UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR/S
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: NOVEMBER 30, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
USAA CORNERSTONE STRATEGY FUND - SEMIANNUAL REPORT FOR PERIOD ENDING
NOVEMBER 30, 2004
[LOGO OF USAA]
USAA(R)
USAA CORNERSTONE
STRATEGY Fund
[GRAPHIC OF USAA CORNERSTONE STRATEGY FUND]
S e m i a n n u a l R e p o r t
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NOVEMBER 30, 2004
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
INVESTMENT OVERVIEW & MANAGERS' COMMENTARY 5
FINANCIAL INFORMATION
Portfolio of Investments 16
Notes to Portfolio of Investments 37
Financial Statements 41
Notes to Financial Statements 44
EXPENSE EXAMPLE 59
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)2005, USAA. All rights reserved.
2
M E S S A G E
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from the PRESIDENT
"
WE REMAIN COMMITTED TO DELIVERING
QUALITY USAA SERVICE AND PROVIDING YOU
[PHOTO OF CHRISTOPHER W. CLAUS] WITH A RANGE OF RESOURCES, INCLUDING OUR
MARKET-TESTED PORTFOLIO MANAGEMENT
TEAM AND NO-LOAD MUTUAL FUNDS.
"
December 2004
- --------------------------------------------------------------------------------
As I write to you in early December, the equity markets have rallied. Several
factors are responsible. First, the presidential election is over. Investors are
relieved that the uncertainty has ended, the results are not in dispute, and no
terrorist attack occurred on U.S. soil. In addition, the U.S. economy is on
sound footing. The annual gross domestic product (GDP) - the total value of all
the goods and services produced in the country - is expected to be up around 4%,
on an inflation-adjusted basis, in 2004 and a moderate yet healthy 3.5% in 2005.
In most of America, the housing market remains strong. Inflation is also under
control, which has kept long-term interest rates in check.
The Federal Reserve Board (the Fed) is expected to continue raising short-term
interest rates at a measured pace. In fact, the Fed has announced its intention
to move toward a more "neutral" interest-rate position, which should put
short-term rates above 3% sometime in 2005. This is good news for money market
investors, because as your yields rise, you will be paid more on your cash
positions. At the same time, however, interest rates on credit-card debt will
also increase. In the months ahead, we expect to see a narrowing of the yield
relationship between bonds of different maturities. In other words, the yield
curve will "flatten." We do not expect a major increase in long-term interest
rates, which the bond market, not the Fed, controls.
3
. . . C O N T I N U E D
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In 2005, the primary drivers of stock market performance will be the growth in
corporate earnings, the valuation of those earnings, Fed policy changes, and the
level of long-term interest rates. Corporate earnings are expected to improve by
about 7%. The dollar is likely to remain weak relative to foreign currencies,
making American products more affordable around the world and helping the U.S.
GDP. But because foreign governments finance the federal budget deficit, the
bond market may push up long-term rates to make U.S. securities more attractive
to foreign investors.
Whatever lies ahead, we remain committed to delivering quality USAA service and
providing you with a range of resources, including our market-tested portfolio
management team and no-load mutual funds without excessive fees. 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.
Mutual fund operating expenses apply and continue throughout the life of the
fund.
Past performance is no guarantee of future results.
5
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA CORNERSTONE STRATEGY FUND
OBJECTIVE
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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
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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.
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11/30/04 5/31/04
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Net Assets $1,448.1 Million $1,350.0 Million
Net Asset Value Per Share $27.47 $25.80
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AVERAGE ANNUAL TOTAL RETURNS AS OF 11/30/04
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5/31/04 TO 11/30/04* 1 YEAR 5 YEARS 10 YEARS
6.47% 12.37% 4.50% 8.13%
*TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. THIS
SIX-MONTH RETURN IS CUMULATIVE.
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
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER GLOBAL FLEXIBLE LIPPER GLOBAL FLEXIBLE USAA CORNERSTONE
DATE S&P 500 INDEX PORTFOLIO FUNDS AVERAGE FUNDS INDEX STRATEGY FUND
------------- ------------------------ ---------------------- ----------------
11/30/1994 $10000.00 $10000.00 $10000.00 $10000.00
12/31/1994 10148.05 10034.31 10008.86 10242.86
1/31/1995 10411.04 9986.22 9875.94 9943.86
2/28/1995 10816.38 10173.64 10019.94 10093.36
3/31/1995 11135.04 10389.95 10248.85 10320.01
4/30/1995 11462.68 10644.51 10482.20 10522.56
5/31/1995 11920.13 10917.72 10742.13 10913.17
6/30/1995 12196.52 11062.11 10845.52 11033.73
