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-GNMA TRUST - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2004
[LOGO OF USAA]
USAA(R)
USAA GNMA Trust(R)
[GRAPHIC OF USAA GNMA TRUST]
A n n u a l R e p o r t
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MAY 31, 2004
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
INVESTMENT OVERVIEW & MANAGER'S COMMENTARY 5
FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm 14
Portfolio of Investments 15
Notes to Portfolio of Investments 18
Financial Statements 19
Notes to Financial Statements 22
DIRECTORS' AND OFFICERS' INFORMATION 32
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
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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
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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 GNMA TRUST
OBJECTIVE
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High level of current income consistent with preservation of
principal.
TYPES OF INVESTMENTS
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Normally invests at least 80% of the Fund's assets in GNMA
securities backed by the full faith and credit of the U.S.
government.
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5/31/04 5/31/03
- --------------------------------------------------------------------------------
Net Assets $610.5 Million $751.8 Million
Net Asset Value Per Share $9.72 $10.16
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AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/04
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 30-DAY SEC YIELD
0.39% 5.46% 6.42% 4.30%
*CALCULATED AS PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION.
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
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OVERVIEW
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CUMULATIVE PERFORMANCE COMPARISON
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[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LEHMAN BROTHERS LIPPER GNMA USAA GNMA LIPPER GNMA
GNMA 30-YEAR INDEX FUNDS INDEX TRUST FUND FUNDS AVERAGE
------------------ ----------- ---------- -------------
5/31/1994 $10000.00 $10000.00 $10000.00 $10000.00
6/30/1994 9984.00 9972.69 10027.72 9970.24
7/31/1994 10182.68 10139.14 10154.67 10135.85
8/31/1994 10212.21 10161.25 10187.59 10154.00
9/30/1994 10067.20 10027.31 10123.65 10018.14
10/31/1994 10050.08 9998.27 10112.10 9987.97
11/30/1994 10024.96 9973.99 10079.73 9961.55
12/31/1994 10140.25 10068.05 10161.77 10056.36
1/31/1995 10351.16 10260.08 10333.09 10247.53
2/28/1995 10624.43 10509.32 10557.51 10494.60
3/31/1995 10674.37 10549.63 10581.28 10537.77
4/30/1995 10833.42 10686.17 10698.91 10676.22
5/31/1995 11162.75 11022.54 11054.04 11025.43
6/30/1995 11240.89 11088.43 11130.93 11088.89
7/31/1995 11263.37 11089.29 11108.55 11084.04
8/31/1995 11380.51 11204.16 11286.00 11200.77
9/30/1995 11494.32 11312.53 11395.37 11315.63
10/31/1995 11587.42 11416.99 11520.68 11422.16
11/30/1995 11721.84 11555.70 11688.86 11567.80
12/31/1995 11873.05 11701.34 11864.45 11717.95
1/31/1996 11954.97 11770.26 11933.83 11784.83
2/29/1996 11865.31 11636.32 11689.67 11632.19
3/31/1996 11835.65 11588.59 11577.52 11583.08
4/30/1996 11804.87 11545.09 11531.53 11536.34
5/31/1996 11764.74 11499.08 11457.03 11489.25
6/30/1996 11921.21 11628.03 11602.22 11613.65
7/31/1996 11966.51 11669.99 11628.11 11655.35
