Federal Home
Loan Mortgage Corporation (Freddie Mac), are supported only by
the credit of the issuing U.S. government agency, and are
neither issued nor guaranteed by the U.S. government.
Obligations pledged as
47
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
collateral are required to maintain a value equal to or in
excess of the repurchase agreement price plus accrued interest
and are held by the Fund, either through its regular custodian
or through a special "tri-party" custodian that maintains
separate accounts for both the Fund and its counterparty,
until maturity of the repurchase agreement. The Fund's Manager
monitors the creditworthiness of sellers with which the Fund
may enter into repurchase agreements.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be
invested in the securities of foreign issuers and may be traded
in foreign currency. 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:
1. Purchases and sales of securities, income, and expenses at
the exchange rate obtained from an independent pricing
service on the respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at
the exchange rate obtained from an independent pricing
service on a daily basis.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from
investments.
Separately, net realized foreign currency gains/losses may
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. These 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
48
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
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.
F. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS - Delivery and
payment for securities that have been purchased by the Fund on
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. The Fund had no
when-issued commitments as of May 31, 2004.
G. 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, 2004, these
fee-offset arrangements reduced the Fund's expenses by
$300,000.
H. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liability arising out of the performance of their duties to the
Trust. In addition, in the normal course of business the Trust
enters into contracts that contain a variety of representations
and warranties that provide general indemnifications. The
Trust's maximum exposure under these arrangements is unknown,
as this would involve future claims that may be made against
the Trust that have not yet occurred. However, the Trust
expects the risk of loss to be remote.
49
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
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 and State Street Bank
and Trust Company (State Street), under which Bank of America and
State Street have each committed $50 million. 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 and State Street, the Fund may
borrow from Bank of America and State Street, at the federal funds
rate plus a 0.50% markup, an amount which, when added to outstanding
borrowings under the CAPCO agreement, does not exceed 25% of the
Fund's total assets.
The USAA funds that are party to the loan agreements are assessed
facility fees in aggregate by Bank of America and State Street 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. For the year ended May 31, 2004, the Fund
paid CAPCO facility fees of $5,000. The Fund had no borrowings under
either of these agreements during the year ended May 31, 2004.
50
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
(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 U.S generally accepted accounting principles. 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 increase paid-in capital by
$884,000, increase accumulated undistributed net investment income by
$1,471,000, and decrease accumulated net realized gain on investments
by $2,355,000. This includes differences in accounting for security
paydown losses, foreign currency gains and losses, other security
transactions, and the utilization of earnings and profits distributed
to shareholders on redemptions of shares as part of the dividends-paid
deduction for federal income tax purposes. This reclassification has
no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2004, and 2003, was as follows:
2004 2003
------------------------------
Ordinary income* $10,866,000 $16,655,000
Long-term realized capital gains 884,000 17,650,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
For the fiscal year ended May 31, 2004, 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. Of the
distributions paid during the fiscal year, the maximum amount that may
be considered qualified dividend income is $10,866,000.
51
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
The information and distributions reported herein may differ from the
information and distributions reported to shareholders for the calendar
year ending December 31, 2004, which will be reported in
conjunction with the 2004 Form 1099-DIV.
As of May 31, 2004, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 12,265,000
Undistributed long-term capital gains 39,794,000
Accumulated capital and other losses (135,000)
Unrealized appreciation of investments 155,311,000
Unrealized appreciation on foreign currency translations 29,000
The difference between book-basis and tax-basis appreciation of
investments is due to differences in the timing of recognition of gains
and losses on investments for tax and book purposes. The Fund's
unrealized appreciation difference is attributable to the tax deferral
of losses on wash sales and differences in the timing of recognition of
unrealized gains and losses on certain investments.
Distributions of net investment income and 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. For the year ended May 31, 2004, the Fund
utilized capital loss carryovers of $22,715,000 to offset capital
gains. At May 31, 2004, the Fund had a current post-October currency
loss of $135,000, for federal income tax purposes. The post-October
loss will be recognized on the first day of the following fiscal year.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2004, were
$1,161,028,000 and $1,134,873,000, respectively.