7/31/1995 12600.80 11422.42 11135.72 11294.88
8/31/1995 12632.25 11421.04 11127.60 11358.92
9/30/1995 13165.06 11645.80 11322.55 11600.28
10/31/1995 13118.02 11585.30 11228.03 11388.47
11/30/1995 13693.23 11856.37 11470.98 11694.33
12/31/1995 13956.99 12132.14 11730.17 12127.48
1/31/1996 14431.47 12331.96 12016.69 12480.75
2/29/1996 14565.73 12375.21 12013.73 12546.36
3/31/1996 14705.97 12502.82 12108.60 12662.44
4/30/1996 14922.58 12746.90 12371.49 12733.09
5/31/1996 15306.77 12890.95 12449.99 12854.22
6/30/1996 15365.13 12912.30 12501.57 12929.92
7/31/1996 14686.68 12595.37 12196.61 12613.00
8/31/1996 14996.93 12849.80 12376.55 12895.73
9/30/1996 15840.25 13271.27 12723.88 13257.00
10/31/1996 16276.96 13390.59 12880.73 13450.72
11/30/1996 17506.22 13909.95 13429.04 14035.68
12/31/1996 17159.43 13912.57 13448.08 14294.98
1/31/1997 18230.90 14159.71 13697.06 14510.03
2/28/1997 18374.02 14271.74 13776.13 14579.92
3/31/1997 17620.47 14046.04 13550.96 14354.12
4/30/1997 18671.46 14152.83 13683.47 14440.14
5/31/1997 19812.98 14797.51 14258.80 15031.51
6/30/1997 20693.79 15266.14 14658.26 15574.49
7/31/1997 22339.96 15918.68 15261.09 16304.05
8/31/1997 21089.37 15444.48 14823.17 15817.94
9/30/1997 22243.71 16227.96 15454.77 16723.10
10/31/1997 21501.66 15639.64 14906.77 16292.87
11/30/1997 22496.20 15745.04 14953.16 16359.92
12/31/1997 22882.27 15874.09 15081.43 16531.03
1/31/1998 23135.11 15998.05 15118.25 16525.14
2/28/1998 24802.75 16688.20 15799.88 17102.49
3/31/1998 26071.84 17229.73 16330.06 17644.49
4/30/1998 26338.82 17356.33 16474.09 17709.29
5/31/1998 25886.72 17176.30 16333.01 17609.14
6/30/1998 26937.45 17230.28 16320.22 17508.99
7/31/1998 26652.76 17078.62 16160.64 17106.77
8/31/1998 22802.07 15144.92 14372.51 15333.10
9/30/1998 24264.04 15458.90 14602.57 15632.78
10/31/1998 26234.66 16199.01 15365.05 16164.89
11/30/1998 27824.04 16903.94 16053.04 16629.71
12/31/1998 29426.35 17399.73 16437.41 16863.16
1/31/1999 30656.39 17613.54 16632.59 16843.95
2/28/1999 29703.77 17132.27 16228.08 16389.23
3/31/1999 30891.86 17677.46 16756.50 16542.94
4/30/1999 32088.13 18463.55 17656.69 17606.09
5/31/1999 31331.24 18155.28 17375.42 17478.00
6/30/1999 33065.30 18810.48 18019.50 17772.61
7/31/1999 32037.35 18852.79 18007.09 17585.84
8/31/1999 31878.74 18805.07 17943.77 17396.45
9/30/1999 31005.90 18794.10 17845.70 17159.72
10/31/1999 32967.13 19217.23 18207.53 17376.16
11/30/1999 33637.25 19876.92 18846.78 17531.73
12/31/1999 35615.65 21248.52 20114.08 18234.54
1/31/2000 33826.45 20783.56 19703.09 17715.16
2/29/2000 33186.79 21627.82 20799.28 17560.75
3/31/2000 36431.32 21900.34 20698.24 18641.63
4/30/2000 35335.64 21209.22 20005.47 18480.20
5/31/2000 34611.26 20855.97 19691.26 18438.08
6/30/2000 35463.68 21649.63 20397.10 18817.09
7/31/2000 34909.73 21175.02 20145.23 18666.08
8/31/2000 37076.91 21888.92 20832.30 19058.13
9/30/2000 35119.99 21316.01 20217.69 18549.91
10/31/2000 34970.78 20913.03 19825.88 18382.93
11/30/2000 32215.94 20203.42 19059.84 18048.96
12/31/2000 32373.98 20926.31 19831.40 18735.29
1/31/2001 33521.89 21387.89 20087.78 19065.52
2/28/2001 30467.28 20431.74 19074.78 18353.68
3/31/2001 28538.23 19584.79 18133.86 17737.24
4/30/2001 30754.19 20424.44 19058.50 18610.53
5/31/2001 30960.50 20362.92 18912.71 18544.48
6/30/2001 30207.23 20178.35 18636.31 18258.28
7/31/2001 29909.76 19938.61 18372.46 18302.31
8/31/2001 28039.23 19597.55 17918.74 17876.68
9/30/2001 25775.18 18068.29 16737.35 16636.46
10/31/2001 26266.96 18567.53 17132.86 16797.91
11/30/2001 28281.31 19358.86 17751.85 17605.15
12/31/2001 28529.22 19649.84 17773.71 17851.15
1/31/2002 28113.11 19358.20 17658.74 17561.02
2/28/2002 27570.82 19272.82 17513.87 17660.27
3/31/2002 28607.86 19986.15 18000.38 18255.82
4/30/2002 26874.19 19821.36 17757.85 18011.49
5/31/2002 26676.90 19823.63 17966.72 17996.22
6/30/2002 24777.37 19144.87 17290.10 17354.87
7/31/2002 22846.43 17798.33 16266.61 16369.92
8/31/2002 22996.00 17938.21 16347.53 16499.72
9/30/2002 20499.29 16735.71 15341.96 15560.59
10/31/2002 22301.58 17366.75 15987.86 16133.23
11/30/2002 23612.95 18243.56 16629.47 16805.13
12/31/2002 22226.45 17744.11 16206.51 16377.46
1/31/2003 21645.31 17491.96 15949.60 15919.91
2/28/2003 21320.06 17297.94 15782.73 15699.02
3/31/2003 21526.48 17282.33 15765.99 15691.13
4/30/2003 23298.79 18422.90 16682.81 16685.13
5/31/2003 24525.17 19577.78 17575.51 17529.25
6/30/2003 24838.46 19782.30 17788.03 17781.70
7/31/2003 25276.60 19917.17 17926.95 17915.81
8/31/2003 25768.58 20334.36 18305.40 18294.48
9/30/2003 25495.73 20676.19 18585.28 18302.37
10/31/2003 26937.29 21491.89 19296.33 19146.49
11/30/2003 27174.02 21771.31 19605.87 19446.27
12/31/2003 28598.15 22744.34 20262.63 20260.80
1/31/2004 29122.96 23161.21 20720.72 20515.35
2/29/2004 29527.62 23525.55 21012.05 20881.27
3/31/2004 29082.21 23627.72 21106.52 20706.27
4/30/2004 28626.28 22983.73 20497.83 20348.30
5/31/2004 29018.33 23070.91 20592.59 20523.31
6/30/2004 29582.42 23430.97 20879.53 20929.00
7/31/2004 28603.44 22822.80 20347.32 20316.48
8/31/2004 28718.06 22902.70 20427.21 20324.44
9/30/2004 29029.16 23392.03 20917.86 20682.40
10/31/2004 29472.65 23875.49 21301.50 20984.68
11/30/2004 30664.78 25086.05 22287.74 21851.76
[END CHART]
DATA FROM 11/30/94 THROUGH 11/30/04.