8/31/1996 11970.10 11669.76 11671.10 11650.97
9/30/1996 12172.39 11854.66 11848.61 11836.08
10/31/1996 12420.71 12088.22 12097.48 12075.24
11/30/1996 12604.54 12269.71 12286.37 12259.27
12/31/1996 12536.47 12190.82 12213.02 12173.11
1/31/1997 12634.26 12269.23 12307.17 12248.94
2/28/1997 12681.00 12300.68 12352.58 12275.20
3/31/1997 12554.19 12183.28 12225.23 12144.03
4/30/1997 12761.34 12370.57 12394.89 12331.10
5/31/1997 12894.05 12481.33 12514.87 12445.77
6/30/1997 13048.78 12628.30 12689.82 12590.31
7/31/1997 13284.97 12866.28 12926.02 12852.40
8/31/1997 13257.07 12825.71 12855.78 12799.02
9/30/1997 13434.71 12994.72 13036.34 12966.85
10/31/1997 13573.09 13123.78 13195.43 13102.29
11/30/1997 13616.52 13152.24 13220.13 13133.17
12/31/1997 13739.07 13281.92 13374.33 13260.07
1/31/1998 13873.72 13412.23 13561.38 13397.38
2/28/1998 13904.24 13430.82 13526.54 13410.33
3/31/1998 13962.64 13478.58 13615.39 13454.99
4/30/1998 14043.62 13555.55 13699.80 13526.69
5/31/1998 14140.52 13652.18 13847.93 13631.83
6/30/1998 14199.91 13711.42 13980.20 13695.82
7/31/1998 14280.85 13775.59 14013.67 13750.38
8/31/1998 14392.24 13904.69 14236.48 13893.26
9/30/1998 14563.51 14076.46 14556.32 14087.27
10/31/1998 14550.40 14002.44 14271.92 14005.53
11/30/1998 14633.34 14082.75 14432.69 14084.75
12/31/1998 14693.33 14137.75 14479.05 14137.46
1/31/1999 14797.66 14223.51 14590.38 14219.77
2/28/1999 14748.82 14129.76 14258.32 14101.86
3/31/1999 14837.32 14218.76 14408.94 14187.83
4/30/1999 14908.54 14280.88 14442.30 14247.24
5/31/1999 14832.50 14178.11 14281.93 14139.22
6/30/1999 14771.69 14099.95 14177.16 14062.61
7/31/1999 14674.20 14007.50 13906.24 13973.24
8/31/1999 14668.33 13993.77 13755.03 13954.18
9/30/1999 14905.95 14222.09 14019.40 14174.87
10/31/1999 14995.39 14287.34 14033.34 14231.42
11/30/1999 15001.39 14289.10 14042.09 14237.27
12/31/1999 14971.39 14227.73 13955.98 14171.62
1/31/2000 14836.64 14103.62 13887.08 14048.61
2/29/2000 15028.04 14277.49 14087.86 14215.49
3/31/2000 15268.48 14501.41 14260.42 14436.16
4/30/2000 15253.22 14468.52 14185.68 14409.23
5/31/2000 15311.18 14527.20 14320.27 14460.54
6/30/2000 15592.90 14774.07 14604.63 14714.49
7/31/2000 15673.99 14834.97 14675.41 14770.96
8/31/2000 15912.23 15053.29 14916.78 14984.53
9/30/2000 16060.22 15182.72 15015.12 15112.78
10/31/2000 16180.67 15277.62 15137.27 15204.86
11/30/2000 16407.20 15510.72 15398.74 15432.91
12/31/2000 16638.54 15733.08 15654.27 15662.51
1/31/2001 16911.41 15972.39 15890.36 15894.95
2/28/2001 16985.82 16053.20 16007.97 15984.05
3/31/2001 17087.73 16132.85 16122.70 16070.76
4/30/2001 17115.08 16133.28 16079.80 16046.25
5/31/2001 17258.84 16242.93 16166.36 16145.98
6/30/2001 17310.62 16282.39 16187.20 16192.45
7/31/2001 17606.63 16584.72 16505.38 16496.01
8/31/2001 17735.16 16708.37 16652.90 16615.07
9/30/2001 17974.58 16930.47 16889.69 16851.05
10/31/2001 18213.64 17146.63 17140.64 17070.81
11/30/2001 18060.65 16983.07 16923.47 16883.26
12/31/2001 18006.47 16900.27 16773.24 16787.80
1/31/2002 18188.33 17072.17 16945.86 16950.45
2/28/2002 18373.85 17255.66 17155.18 17132.06
3/31/2002 18199.30 17075.70 16908.33 16927.94
4/30/2002 18519.61 17374.17 17261.04 17234.99
5/31/2002 18639.99 17488.01 17432.39 17347.34
6/30/2002 18789.11 17624.79 17558.45 17488.34
7/31/2002 19007.06 17825.86 17752.95 17688.69
8/31/2002 19140.11 17965.14 17935.78 17831.22
9/30/2002 19298.97 18109.86 18081.22 17989.80