52
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
The cost of securities at May 31, 2004, for federal income tax
purposes, was $1,284,354,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2004, for federal income tax purposes, were $170,614,000 and
$15,303,000, respectively, resulting in net unrealized appreciation of
$155,311,000.
(5) FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
A forward currency contract (currency contract) is a commitment to
purchase or sell a foreign currency at a specified date, at a
negotiated price. The Fund may enter into currency contracts in
connection with the purchase or sale of a security denominated in a
foreign currency. These contracts allow the Fund to "lock in" the U.S.
dollar price of the security. The Fund may also enter into currency
contracts to hedge against foreign currency exchange risks on the
non-U.S. dollar denominated securities held in the Fund's portfolio.
Currency contracts are valued on a daily basis using foreign currency
exchange rates obtained from an independent pricing service. Risks of
entering into currency contracts include the potential inability of
the counterparty to meet the terms of the contract and the Fund's
giving up the opportunity for potential profit.
At May 31, 2004, the terms of open foreign currency contracts were as
follows (in thousands):
FOREIGN CURRENCY CONTRACTS TO BUY
- --------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE RECEIVE 5/31/2004 FOR U.S. DOLLAR (DEPRECIATION)
- --------------------------------------------------------------------------------
6/01/2004 5,603 $51 $51 $-
Japanese Yen
- --------------------------------------------------------------------------------
53
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
FOREIGN CURRENCY CONTRACTS TO SELL
- --------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE DELIVER 5/31/2004 FOR U.S. DOLLAR (DEPRECIATION)
- --------------------------------------------------------------------------------
6/01/2004 475 $348 $348 $-
Canadian Dollar
6/01/2004 12 21 21 -
Pound Sterling
6/01/2004 584 87 86 (1)
Norwegian Krone
6/03/2004 443 66 66 -
Norwegian Krone
- --------------------------------------------------------------------------------
$522 $521 $(1)
- --------------------------------------------------------------------------------
(6) 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 loans 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, 2004, the Fund loaned
securities having a fair market value of approximately $88,281,000 and
received cash collateral of $92,724,000 for the loans. The cash
collateral was invested in money market instruments, as noted in the
Fund's portfolio of investments.
(7) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's investment
policies, directly manages portions of the Fund's
54
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
portfolio, and provides portfolio management oversight of the
Fund's assets managed by subadvisers. 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 Global Flexible Funds Index, which
tracks the total return performance of the 30 largest funds in
the Lipper Global Flexible Portfolio 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. The performance period for the Fund
commenced on August 1, 2001, and will consist of the current
month plus the preceding months through that date until a
period of 36 months is included in the performance period.
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%.
55
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
For the year ended May 31, 2004, the Fund incurred total
management fees, paid or payable to the Manager, of $9,485,000,
which included no performance adjustment.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into
investment subadvisory agreements with Wellington Management
Company, LLP (Wellington Management) and MFS Investment
Management (MFS), under which Wellington Management
directs the investment and reinvestment of portions of the
Fund's assets invested in U.S. stocks and real estate
securities (as allocated from time to time by the Manager), and
MFS directs the investment and reinvestment of the portion of
the Fund's assets invested in international stocks (as
allocated from time to time by the Manager). The Manager (not
the Fund) pays Wellington Management and MFS 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, 2004, the
Fund incurred administrative and servicing fees, paid or
payable to the Manager, of $1,897,000.
D. EXPENSE LIMITATION - The Manager has voluntarily agreed to
limit the annual expenses of the Fund to 1.19% of the Fund's
average annual net assets, excluding the effect of any expenses
paid indirectly, 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, 2004, the
Fund incurred reimbursable expenses of $73,000.
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.
56
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
For the year ended May 31, 2004, the Fund incurred transfer
agent's fees, paid or payable to USAA Transfer Agency Company,
of $2,607,000.
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.
(8) 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.