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 is 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 is 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 tracks the total
return performance of the 10 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 6.47%
for the six-month period ended November 30, 2004. This
compares to an 8.80% return for the Lipper Global Flexible
Portfolio Funds Average, 8.23% for the Lipper Global Flexible
Funds Index, and 5.67% 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 (1,190
FUNDS IN CATEGORY) AS OF NOVEMBER 30, 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 RATINGTM 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 category, the USAA
Cornerstone Strategy Fund received a Morningstar Rating of 5
stars for the three- and five-year periods among 1,190 and 884
funds and 3 stars for the 10-year period among 299 funds
through November 30, 2004. Ratings are based on risk-adjusted
returns.
HOW WERE THE FUND'S ASSETS ALLOCATED AMONG THE VARIOUS ASSET CLASSES?
We began the period with roughly 56% of net assets in U.S.
stocks, 25% in international stocks, and 19% in bonds and
money market instruments. During the six-month period, we
shifted 5% of net assets from U.S. stocks to international
stocks, given the significantly more attractive valuation
characteristics of overseas stocks relative to their U.S.
counterparts. As a result of this shift and the performance of
the individual managers within their respective markets, we
ended the six-month period with 51% in U.S. equities, 29% in
international stocks, and 19% in bonds and money market
instruments. During the period, the Fund had no allocation to
real estate securities or precious metals and minerals.
HOW DID THE FUND'S U.S. STOCKS PORTION PERFORM?
The equity portion gained slightly less than the Russell 3000
Index, an index utilized by Wellington Management Company, LLP
as a performance benchmark in managing the U.S. stocks portion
of the Fund. Although individual stock selection was positive,
it was not enough to offset unfavorable sector positioning.
The best-performing areas of the market included the energy
sector, driven by the rise in oil prices, as well as the
materials and
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.
10
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
industrials sectors, which benefited from the strength of the
U.S. economic recovery. The Fund benefited from its cyclical
tilt that favored these sectors, with Exxon Mobil Corp.,
General Electric Co., and Precision Castparts Corp. among the
leading contributors to performance.
Overweight positions in the weaker sectors of the market,
including health care and information technology, held the
equity portion back. Regulatory and pricing concerns dragged
down large pharmaceutical companies; Eli Lilly & Co. and
Pfizer, Inc. were the greatest detractors from performance.
Within information technology, weakness in the semiconductor
market weighed on holdings Intel Corp. and Applied Materials,
Inc., but strong performance from VeriSign, Inc. and Microsoft
Corp. partially offset these losses in the sector.
WHAT'S YOUR OUTLOOK FOR THE U.S. STOCKS PORTION?
The U.S. stocks portion maintains a cyclical tilt, emphasizing
the industrial economy over consumer cyclicals. This reflects
our view that, while higher energy costs and decelerating
economic growth will continue to weigh on consumer spending
and challenge corporations' efforts to improve margins,
earnings will continue at a slower, but still above-average,
pace.
HOW DID THE INTERNATIONAL STOCKS PORTION OF THE FUND PERFORM DURING THE PERIOD?
The international stocks portion underperformed relative to the
MSCI-EAFE Index. Our stock selection in leisure companies was
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.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-36.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
a primary detractor. One holding, British Sky Broadcasting
Group plc (U.K.), fell sharply when it announced slower
revenue growth and a capital expenditure plan that would
further postpone margin improvement. We sold our entire
position in August 2004. We also suffered when the
Australia-based News Corp., Inc. "B" announced shareholder
approval of a change in its country of domicile to the United
States. Since News Corp., Inc. "B" would then no longer be an
"international" stock, many international funds began to sell.
The stock of NOK Corp. (Japan), which among other businesses
makes the flexible printed circuits used in mobile phones, fell
when management lowered forecasts due to slower growth in the
mobile phone business and the rising cost of raw materials. Our
view is that this is a short-term problem, and we remain
confident in the stock.
WHICH INTERNATIONAL STOCKS HOLDINGS HAD A POSITIVE IMPACT ON PERFORMANCE?
In the transportation sector, Canadian National Railway Co.
(Canada) gained sharply when the company reported better-than-
expected third-quarter profits due to higher shipments, price
increases, and the rebounding Canadian economy.
We also benefited from several holdings in the retail sector.