10/31/2002 19358.80 18149.33 18112.66 18018.97
11/30/2002 19376.22 18152.73 18111.53 18012.76
12/31/2002 19568.05 18348.08 18322.31 18209.42
1/31/2003 19616.97 18392.33 18366.94 18247.53
2/28/2003 19715.05 18493.95 18459.79 18352.04
3/31/2003 19728.85 18485.98 18457.75 18341.54
4/30/2003 19774.23 18530.43 18519.67 18388.61
5/31/2003 19774.23 18551.75 18560.95 18439.76
6/30/2003 19834.34 18582.88 18577.66 18460.01
7/31/2003 19506.68 18210.06 18191.24 18046.79
8/31/2003 19635.23 18320.22 18303.32 18163.12
9/30/2003 19918.76 18622.51 18597.71 18478.80
10/31/2003 19866.97 18546.06 18526.86 18380.89
11/30/2003 19936.51 18605.15 18558.73 18428.73
12/31/2003 20121.92 18734.90 18690.93 18559.03
1/31/2004 20222.53 18833.39 18784.70 18651.32
2/29/2004 20354.98 18949.53 18895.22 18771.49
3/31/2004 20438.44 19010.94 18971.58 18839.71
4/30/2004 20117.56 18694.79 18691.04 18515.23
5/31/2004 20077.32 18647.57 18631.22 18463.99
[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 GNMA Trust to the following benchmarks:
o The Lehman Brothers GNMA 30-Year Index, an unmanaged index of
pass-through securities with an original maturity of 30
years.
o The Lipper GNMA Funds Index, which tracks the total return
performance of the 10 largest funds within the Lipper GNMA
Funds category.
o The Lipper GNMA Funds Average, an unmanaged index of peer
funds, reported by Lipper Inc., an independent organization
that monitors the performance of mutual funds.
8
M A N A G E R ' S
==================--------------------------------------------------------------
COMMENTARY on the Fund
[PHOTO OF MARGARET "DIDI" WEINBLATT] MARGARET "DIDI" WEINBLATT, Ph.D., CFA
USAA Investment Management Company
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
The USAA GNMA Trust had a total return of 0.39% for the year
ended May 31, 2004. This compares to a 0.22% return for the
Lipper GNMA Funds Average, a 0.52% return for the Lipper GNMA
Funds Index, and a 1.53% return for the Lehman Brothers GNMA
30-Year Index for the period.
[LOGO OF LIPPER.LEADER] [LOGO OF LIPPER.LEADER]
----------------------- -----------------------
PRESERVATION EXPENSE
----------------------- -----------------------
The Fund is listed as a Lipper Leader for Preservation and
Expense of 3,866 funds and 143 funds, respectively, within the
Lipper GNMA Funds category for the overall period ending May
31, 2004.
WHAT WAS THE OVERALL MARKET ENVIRONMENT?
Over the 12-month period, rising interest rates eroded bond
prices, but income from the Fund's bonds compensated for the
REFER TO PAGE 7 FOR BENCHMARK DEFINITIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
9
. . . C O N T I N U E D
========================--------------------------------------------------------
fall in price and allowed us to deliver a positive total
return. 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). Over the course of the reporting year, yields on
three-and five-year Treasuries rose 1.5% and yields on
10-year Treasuries rose 1.28%.
HOW DID MORTGAGE-BACKED SECURITIES PERFORM?
While virtually all bonds suffer price erosion during such
periods of rising interest rates, mortgage-backed securities
tended to outperform other sectors of the bond market. One
thing that held back mortgage-backed securities was the high
level of mortgage prepayments. But with interest rates rising
and the period of rapid repayments now behind us,
mortgage-backed securities have begun to show their more
defensive nature.