(9) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2004, 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:
NET REALIZED
COST TO GAIN (LOSS)
SELLER PURCHASER PURCHASER TO SELLER
- -------------------------------------------------------------------------------------
USAA Cornerstone Strategy Fund USAA Precious Metals
and Minerals Fund $5,731,000 $1,182,000
USAA Life Diversified USAA Cornerstone
Assets Fund Strategy Fund 499,000 (1,000)
57
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2004
(10) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
--------------------------------------------------------------------------------------
Net asset value at beginning of $ 22.22 $ 23.57 $ 25.26 $ 26.27 $ 27.29
period --------------------------------------------------------------------------------------
Income (loss) from investment
operations:
Net investment income .22 .27 .39(c) .58 .63
Net realized and
unrealized gain (loss) 3.57 (.93) (1.16)(c) (.40) .80
--------------------------------------------------------------------------------------
Total from investment operations 3.79 (.66) (.77) .18 1.43
--------------------------------------------------------------------------------------
Less distributions:
From net investment income (.21) (.26) (.57) (.48) (.78)
From realized capital gains - (.43) (.35) (.71) (1.67)
--------------------------------------------------------------------------------------
Total distributions (.21) (.69) (.92) (1.19) (2.45)
--------------------------------------------------------------------------------------
Net asset value at end of period $ 25.80 $ 22.22 $ 23.57 $ 25.26 $ 26.27
======================================================================================
Total return(%)* 17.08 (2.59) (2.96) .58 5.49
Net assets at end of period (000) $1,350,044 $1,132,544 $1,197,131 $1,016,101 $1,097,170
Ratio of expenses to
average net assets(%)** 1.19(a,b) 1.19(a,b) 1.16(a,b) 1.07(a) 1.09
Ratio of expenses to average net
assets, excluding
reimbursements(%)** 1.20(a) 1.27(a) 1.17(a) N/A N/A
Ratio of net investment
income to average
net assets(%)** .81 1.34 1.69(c) 2.26 2.43
Portfolio turnover(%) 90.94 131.07 30.52 54.67 37.46
* Assumes reinvestment of all net investment income and realized capital gain distributions during the period.
** For the year ended May 31, 2004, average net assets were $1,265,330,000.
(a) Reflects total expenses, excluding any expenses paid indirectly, which decreased the Fund's expense ratios as follows:
(.02%) (.01%) - - N/A
(b) Effective April 26, 2002, the Manager voluntarily agreed to limit the annual expenses of the Fund to 1.19% of the Fund's
average net assets.
(c) In 2001, a change in amortization method was made as required by a recently issued accounting pronouncement. Without
that change, these amounts would have been:
Net investment income $ .39
Net realized and unrealized loss $(1.16)
Ratio of net investment income to average net assets 1.70%
58
D I R E C T O R S ' A N D O F F I C E 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 38 individual funds as of May 31, 2004. 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 (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.
59
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED DIRECTORS(1)
- --------------------------------------------------------------------------------
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 (FPS) (1/97-7/03). 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 (IMCO), USAA Life Insurance Company, USAA Federal
Savings Bank, USAA Real Estate Company (RealCo), and USAA Financial
Advisors, Inc. (FAI).
CHRISTOPHER W. CLAUS (2, 4)
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.
60
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
NON-INTERESTED (INDEPENDENT) DIRECTORS
- --------------------------------------------------------------------------------
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), which focuses in
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.
61
. . . C O N T I N U E D
========================--------------------------------------------------------
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). 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 Company (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.
62
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED OFFICERS(1)
- --------------------------------------------------------------------------------
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, Life/IMCO/FPS General Counsel, USAA
(10/03-present); Senior Vice President, Securities Counsel, USAA
(12/02-10/03); 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 USAA Life Insurance Company, IMCO, FAI, FPS, and USAA
Shareholder Account Services; and Secretary for 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/FPS Senior Financial Officer,
USAA (12/02-present); Senior Vice President, Senior Financial
Officer,
63
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
IMCO (6/01-12/02); Vice President, Senior Financial Officer, RealCo
(12/97-5/01). Mr. Holmes also holds the Officer positions of Senior
Vice President, Senior Financial Officer of USAA Life Insurance
Company, IMCO, USAA Shareholder Account Services, FAI, and FPS; and
Treasurer of USAA Life Investment Trust, a registered investment
company offering five individual funds.