Hennes & Mauritz AB "B" (Sweden), better known to U.S.
shoppers as H&M, had better-than-expected sales thanks to
strategic placement of new stores. Esprit Holdings Ltd. (Hong
Kong) and Next plc (U.K.) were other strong retail stocks.
WHAT'S YOUR INTERNATIONAL STOCKS OUTLOOK?
We believe the market as a whole can achieve earnings in the 8%
to 10% range, and we're looking to invest in companies that we
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
believe can reach the 11% to 12% range or better. We are
focused on transparent companies with strong fundamentals, and
believe a volatile market will favor money managers, such as
MFS, who are good stock-pickers.
WHAT ABOUT THE BONDS PORTION OF THE FUND?
Slower economic growth tends to create more favorable
conditions for bonds. Over the six-month period, the bond
market focused on employment as the key measure of the
economy. When data came out showing a weak job market, the
bond market rallied. When there was a strong jobs report, the
bond market sold off. The market also had to deal with the
- --------------------------------------
HISTORICAL YIELD CURVE*
- --------------------------------------
[CHART OF HISTORICAL YIELD CURVE*]
5/28/04 11/30/04 CHANGE
------- -------- ------
3 MONTH 1.060 2.223 1.1627
6 MONTH 1.378 2.432 1.0541
2 YEAR 2.532 2.997 0.4645
3 YEAR 3.063 3.251 0.1877
5 YEAR 3.791 3.691 -0.0999
10 YEAR 4.647 4.349 -0.2976
30 YEAR 5.345 5.002 -0.3426
[END CHART]
*YIELD OF TREASURY BILLS, NOTES, AND BONDS. SOURCE: BLOOMBERG
L.P.
13
. . . C O N T I N U E D
========================--------------------------------------------------------
Federal Reserve Board (the Fed), which in June 2004 began a
tightening regimen that took short-term rates from 1% to 2% in
four moves of 0.25% each. The net effect was that short-term
rates increased while intermediate- and long-term rates fell.
HOW DID YOU MANAGE THE BONDS PORTION OF THE FUND?
We continued to be concerned about the possibility of rising
interest rates, so we kept the Fund's duration (a measure of
interest- rate sensitivity) relatively short. This held back
performance, since longer-term bonds outperformed shorter-term
bonds. Our position in mortgage-backed securities helped
performance. They tend to perform well in periods of slightly
rising or stable interest rates, principally because they have
higher yields and relatively short durations. Also, now that
the period of plunging interest rates has ended, so has the
wave of mortgage pre-payments that previously had such a
negative impact on mortgage-backed securities.
We continued to benefit from our investment in U.S. Treasury
inflation-protected securities (TIPS) as expectations of
future inflation rates rose, and also gained from our
overweight position in investment-grade corporate bonds. We
held floating-rate bonds among shorter maturities, which did
not suffer the price erosion of fixed-rate short-term assets
as the Fed raised rates.
WHAT'S YOUR BONDS MARKET OUTLOOK?
Although employment reports have been inconsistent, we see
signs of continued economic growth, and expect the Fed to
continue raising short-term interest rates. We also expect
long-term rates to increase, but at a more measured pace.
Rates are now at relatively more attractive levels than they
have been in the last two years, and we are finding many
opportunities to make investments.
On behalf of all the managers working on the USAA Cornerstone
Strategy Fund, we thank you for the privilege of serving you.
14
P O R T F O L I O
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HIGHLIGHTS
- -------------------------------------------------------------
TOP 3 HOLDINGS*
IN EACH SECTOR
(% of Net Assets)
- -------------------------------------------------------------
INTERNATIONAL STOCKS
Reckitt Benckiser plc 1.1%
Total S.A. 0.8%
Vodafone Group plc 0.8%
BONDS
Freddie Mac, Pool C01491 1.1%
Government National Mortgage Assn. I, Pool 781496 0.8%
U.S. Treasury Inflation-Indexed Notes, 3.38% 0.7%
U.S. EQUITIES
Microsoft Corp. 1.7%
Bank of America Corp. 1.6%
General Electric Co. 1.3%
*EXCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 16-36.
15
. . . C O N T I N U E D
========================--------------------------------------------------------
ASSET ALLOCATION
11/30/04
[PIE CHART OF ASSET ALLOCATION]
U.S. Equities 50.9%
International Stocks 29.4%
Bonds 17.5%
Other* 7.0%
[END CHART]
*INCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS
PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT
EQUAL 100%.