LIPPER RATINGS FOR PRESERVATION REFLECT FUNDS' HISTORICAL LOSS
AVOIDANCE RELATIVE TO OTHER FUNDS WITHIN THE SAME ASSET CLASS,
AS OF MAY 31, 2004. PRESERVATION RATINGS ARE RELATIVE, RATHER
THAN ABSOLUTE, MEASURES, AND FUNDS NAMED LIPPER LEADERS FOR
PRESERVATION MAY STILL EXPERIENCE LOSSES PERIODICALLY; THOSE
LOSSES MAY BE LARGER FOR EQUITY AND MIXED-EQUITY FUNDS THAN
FOR FIXED-INCOME FUNDS. THE FUND RECEIVED A LIPPER LEADER
RATING FOR PRESERVATION AMONG 3,866 FUNDS AND 3,271 FUNDS FOR
THE THREE-AND FIVE-YEAR PERIODS, RESPECTIVELY, AND A SCORE OF
2 FOR THE 10-YEAR PERIOD AMONG 1,727 FUNDS. LIPPER RATINGS FOR
EXPENSE REFLECT FUNDS' EXPENSE MINIMIZATION RELATIVE TO PEERS
WITH SIMILAR LOAD STRUCTURES AS OF MAY 31, 2004. THE FUND
RECEIVED A LIPPER LEADER RATING FOR EXPENSE AMONG 143 FUNDS,
118 FUNDS, AND 78 FUNDS FOR THE THREE-, FIVE-, AND 10-YEAR
PERIODS, RESPECTIVELY. RATINGS ARE SUBJECT TO CHANGE EVERY
MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF PERCENTILE
RANKS FOR THE PRESERVATION AND EXPENSE METRICS OVER THREE-,
FIVE-, AND 10-YEAR PERIODS (IF APPLICABLE). THE HIGHEST 20%
OF FUNDS IN EACH PEER GROUP ARE NAMED LIPPER LEADERS, THE NEXT
20% RECEIVE A SCORE OF 2, THE MIDDLE 20% ARE SCORED 3, THE
NEXT 20% ARE SCORED 4, AND THE LOWEST 20% ARE SCORED 5. LIPPER
RATINGS ARE NOT INTENDED TO PREDICT FUTURE RESULTS, AND LIPPER
DOES NOT GUARANTEE THE ACCURACY OF THIS INFORMATION. MORE
INFORMATION IS AVAILABLE AT WWW.LIPPERLEADERS.COM. LIPPER
LEADER COPYRIGHT 2004, REUTERS, ALL RIGHTS RESERVED.
10
. . . C O N T I N U E D
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COMMENTARY on the Fund
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.
HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT?
While interest rates remained low, we allowed the Fund's cash
allocation to build, which was a drag on income. However, as
interest rates approached their highest levels in two years
toward the end of the period, we began to deploy the cash. We
tended to
11
. . . C O N T I N U E D
========================--------------------------------------------------------
invest in slightly higher-coupon mortgages to defend against
rising rates and kept a small allocation to Treasury
inflation-protected securities (TIPS), which are designed to
perform well when inflation expectations increase.
- ---------------------------------------------------------
COUPON RATE COMPOSITION
OF MORTGAGE POOLS
- ---------------------------------------------------------
[CHART OF COUPON RATE COMPOSITION OF MORTGAGE POOLS]
COUPON RATE % CATEGORY PERCENTAGE
5.00% 8.7%
5.50 26.9
6.00 33.9
6.50 18.1
6.75 0.2
7.00 7.9
7.50 2.1
8.00 2.0
8.50 0.1
9.00 0.1
- ---------------------------------------------------------
AVERAGE COUPON RATE
6.03% (MAY 2004)
[END CHART]
HOW DOES A GNMA DIFFER FROM A FANNIE MAE OR FREDDIE MAC?
GNMAs are backed by the full faith and credit of the U.S.
government, just like U.S. Treasury securities. Fannie Mae and
Freddie Mac are government-sponsored enterprises (GSEs), but
their securities are not backed by the full faith and credit
of the U.S. government.
12
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
WHAT'S YOUR MARKET OUTLOOK?
We believe job growth and other economic indicators are
pointing to a strong recovery. 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 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 is prudent to do so.
We thank you for the opportunity and privilege of serving you.
13
P O R T F O L I O
==================--------------------------------------------------------------
HIGHLIGHTS
ASSET ALLOCATION
5/31/04
[PIE CHART OF ASSET ALLOCATION]
30-Year Fixed-Rate Single-Family Mortgages* 79.9%
Collateralized Mortgage Obligations 9.0%
15-Year Fixed-Rate Single-Family Mortgages* 5.9%
Repurchase Agreement 3.0%
U.S.Treasury Inflation-Indexed Note 1.9%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT
EQUAL 100%.