EILEEN M. SMILEY
Assistant Secretary
Born: November 1959
Year of Appointment: 2003
Vice President, Securities Counsel, USAA (2/04-present); Assistant
Vice President, Securities Counsel, USAA (1/03-2/04); Attorney,
Morrison & Foerster, LLP (1/99-1/03). Ms. Smiley also holds the
Officer position of Vice President and Assistant Secretary of IMCO,
FAI, and FPS; and Assistant Secretary of USAA Life Investment Trust,
a registered investment company offering five individual funds.
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).
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.
64
N O T E S
==========----------------------------------------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
65
N O T E S
==========----------------------------------------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
66
N O T E S
==========----------------------------------------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
67
N O T E S
==========----------------------------------------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
68
N O T E S
==========----------------------------------------------------------------------
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
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 Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1900
ACCOUNTING FIRM 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 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.
COPIES OF THE FUND'S PROXY VOTING POLICIES AND PROCEDURES ARE AVAILABLE WITHOUT
CHARGE (I) BY CALLING 1-800-531-8448; (II) AT USAA.COM; AND (III) ON THE SEC'S
WEB SITE AT HTTP://WWW.SEC.GOV.
[LOGO OF RECYCLED PAPER]
Recycled
Paper
- --------------------------------------------------------------------------------
[LOGO OF USAA] 9800 Fredericksburg Road -------------
USAA(R) San Antonio, Texas 78288 PRSRT STD
U.S.
Postage
P A I D
USAA
-------------
Receive this document
and others electronically.
Sign up at USAA.COM.
- --------------------------------------------------------------------------------
[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23405-0704 (C)2004, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On June 25, 2003, the Board of Trustees of USAA Investment Trust approved a Code
of Ethics (Sarbanes Code) applicable solely to its senior financial officers,
including its principal executive officer (President), as defined under the
Sarbanes-Oxley Act of 2002 and implementing regulations of the Securities and
Exchange Commission. A copy of the Sarbanes Code is attached as an Exhibit to
this Form N-CSR.
No amendments have been made to the Sarbanes Code since it was adopted, and no
waivers (explicit or implicit) from a provision of the Sarbanes Code have been
granted.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Dr. Laura T. Starks, Ph.D. has been designated as an audit committee financial
expert for USAA Investment Trust. Dr. Starks has served as a professor of
Finance at the University of Texas at Austin since 1987, and has served as the
Chair Professor of Finance since 1996. Dr. Starks also has served as a
consultant to numerous clients, including accounting firms, on a range of
finance, accounting and auditing issues. Dr. Starks is an independent director
who serves as a member of the Audit Committee, Pricing and Investment Committee
and the Corporate Governance Committee of the Board of Trustees of USAA
Investment Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 9 funds. The
aggregate fees billed by the Registrant's independent auditor, Ernst & Young
LLP, for professional services rendered for the audit of the Registrant's annual
financial statements and services provided in connection with statutory and
regulatory filings by the Registrant for fiscal years ended May 31, 2004 and
2003 were $145,300 and $140,400 respectively.
(b) AUDIT RELATED FEE. No such fees were billed by Ernst & Young LLP for 2004 or
2003.
(c) TAX FEES. The aggregate fees paid or accrued by the Registrant for
professional services rendered by Ernst & Young LLP for the review of the
Registrant's federal, state and city income tax returns and excise tax
calculations for fiscal years ended May 31, 2004 and 2003 were $39,400 and
$38,400, respectively.
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2004 or 2003.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, for
2004 and 2003 were $55,200 and $75,400, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2004 and 2003 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
funds. The Board of Directors/Trustees will consider Ernst & Young LLP's
independence and will consider whether the provision of these non-audit services
to IMCO is compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 10. 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.
ITEM 11. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUND, INC.
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA STATE TAX-FREE TRUST
USAA LIFE INVESTMENT TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment
Trust, USAA State Tax-Free Trust and USAA Life Investment Trust (collectively,
the Funds, and each a Company) have adopted this code of ethics (the Code) to
comply with Section 406 of the Sarbanes-Oxley Act of 2002 (the Act) and
implementing regulations of the Securities and Exchange Commission (SEC). The
Code applies to each Company's Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer (each a Covered Officer), as detailed
in Appendix A.