- --------------------------------------------------------
TOP 10 INDUSTRIES*
(% OF NET ASSETS)
- --------------------------------------------------------
Pharmaceuticals 6.0%
Diversified Banks 4.2%
Integrated Oil & Gas 2.8%
Aerospace & Defense 2.3%
Oil & Gas Exploration & Production 2.3%
Industrial Conglomerates 2.2%
Integrated Telecommunication Services 2.2%
Other Diversified Financial Services 2.2%
Systems Software 2.2%
Regional Banks 2.1%
*EXCLUDES U.S. GOVERNMENT
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of INVESTMENTS
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
U.S. EQUITIES (50.9%)
U.S. STOCKS (49.8%)
ADVERTISING (0.3%)
95,500 Lamar Advertising Co.* $ 3,767
----------
AEROSPACE & DEFENSE (2.3%)
81,900 Engineered Support Systems, Inc. 4,505
68,900 General Dynamics Corp. 7,466
98,800 Precision Castparts Corp. 6,406
122,800 Rockwell Collins, Inc. 4,895
107,400 United Technologies Corp. 10,480
----------
33,752
----------
AIR FREIGHT & LOGISTICS (0.5%)
73,000 FedEx Corp. 6,937
----------
ALUMINUM (0.6%)
244,800 Alcoa, Inc. 8,318
----------
APPAREL, ACCESSORIES, & LUXURY GOODS (0.4%)
69,100 Columbia Sportswear Co.* 3,932
62,100 Liz Claiborne, Inc. 2,550
----------
6,482
----------
APPAREL RETAIL (0.8%)
33,600 Chico's FAS, Inc.* 1,297
37,500 Christopher & Banks Corp. 740
248,000 Gap, Inc.(g) 5,419
172,500 Pacific Sunwear of California, Inc.* 3,831
----------
11,287
----------
APPLICATION SOFTWARE (0.1%)
125,350 Cadence Design Systems, Inc.* 1,722
----------
ASSET MANAGEMENT & CUSTODY BANKS (0.6%)
136,500 Federated Investors, Inc. "B" 4,016
75,600 Franklin Resources, Inc. 4,961
----------
8,977
----------
AUTO PARTS & EQUIPMENT (0.1%)
24,000 Lear Corp. 1,392
----------
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY (0.5%)
85,100 Genzyme Corp.* $ 4,767
72,900 Gilead Sciences, Inc.* 2,512
----------
7,279
----------
CASINOS & GAMING (0.1%)
35,700 Harrah's Entertainment, Inc. 2,192
----------
COMMUNICATIONS EQUIPMENT (1.3%)
469,900 Cisco Systems, Inc.* 8,792
268,100 Motorola, Inc. 5,163
208,800 Polycom, Inc.* 4,769
----------
18,724
----------
COMPUTER HARDWARE (0.7%)
245,900 Dell, Inc.* 9,964
----------
COMPUTER STORAGE & PERIPHERALS (0.1%)
87,800 SanDisk Corp.* 1,983
----------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.3%)
39,600 Caterpillar, Inc. 3,625
3,800 Oshkosh Truck Corp. 239
----------
3,864
----------
CONSUMER FINANCE (0.3%)
83,800 American Express Co. 4,669
----------
DATA PROCESSING & OUTSOURCED SERVICES (0.8%)
34,500 DST Systems, Inc.* 1,682
241,100 First Data Corp. 9,907
----------
11,589
----------
DISTILLERS & VINTNERS (0.1%)
40,700 Constellation Brands, Inc. "A"* 1,819
----------
DIVERSIFIED BANKS (1.6%)
489,600 Bank of America Corp. 22,654
----------
DIVERSIFIED CHEMICALS (0.6%)
196,100 Du Pont (E.I.) De Nemours & Co. 8,887
----------
18
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
DIVERSIFIED COMMERCIAL SERVICES (0.9%)
257,000 ARAMARK Corp. "B" $ 6,723
38,900 Career Education Corp.* 1,513
90,000 ITT Educational Services, Inc.(g)* 4,296
----------
12,532
----------
ELECTRIC UTILITIES (0.4%)
182,100 Southern Co. 5,971
----------
ELECTRONIC MANUFACTURING SERVICES (0.1%)
31,800 Benchmark Electronics, Inc.* 1,115
----------
ENVIRONMENTAL SERVICES (0.1%)
63,400 Waste Connections, Inc.* 2,159
----------
GOLD (0.2%)
65,300 Freeport-McMoRan Copper & Gold, Inc. "B" 2,555
----------
HEALTH CARE EQUIPMENT (1.3%)
80,100 Diagnostic Products Corp. 3,877
71,600 Fisher Scientific International, Inc.* 4,049
209,100 Medtronic, Inc. 10,047
23,300 Waters Corp.* 1,087
----------
19,060
----------
HEALTH CARE FACILITIES (0.4%)
224,400 Odyssey Healthcare, Inc.(g)* 2,996
79,800 Triad Hospitals, Inc.* 2,928
----------
5,924
----------
HEALTH CARE SERVICES (0.1%)
70,200 Dendrite International, Inc.* 1,198
----------
HEALTH CARE SUPPLIES (0.2%)
23,400 Cooper Companies, Inc. 1,627
54,600 Edwards Lifesciences Corp.* 2,054
----------
3,681
----------
HOME ENTERTAINMENT SOFTWARE (0.1%)
41,700 Electronic Arts, Inc.* 2,039
----------
19
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
HOME IMPROVEMENT RETAIL (0.8%)
200,600 Lowe's Companies, Inc. $ 11,099
----------
HOMEBUILDING (0.3%)
136,550 D.R. Horton, Inc. 4,808
----------
HOUSEHOLD PRODUCTS (0.4%)
115,200 Procter & Gamble Co. 6,161
----------
HOUSEWARES & SPECIALTIES (0.2%)
80,800 Yankee Candle Co., Inc.* 2,461
----------
HYPERMARKETS & SUPER CENTERS (0.4%)