*COMBINED IN THE PORTFOLIO OF INVESTMENTS UNDER MORTGAGE-BACKED
PASS-THROUGH SECURITIES, SINGLE-FAMILY.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 15-17.
14
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 GNMA TRUST:
We have audited the accompanying statement of assets and
liabilities of the USAA GNMA Trust (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 GNMA Trust 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
15
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(in thousands)
USAA GNMA TRUST
MAY 31, 2004
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- --------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (94.8%)(a)
MORTGAGE-BACKED PASS-THROUGH SECURITIES, SINGLE-FAMILY (85.8%)
Government National Mortgage Assn. I,
$ 9,895 Pool 604858 5.50% 12/15/2018 $ 10,154
21,906 Pool 553312 5.50 6/15/2033 21,815
54,663 Pool 604713 5.50 10/15/2033 54,436
23,461 Pool 616143 5.50 12/15/2033 23,363
11,290 Pool 781378 6.00 12/15/2016 11,784
5,498 Pool 780770 6.00 4/15/2028 5,620
2,615 Pool 482833 6.00 11/15/2028 2,672
4,139 Pool 492703 6.00 2/15/2029 4,228
3,811 Pool 781148 6.00 7/15/2029 3,894
6,687 Pool 584367 6.00 5/15/2032 6,823
22,854 Pool 603869 6.00 1/15/2033 23,313
6,857 Pool 553069 6.00 2/15/2033 6,994
8,415 Pool 581541 6.00 7/15/2033 8,584
6,369 Pool 615955 6.00 9/15/2033 6,496
1,869 Pool 456861 6.50 5/15/2028 1,947
1,706 Pool 472596 6.50 5/15/2028 1,777
1,839 Pool 462642 6.50 7/15/2028 1,915
1,587 Pool 464827 6.50 9/15/2028 1,653
356 Pool 467338 6.50 11/15/2028 370
4,962 Pool 490804 6.50 11/15/2028 5,168
288 Pool 434165 6.50 1/15/2029 300
258 Pool 469900 6.50 1/15/2029 268
6,169 Pool 486065 6.50 3/15/2031 6,420
5,911 Pool 485860 6.50 10/15/2031 6,152
4,461 Pool 577423 6.50 1/15/2032 4,642
2,033 Pool 581120 6.50 3/15/2032 2,116
6,581 Pool 552707 6.50 8/15/2032 6,848
27,522 Pool 781516 6.50 9/15/2032 28,642
322 Pool 474279 6.75 5/15/2028 339
639 Pool 474256 6.75 5/15/2028 673
609 Pool 440293 7.00 4/15/2027 646
72 Pool 440325 7.00 4/15/2027 77
3,347 Pool 780570 7.00 5/15/2027 3,551
597 Pool 478209 7.00 6/15/2028 633
600 Pool 458908 7.00 7/15/2028 636
761 Pool 464128 7.00 8/15/2028 806
554 Pool 486467 7.00 8/15/2028 588
1,331 Pool 464854 7.00 9/15/2028 1,410
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS (continued)
(in thousands)
USAA GNMA TRUST
MAY 31, 2004
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- --------------------------------------------------------------------------------------------------
$ 4,975 Pool 487603 7.00% 5/15/2029 $ 5,269
4,583 Pool 487613 7.00 6/15/2029 4,854
3,887 Pool 555482 7.00 8/15/2031 4,113
1,646 Pool 781328 7.00 9/15/2031 1,743
3,037 Pool 564438 7.00 10/15/2031 3,214
1,995 Pool 563599 7.00 6/15/2032 2,111
5,268 Pool 563613 7.00 7/15/2032 5,574
1,546 Pool 780716 7.50 2/15/2028 1,667
254 Pool 781001 7.50 3/15/2029 273
745 Pool 499432 7.50 4/15/2029 800
1,521 Pool 470683 7.50 7/15/2029 1,634
1,965 Pool 510533 7.50 10/15/2029 2,112
381 Pool 518539 7.50 10/15/2029 409