The purpose of the Code is to promote:
o honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between the Covered Officers' personal
and professional relationships;
o full, fair, accurate, timely and understandable disclosure in reports
and documents that each Company files with, or submits to, the SEC and
in other public communications made by each Company;
o compliance with applicable laws and governmental rules and regulations;
o prompt internal reporting of violations of the Code to the Chief Legal
Officer of each Company, the President of each Company (if the
violation concerns the Treasurer) and the Chairman of the Board of
Directors/Trustees of each Company; and
o accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically. In
addition, it is recognized by each Company's Board of Directors/Trustees (each a
Board, and collectively the Boards) that the Covered Officers also may be
officers or employees of one or more other investment companies covered by this
joint USAA Funds' Code.
B. GENERAL RULE. Covered Officers Should Avoid Actual and
Apparent Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
o use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the detriment
of the Funds and their shareholders;
o cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
o accept gifts, gratuities, entertainment or any other benefit from any
person or entity that does business or is seeking to do business with
the Funds during contract negotiations.
o accept gifts, gratuities, entertainment or any other benefit with a
market value over $100 per person, per year, from or on behalf of any
person or entity that does, or seeks to do, business with or on behalf
of the Funds.
o EXCEPTION. Business-related entertainment such as meals, and
tickets to sporting or theatrical events, which are infrequent
and not lavish are excepted from this prohibition. Such
entertainment must be appropriate as to time and place,
reasonable and customary in nature, modest in cost and value,
incidental to the business, and not so frequent as to raise any
question of impropriety (Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
o service as a director on the board or an officer of any public or
private company, other than a USAA company or a Company, must be
approved by the USAA Funds' and IMCO's Code of Ethics Committee and
reported to each affected Company.
o the receipt of any non-nominal (i.e., valued over $25) gifts from any
person or entity with which a Company has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of Secretary of
a Company shall be considered the Chief Legal Officer of a Company.
o the receipt of any business-related entertainment from any person or
entity with which the Funds have current or prospective business
dealings must be approved in advance by the Chief Legal Officer unless
such entertainment qualifies as Customary Business Entertainment.
o any ownership interest in, or any consulting or employment relationship
with, any of the Company's service providers, other than IMCO or any
other USAA company, must be approved by the Chairman of the Board of
the Directors/Trustees and reported to each affected Board.
o any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other than an
interest arising from the Covered Officer's employment, such as
compensation or equity ownership should be approved by the Chairman of
the Board of Directors/Trustees and reported to each affected Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
o Each Covered Officer should familiarize himself with the disclosure
requirements applicable to the Funds, and the procedures and policies
implemented to promote full, fair, accurate, timely and understandable
disclosure by each Company.
o Each Covered Officer should not knowingly misrepresent, or cause others
to misrepresent, facts about the Funds to others, whether within or
outside the Funds, including to the Funds' Directors/Trustees and
auditors, and to government regulators and self-regulatory
organizations.
o Each Covered Officer should, to the extent appropriate within his area
of responsibility, consult with other officers and employees of the
Funds and IMCO with the goal of promoting full, fair, accurate, timely
and understandable disclosure in the reports and documents filed by a
Company with, or submitted to, the SEC, and in other public
communications made by the Funds.
o Each Covered Officer is responsible for promoting compliance with the
standards and restrictions imposed by applicable laws, rules and
regulations, and promoting compliance with the USAA Funds' and IMCO's
operating policies and procedures.
o A Covered Officer should not retaliate against any person who reports a
potential violation of this Code in good faith.
o A Covered Officer should notify the Chief Legal Officer promptly if he
knows of any violation of the Code. Failure to do so itself is a
violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of each
Company is responsible for applying this Code to specific
situations in which questions are presented under it and has the
authority to interpret the Code in any particular situation. The
Chief Legal Officer should consult, if appropriate, the USAA
Funds' outside counsel or counsel for the Independent
Directors/Trustees. However, any approvals or waivers sought by a
Covered Officer will be reported initially to the Chairman of the
Board of Directors/Trustees and will be considered by the Board
of Directors/Trustees.