114,400 Wal-Mart Stores, Inc. 5,956
----------
INDUSTRIAL CONGLOMERATES (2.2%)
550,400 General Electric Co. 19,462
346,600 Tyco International Ltd. 11,774
----------
31,236
----------
INDUSTRIAL GASES (0.7%)
174,900 Air Products & Chemicals, Inc. 10,013
----------
INDUSTRIAL MACHINERY (0.8%)
148,300 Ingersoll-Rand Co. Ltd. "A" 11,036
----------
INSURANCE BROKERS (0.3%)
159,800 Arthur J. Gallagher & Co. 4,898
----------
INTEGRATED OIL & GAS (2.0%)
121,000 ConocoPhillips 11,010
338,400 Exxon Mobil Corp. 17,343
----------
28,353
----------
INTEGRATED TELECOMMUNICATION SERVICES (0.5%)
329,300 Sprint Corp. - FON Group 7,511
----------
20
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES (0.8%)
139,800 VeriSign, Inc.* $ 4,600
186,900 Yahoo!, Inc.* 7,031
----------
11,631
----------
INVESTMENT BANKING & BROKERAGE (1.2%)
394,800 E-Trade Group, Inc.* 5,472
205,100 Merrill Lynch & Co., Inc. 11,426
----------
16,898
----------
MANAGED HEALTH CARE (0.5%)
60,700 Coventry Health Care, Inc.* 3,013
57,000 Health Net, Inc.* 1,551
60,700 Pacificare Health Systems, Inc. "A"* 2,938
----------
7,502
----------
METAL & GLASS CONTAINERS (0.7%)
384,000 Pactiv Corp.* 9,542
----------
MOVIES & ENTERTAINMENT (1.6%)
309,006 News Corp., Inc. "B" 5,546
980,400 Time Warner, Inc.* 17,363
----------
22,909
----------
MULTI-LINE INSURANCE (0.9%)
202,400 American International Group, Inc. 12,822
----------
OIL & GAS DRILLING (0.2%)
105,200 Ensco International, Inc. 3,294
----------
OIL & GAS EQUIPMENT & SERVICES (0.6%)
137,600 Schlumberger Ltd. 9,031
----------
OIL & GAS EXPLORATION & PRODUCTION (1.2%)
343,300 Chesapeake Energy Corp. 6,179
139,500 Noble Energy, Inc. 8,899
56,700 XTO Energy, Inc. 2,061
----------
17,139
----------
21
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.7%)
422,943 Citigroup, Inc. $ 18,927
137,900 Principal Financial Group, Inc. 5,196
----------
24,123
----------
PACKAGED FOODS & MEAT (0.2%)
129,600 Hain Celestial Group, Inc.* 2,518
----------
PAPER PRODUCTS (0.4%)
131,900 International Paper Co. 5,476
----------
PERSONAL PRODUCTS (0.6%)
211,600 Gillette Co. 9,202
----------
PHARMACEUTICALS (3.4%)
239,300 Abbott Laboratories 10,041
106,200 Eli Lilly & Co. 5,663
115,400 King Pharmaceuticals, Inc.* 1,437
526,100 Pfizer, Inc. 14,610
439,600 Schering-Plough Corp. 7,847
45,200 Watson Pharmaceuticals, Inc.* 1,313
215,100 Wyeth 8,576
----------
49,487
----------
PROPERTY & CASUALTY INSURANCE (0.7%)
41,200 Ambac Financial Group, Inc. 3,351
204,923 St. Paul Travelers Companies, Inc. 7,475
----------
10,826
----------
RAILROADS (0.8%)
296,500 CSX Corp. 11,306
----------
REGIONAL BANKS (0.4%)
88,200 Zions Bancorp. 5,865
----------
RESTAURANTS (0.2%)
65,600 CBRL Group, Inc. 2,675
----------
22
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT (0.7%)
248,500 Applied Materials, Inc.* $ 4,135
76,500 Lam Research Corp.* 1,990
110,200 Varian Semiconductor Equipment Associates, Inc.* 3,914
----------
10,039
----------
SEMICONDUCTORS (1.3%)
107,600 Analog Devices, Inc. 3,976
111,800 Fairchild Semiconductor International, Inc. "A"* 1,710
241,500 Intel Corp. 5,397
41,700 International Rectifier Corp.* 1,766
239,000 Texas Instruments, Inc. 5,779
----------
18,628
----------
SOFT DRINKS (0.6%)
179,100 PepsiCo, Inc. 8,939
----------
SPECIALTY STORES (1.7%)
24,200 Guitar Center, Inc.* 1,171
280,200 Michaels Stores, Inc. 7,658
82,200 O'Reilly Automotive, Inc.(g)* 3,579
119,200 Petco Animal Supplies, Inc.* 4,310
91,600 PETsMART, Inc. 3,139
171,100 Staples, Inc. 5,460
----------
25,317
----------
SYSTEMS SOFTWARE (2.2%)
227,400 Computer Associates International, Inc. 6,942
921,700 Microsoft Corp. 24,711
----------
31,653
----------
TECHNOLOGY DISTRIBUTORS (0.3%)
63,000 CDW Corp. 4,140
----------
THRIFTS & MORTGAGE FINANCE (0.5%)
49,700 Fannie Mae 3,415
27,200 Golden West Financial Corp. 3,243
----------
6,658
----------
TOBACCO (0.7%)
165,700 Altria Group, Inc. 9,526
----------
23
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
TRADING COMPANIES & DISTRIBUTORS (0.2%)
52,000 Fastenal Co. $ 3,180
----------
TRUCKING (0.2%)
70,000 Yellow Roadway Corp.(g)* 3,700
----------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
394,700 Nextel Communications, Inc. "A"* 11,233
----------
Total U.S. stocks (cost: $609,717) 721,283
----------
EXCHANGE-TRADED FUNDS (1.1%)
131,400 iShares Russell 2000 Growth Index Fund(g) 8,568