766 Pool 538003 7.50 8/15/2030 823
462 Pool 443263 7.50 12/15/2030 497
276 Pool 486050 7.50 1/15/2031 297
212 Pool 530250 7.50 1/15/2031 228
859 Pool 552172 7.50 11/15/2031 923
112 Pool 178674 8.00 1/15/2022 123
790 Pool 352169 8.00 6/15/2023 869
780 Pool 442548 8.00 5/15/2027 851
885 Pool 511530 8.00 7/15/2030 965
471 Pool 520978 8.00 9/15/2030 514
226 Pool 307542 8.50 6/15/2021 251
126 Pool 329602 8.50 7/15/2022 140
319 Pool 312950 9.00 7/15/2021 359
Government National Mortgage Assn. II,
22,317 Pool 003389 5.00 5/20/2033 21,528
23,424 Pool 003414 5.00 7/20/2033 22,597
7,537 Pool 003375 5.50 4/20/2033 7,497
19,798 Pool 003530 5.50 3/20/2034 19,674
4,900 Pool 003052 6.00 3/20/2031 4,995
10,948 Pool 003273 6.00 8/20/2032 11,157
9,087 Pool 003285 6.00 9/20/2032 9,261
8,020 Pool 003460 6.00 10/20/2033 8,198
8,891 Pool 448816 6.00 12/20/2033 9,013
24,191 Pool 003517 6.00 2/20/2034 24,639
24,648 Pool 003531 6.00 3/20/2034 25,105
2,011 Pool 003080 6.50 5/20/2031 2,088
1,756 Pool 003107 6.50 7/20/2031 1,823
4,678 Pool 781494 6.50 8/20/2031 4,857
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS (continued)
(in thousands)
USAA GNMA TRUST
MAY 31, 2004
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- --------------------------------------------------------------------------------------------------
$ 7,676 Pool 781427 6.50% 4/20/2032 $ 7,968
7,280 Pool 003250 6.50 6/20/2032 7,558
5,165 Pool 002971 7.00 9/20/2030 5,458
909 Pool 003070 7.50 4/20/2031 975
233 Pool 000563 8.00 12/20/2022 256
6,300 Pool 002958 8.00 8/20/2030 6,843
Fannie Mae,(+)
2,590 Pool 598427 6.00 2/01/2017 2,692
3,161 Pool 608749 6.50 10/01/2016 3,340
7,599 Pool 618473 6.50 12/01/2016 8,030
--------
523,918
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (9.0%)
Government National Mortgage Assn. I,
13,104 Series 2003-99 5.50 6/16/2021 13,423
15,000 Series 2003-50 PC 5.50 3/16/2032 14,739
10,000 Series 2002-35, Class C 5.86 10/16/2023 10,505
15,000 Series 2001-12, Class B 6.15 6/16/2021 16,063
--------
54,730
--------
Total U.S. government agency issues (cost: $578,730) 578,648
--------
U.S. TREASURY SECURITY (1.9%)
INFLATION-INDEXED NOTE(b)
10,421 3.00%, 7/15/2012 (cost: $10,873) 11,334
--------
REPURCHASE AGREEMENT (3.0%)
18,426 UBS Securities LLC, 1.03%, acquired on
5/28/2004 and due on 6/01/2004 at
$18,426 (collateralized by $18,810 of
Freddie Mac Notes(a,+), 4.20%, due
12/30/2013; market value $18,797)(c) (cost: $18,426) 18,426
--------
TOTAL INVESTMENTS (COST: $608,029) $608,408
========
18
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA GNMA TRUST
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%.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) U.S. government agency issues - mortgage-backed securities
issued by Government National Mortgage Association (GNMA) 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.
(b) 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 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.