B. REQUIRED REPORTS
o EACH COVERED OFFICER MUST:
o Upon adoption of the Code, affirm in writing to the Boards
that he has received, read and understands the Code.
o Annually thereafter affirm to the Chief Legal Officer that
he has complied with the requirements of the Code.
o THE CHIEF LEGAL OFFICER MUST:
o report to the Board about any matter or situation submitted
by a Covered Officer for interpretation under the Code, and
the advice given by the Chief Legal Officer;
o report annually to the Board and the Corporate Governance
Committee describing any issues that arose under the Code,
or informing the Board and Corporate Governance Committee
that no reportable issues occurred during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
o INITIAL COMPLAINT. All complaints or other inquiries concerning
potential violations of the Code must be reported to the Chief
Legal Officer. The Chief Legal Officer shall be responsible for
documenting any complaint. The Chief Legal Officer also will
report immediately to the President of the Company (if the
complaint involves the Treasurer), the Chairman of the Board (or
for the USAA Life Investment Trust (LIT) the Chairman/CEO of USAA
if the complaint involves the Chairman of the LIT Board) and the
Chairperson of the Audit Committee any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints, the
Chief Legal Officer will report quarterly to the Board.
o INVESTIGATIONS. The Chief Legal Officer will take all appropriate
action to investigate any potential violation unless the Chairman
of the Board or the Chairperson of the Audit Committee direct
another person to undertake such investigation. The Chief Legal
Officer may utilize USAA's Office of Ethics to do a unified
investigation under this Code and USAA's Code of Conduct. The
Chairman of the Board, or the Board as a whole, may direct the
Company's outside counsel or the counsel to the Independent
Directors/Trustees (if any) to participate in any investigation
under this Code.
o STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
o VIOLATIONS OF THE CODE. If after investigation, the Chief Legal
Officer, or other investigating person, believes that a violation
of the Code has occurred, he will report immediately to the
Chairman of the Board (and for the USAA LIT the Chairman/CEO of
USAA if the violation involves the Chairman of the LIT Board) the
nature of the violation, and his recommendation regarding the
materiality of the violation. If, in the opinion of the
investigating person, the violation could materially affect the
Funds' financial condition or reputation, the Chief Legal Officer
also will notify the Chairperson of the Audit Committee of each
Company.
The Chief Legal Officer will inform, and make a recommendation
to, the Board, which will consider what further action is
appropriate. Appropriate action could include: (1) review of, and
modifications to, the Code or other applicable policies or
procedures; (2) notifications to appropriate personnel of IMCO or
USAA; (3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
o The Boards of Directors/Trustees understand that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates USAA's
Code of Business Conduct, these procedures do not limit or
restrict USAA's ability to discipline such Covered Officer
under USAA's Code of Business Conduct. In that event, the
Chairman of the Board of Directors/Trustees will report to
the Boards the action taken by USAA with respect to a
Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of a Company, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The USAA Funds' and IMCO's Joint Code of
Ethics under Rule 17j-1 under the 1940 Act, and IMCO's more detailed compliance
policies and procedures (including its Insider Trading Policy) are separate
requirements applying to Covered Officers and other IMCO employees, and are not
part of this Code. Also, USAA's Code of Conduct imposes separate requirements on
Covered Officers and all employees of USAA, and also is not part of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Directors/Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the
appropriate Board of Directors/Trustees and counsel for the Independent
Directors/Trustees (if any), the appropriate Company and its counsel, IMCO, and
other personnel of USAA as determined by the affected Company's Chief Legal
Officer or the Chairman of the Board of Directors/Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003 Approved
and adopted by the Boards of Directors/Trustees of USAA Mutual Fund, Inc., USAA
Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free Trust: June
25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
APPENDIX A
COVERED OFFICERS
TITLE COMPANY
PRESIDENT USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
TREASURER USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA INVESTMENT TRUST
By:* /s/ EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: 07-25-04
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: 07-28-04
------------------------------
By:* /s/ DAVID HOLMES
--------------------------------------------
Signature and Title: David Holmes/Treasurer
Date: 07-28-04
------------------------------
*Print the name and title of each signing officer under his or her signature.