58,400 MidCap SPDR Trust Series 1(g) 6,828
----------
Total exchange-traded funds (cost: $14,409) 15,396
----------
Total U.S. equities (cost: $624,126) 736,679
----------
INTERNATIONAL STOCKS (29.4%)
AUSTRALIA (0.4%)
471,913 QBE Insurance Group Ltd. (Property & Casualty Insurance) 5,086
----------
AUSTRIA (0.6%)
173,170 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks) 8,791
----------
BRAZIL (0.4%)
65,110 Brasil Telecom Participacoes S.A. ADR (Preferred)
(Integrated Telecommunication Services) 2,428
148,800 Companhia Vale Do Rio Doce ADR (Diversified Metals & Mining) 3,693
----------
6,121
----------
CANADA (1.1%)
113,120 BCE, Inc. (Integrated Telecommunication Services) 2,742
111,210 Canadian National Railway Co. (Railroads) 6,447
116,450 Encana Corp. (Oil & Gas Exploration & Production) 6,633
----------
15,822
----------
CAYMAN ISLANDS (0.2%)
4,241,000 Hutchison Telecommunications International Ltd. (Wireless
Telecommunication Services)* 3,463
----------
24
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
FRANCE (4.2%)
369,860 AXA S.A. (Multi-Line Insurance) $ 8,641
102,120 Business Objects S.A. (Application Software)* 2,387
240,331 Credit Agricole S.A. (Regional Banks)(g) 7,099
60,160 L'Air Liquide S.A. (Industrial Gases) 10,377
60,630 Sanofi-Synthelabo S.A. (Pharmaceuticals) 4,554
137,141 Schneider Electric S.A. (Electrical Components & Equipment) 9,501
65,134 Societe Television Francaise 1 (Broadcasting & Cable TV) 2,069
49,780 Total S.A. (Integrated Oil & Gas)(g) 10,870
172,460 Veolia Environnement S.A. (Multi-Utilities & Unregulated Power) 5,426
----------
60,924
----------
GERMANY (0.8%)
142,760 Bayerische Motoren Werke AG (Automobile Manufacturers) 6,015
83,170 Schering AG (Pharmaceuticals) 5,905
----------
11,920
----------
HONG KONG (0.4%)
5,068,500 CNOOC Ltd. (Oil & Gas Exploration & Production) 2,884
592,500 Esprit Holdings Ltd. (Apparel Retail) 3,246
----------
6,130
----------
HUNGARY (0.4%)
97,900 OTP Bank Ltd. GDR (Regional Banks) 5,629
----------
IRELAND (0.6%)
291,150 Depfa Bank plc (Specialized Finance) 4,748
190,520 Irish Life & Permanent plc (Other Diversified Financial Services) 3,284
----------
8,032
----------
ITALY (0.5%)
306,000 RAS S.p.A. (Multi-Line Insurance) 6,613
----------
JAPAN (5.2%)
249,000 Bridgestone Corp. (Tires & Rubber) 4,507
173,000 Canon, Inc. (Electronic Equipment Manufacturers) 8,663
330,800 Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals) 5,184
697 KDDI Corp. (Integrated Telecommunication Services) 3,436
64,100 Kyocera Corp. (Electronic Equipment Manufacturers) 4,510
75,100 Murata Manufacturing Co. Ltd. (Electrical Components & Equipment) 3,921
115,000 NOK Corp. (Auto Parts & Equipment) 3,331
62,900 Nintendo Co. (Leisure Products) 7,557
25
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
114,400 Nitto Denko Corp. (Specialty Chemicals) $ 5,951
45,900 Seiko Epson Corp. (Office Electronics) 1,875
660,000 Sekisui Chemical Co. Ltd. (Homebuilding) 4,330
840,000 Shinsei Bank Ltd. (Diversified Banks) 5,608
37,000 Tokyo Broadcasting System, Inc. (Broadcasting & Cable TV) 586
1,659,000 Tokyo Gas Co. Ltd. (Gas Utilities) 6,649
901,000 Toray Industries, Inc. (Textiles) 3,961
155,600 Toyota Motor Corp. (Automobile Manufacturers) 5,829
----------
75,898
----------
KOREA (0.4%)
15,410 Samsung Electronics Co. Ltd. (Semiconductors) 6,386
----------
MEXICO (0.6%)
67,680 America Movil S.A. de C.V. ADR "L" (Wireless
Telecommunication Services) 3,161
90,020 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 5,606
----------
8,767
----------
NETHERLANDS (0.3%)
324,340 Reed Elsevier N.V. (Publishing) 4,335
----------
POLAND (0.1%)
183,080 Powszechna Kasa Oszczednosci Bank Polski S.A. (Regional Banks)* 1,449
----------
SINGAPORE (0.8%)
376,000 DBS Group Holdings Ltd. (Diversified Banks) 3,625
3,406,080 Singapore Telecommunications Ltd. (Integrated
Telecommunication Services) 4,926
276,000 United Overseas Bank Ltd. (Diversified Banks) 2,290
----------
10,841
----------
SPAIN (1.5%)
439,800 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks)(g) 7,219
203,550 Iberdrola S.A. (Electric Utilities) 4,771
531,378 Telefonica S.A. (Integrated Telecommunication Services) 9,314
----------
21,304
----------
SWEDEN (2.2%)
172,380 Atlas Copco AB "A" (Industrial Machinery) 7,572
2,436,960 Ericsson LM "B" (Communications Equipment)* 8,101
26
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------