(c) 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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
19
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA GNMA TRUST
May 31, 2004
ASSETS
Investments in securities, at market value (identified cost of $608,029) $608,408
Cash 90
Receivables:
Capital shares sold 100
USAA Transfer Agency Company 3
Interest 2,954
--------
Total assets 611,555
--------
LIABILITIES
Payables:
Capital shares redeemed 403
Dividends on capital shares 537
Accrued management fees 65
Accrued transfer agent's fees 14
Other accrued expenses and payables 48
--------
Total liabilities 1,067
--------
Net assets applicable to capital shares outstanding $610,488
========
NET ASSETS CONSIST OF:
Paid-in capital $649,366
Accumulated net realized loss on investments (39,257)
Net unrealized appreciation of investments 379
--------
Net assets applicable to capital shares outstanding $610,488
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 62,793
========
Net asset value, redemption price, and offering price per share $ 9.72
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA GNMA TRUST
YEAR ENDED MAY 31, 2004
INVESTMENT INCOME
Interest income $ 27,252
--------
EXPENSES
Management fees 854
Administrative and servicing fees 999
Transfer agent's fees 926
Custody and accounting fees 132
Postage 79
Shareholder reporting fees 41
Trustees' fees 7
Registration fees 43
Professional fees 52
Other 19
--------
Total expenses 3,152
Expenses paid indirectly (1)
--------
Net expenses 3,151
--------
NET INVESTMENT INCOME 24,101
--------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss (266)
Change in net unrealized appreciation/depreciation (21,536)
--------
Net realized and unrealized loss (21,802)
--------
Increase in net assets resulting from operations $ 2,299
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA GNMA TRUST
YEARS ENDED MAY 31,
2004 2003
-----------------------
FROM OPERATIONS
Net investment income $ 24,101 $ 31,269
Net realized gain (loss) on investments (266) 8,198
Change in net unrealized appreciation/depreciation of
investments (21,536) 3,451
-----------------------
Increase in net assets resulting
from operations 2,299 42,918
-----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (32,030) (38,958)
-----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 108,530 301,214
Reinvested dividends 25,261 30,830
Cost of shares redeemed (245,366) (173,367)
-----------------------
Increase (decrease) in net assets from
capital share transactions (111,575) 158,677
-----------------------
Net increase (decrease) in net assets (141,306) 162,637
NET ASSETS
Beginning of period 751,794 589,157
-----------------------
End of period $ 610,488 $ 751,794
=======================
CHANGE IN SHARES OUTSTANDING
Shares sold 10,878 29,537
Shares issued for dividends reinvested 2,543 3,020
Shares redeemed (24,641) (17,008)
-----------------------
Increase (decrease) in shares outstanding (11,220) 15,549
=======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA GNMA TRUST
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 GNMA Trust (the Fund). The
Fund's investment objective is to provide a high level of current
income consistent with preservation of principal.
A. SECURITY VALUATION - The value of each security is
determined (as of the close of trading on the New York Stock
Exchange on each business day the exchange is open) as set
forth below:
1. 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.
2. Securities purchased with maturities of 60 days or less
are stated at amortized cost, which approximates market
value. Repurchase agreements are valued at cost.
3. 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 USAA Investment Management Company
(the Manager), an affiliate of the Fund, under valuation
procedures approved by the Trust's Board of Trustees.
23
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
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. 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 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. 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
24
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
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 Fund had no when-issued commitments
as of May 31, 2004.
F. EXPENSES PAID INDIRECTLY - Through 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 $1,000.
G. 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.
H. 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
25
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
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 $3,000. The Fund had
no borrowings under either of these agreements during the year ended
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
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
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 for security paydown losses resulted in
reclassifications made to the statement of assets and liabilities to
increase accumulated undistributed net investment income and increase
accumulated net realized loss on investments by $7,929,000. 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* $32,030,000 $38,958,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
As of May 31, 2004, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 537,000
Accumulated capital and other losses (39,257,000)
Unrealized appreciation 379,000
Net investment income is accrued daily as dividends and distributed
to shareholders monthly. Distributions of realized gains from
security transactions not offset by capital losses are made annually
in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes. At May 31, 2004, the Fund had a current
post-October deferred capital loss of $3,240,000 and capital loss
carryovers of $36,018,000, for federal income tax purposes. The
post-October loss will be recognized on the first day of the
following fiscal year. If not offset by subsequent capital gains, the
capital loss carryovers will expire between 2005 and 2012, as shown
below. It is unlikely that the Trust's
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
Board of Trustees will authorize a distribution of capital gains
realized in the future until the capital loss carryovers have been
utilized or expire.
CAPITAL LOSS CARRYOVER BALANCE EXPIRES
- ---------------------------------------------------------------------------
$ 3,500,000 2005
8,011,000 2008
13,754,000 2009
1,176,000 2010
9,577,000 2012
(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 $365,432,000 and $469,341,000, respectively.
The cost of securities at May 31, 2004, for federal income tax
purposes, was $608,029,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2004, for federal income tax purposes, were $8,398,000 and
$8,019,000, respectively, resulting in net unrealized appreciation of
$379,000.
(5) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund may lend its securities to qualified financial institutions,
such as certain broker-dealers, to earn additional income. The
borrowers are required to secure their 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
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
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. The Fund had no securities-
lending transactions during the year ended May 31, 2004.
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's
investment policies and manages the Fund's portfolio. 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 GNMA Funds Index,
which tracks the total return performance of the 10 largest
funds in the Lipper GNMA Funds category. The Fund's base fee
is accrued daily and paid monthly at an annualized rate of
0.125% of its 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
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
(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
- ------------------------------------------------------------------------------
+/- 0.20% to 0.50% +/- 0.04%
+/- 0.51% to 1.00% +/- 0.05%
+/- 1.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
For the year ended May 31, 2004, the Fund incurred total
management fees, paid or payable to the Manager, of $854,000,
which included a performance adjustment of $21,000 that
increased the base management fee of 0.125% by 0.003%.
B. 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 $999,000.
C. 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 $25.50 per shareholder account plus
out-of-pocket expenses. For the year ended May 31, 2004, the
Fund incurred transfer agent's fees, paid or payable to USAA
Transfer Agency Company, of $926,000. Additionally, the Fund
recorded a receivable from USAA Transfer Agency Company of
$3,000 at May 31, 2004.
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
D. 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.
(7) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors,
officers, and/or employees of the Manager. None of the affiliated
trustees or Fund officers received any compensation from the Fund.
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2004
(8) 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 period $ 10.16 $ 10.08 $ 9.89 $ 9.37 $ 10.00
-------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .48 .56 .57(b) .66 .64
Net realized and unrealized gain (loss) (.44) .08 .19(b) .52 (.63)
-------------------------------------------------------------------------
Total from investment operations .04 .64 .76 1.18 .01
Less distributions:
From net investment income (.48) (.56) (.57) (.66) (.64)
-------------------------------------------------------------------------
Net asset value at end of period $ 9.72 $ 10.16 $ 10.08 $ 9.89 $ 9.37
=========================================================================
Total return (%)* .39 6.49 7.83 12.91 .21
Net assets at end of period (000) $610,488 $751,794 $589,157 $476,641 $414,435
Ratio of expenses to average
net assets (%)** .47(a) .46(a) .41(a) .32(a) .32
Ratio of net investment income to
average net assets (%)** 3.62 4.43 5.62(b) 6.74 6.77
Portfolio turnover (%) 58.53 74.64 44.77 94.72 80.06
* Assumes reinvestment of all net investment income distributions during the period.
** For the year ended May 31, 2004, average net assets were $665,453,000.
(a) Reflects total expenses, excluding any expenses paid indirectly, which did not affect the Fund's expense ratios.
(b) 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 $ .57
Net realized and unrealized gain $ .19
Ratio of net investment income to average net assets 5.63%
32
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.
33
. . . 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.
34
. . . 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.
35
. . . 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.
36
. . . 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,
37
. . . 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.
38
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TRUSTEES Robert G. Davis, CHAIRMAN OF THE BOARD
Christopher W. Claus, VICE CHAIRMAN OF THE BOARD
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Laura T. Starks, Ph.D.
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT 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.
[LOGO OF RECYCLED PAPER]
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Paper
- --------------------------------------------------------------------------------
[LOGO OF USAA] 9800 Fredericksburg Road -------------
USAA(R) San Antonio, Texas 78288 PRSRT STD
U.S.
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- --------------------------------------------------------------------------------
[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23413-0704 (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
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Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: 07-25-04
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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
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By:* /s/ DAVID HOLMES
--------------------------------------------
Signature and Title: David Holmes/Treasurer
Date: 07-28-04
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*Print the name and title of each signing officer under his or her signature.