217,860 Hennes & Mauritz AB "B" (Apparel Retail) $ 6,983
239,260 Sandvik AB (Industrial Machinery) 9,657
----------
32,313
----------
SWITZERLAND (2.3%)
18,200 Credit Suisse Group (Diversified Banks) 708
106,750 Novartis AG (Pharmaceuticals) 5,102
90,510 Roche Holdings AG (Pharmaceuticals) 9,507
10,970 Straumann AG (Health Care Supplies) 2,391
21,602 Syngenta AG (Specialty Chemicals) 2,279
33,480 Synthes, Inc. (Health Care Equipment)* 3,616
120,104 UBS AG (Diversified Banks) 9,682
----------
33,285
----------
TAIWAN (0.1%)
1,295,637 Compal Electronics, Inc. (Computer Hardware) 1,242
----------
UNITED KINGDOM (6.3%)
851,740 Amvescap plc (Investment Banking & Brokerage) 5,210
199,890 AstraZeneca plc (Pharmaceuticals) 7,796
264,600 BG Group plc (Oil & Gas Exploration & Production) 1,832
174,200 BOC Group plc (Diversified Chemicals) 3,110
259,960 Bunzl plc (Diversified Commercial Services) 2,214
652,090 Diageo plc (Distillers & Vintners) 9,104
160,700 GlobalSantaFe Corp. (Oil & Gas Drilling) 5,046
1,575,691 Kingfisher plc (Home Improvement Retail) 8,655
164,020 Next plc (Apparel Retail) 5,018
557,240 Reckitt Benckiser plc (Household Products) 16,398
196,074 Royal Bank Scotland Group plc (Diversified Banks) 6,013
4,149,060 Vodafone Group plc (Wireless Telecommunication Services) 11,236
721,740 William Hill plc (Casinos & Gaming) 7,158
332,550 Yell Group plc (Publishing) 2,745
----------
91,535
----------
Total international stocks (cost: $325,462) 425,886
----------
27
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
BONDS (17.5%)
CORPORATE OBLIGATIONS (6.9%)
APPAREL, ACCESSORIES, & LUXURY GOODS (0.1%)
$ 1,000 Kellwood Co., Senior Notes 7.88% 7/15/2009 $ 1,107
----------
BROADCASTING & CABLE TV (0.3%)
2,000 Comcast Cable Communications, Inc.,
Senior Notes 6.88 6/15/2009 2,215
2,000 Cox Communications, Inc., Notes(g) 4.63 6/01/2013 1,866
----------
4,081
----------
CONSUMER FINANCE (0.6%)
2,000 American Honda Finance Corp., MTN(b) 2.38(c) 5/11/2007 2,001
2,000 General Motors Acceptance Corp., Notes(g) 3.33(c) 10/20/2005 2,008
1,000 General Motors Acceptance Corp., Notes 6.75 12/01/2014 988
2,000 Household Finance Corp., Notes 6.38 10/15/2011 2,201
2,000 SLM Corp., MTN, CPI Floating Rate Note 4.03(c) 6/01/2009 2,012
----------
9,210
----------
DIVERSIFIED BANKS (0.3%)
1,600 Bank of America Corp., Subordinated Notes 9.38 9/15/2009 1,948
1,818 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 1,761
----------
3,709
----------
ELECTRIC UTILITIES (1.2%)
1,000 FirstEnergy Corp., Notes, Series B 6.45 11/15/2011 1,075
1,954 Oglethorpe Power Corp., Secured
Series Facility Bonds 6.97 6/30/2011 2,079
2,000 Pinnacle West Capital Corp., Senior Notes 2.96(c) 11/01/2005 2,000
2,000 Power Contract Financing, Senior Notes(b) 6.26 2/01/2010 2,083
2,000 PPL Capital Funding, Inc., Guaranteed Notes,
Series A 4.33 3/01/2009 1,971
2,000 Public Service Electric & Gas Co., First
Mortgage Bond, Series A 2.06(c) 6/23/2006 2,000
2,000 Sempra Energy ESOP, Series 1999 (NBGA)(b) 4.21 11/01/2014(e) 2,011
2,000 Tampa Electric Co., Notes 6.38 8/15/2012 2,172
2,000 Tristate General & Transport Assoc., Notes(b) 6.04 1/31/2018 2,062
----------
17,453
----------
FOOD RETAIL (0.1%)
2,000 Safeway Inc., Notes 5.80 8/15/2012 2,081
----------
28
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of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
FOREST PRODUCTS (0.1%)
$ 1,000 Weyerhaeuser Co., Notes 6.75% 3/15/2012 $ 1,123
----------
GAS UTILITIES (0.3%)
1,000 Kinder Morgan Energy Partners, LP,
Senior Notes 5.13 11/15/2014 989
2,000 Noram Energy Corp., Debentures 6.50 2/01/2008 2,146
1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 1,049
----------
4,184
----------
HEALTH CARE FACILITIES (0.1%)
2,000 HCA, Inc., Notes(g) 5.25 11/06/2008 2,005
----------
HOUSEWARES & SPECIALTIES (0.1%)
2,000 Newell Rubermaid, Inc., MTN, Series A 6.35 7/15/2008 2,118
----------
INTEGRATED TELECOMMUNICATION SERVICES (0.1%)
1,000 Citizens Communications Co., Notes 8.50 5/15/2006 1,076
----------
LIFE & HEALTH INSURANCE (0.1%)
2,000 Phoenix Home Life Mutual Insurance, Notes(b) 6.95 12/01/2006 2,096
----------
MANAGED HEALTH CARE (0.2%)
2,110 Highmark, Inc., Senior Notes(b) 6.80 8/15/2013 2,270
----------
MOVIES & ENTERTAINMENT (0.3%)
2,000 AOL Time Warner, Inc., Notes 5.63 5/01/2005 2,024
2,000 AOL Time Warner, Inc., Notes(g) 6.88 5/01/2012 2,249
----------
4,273
----------
MULTI-UTILITIES & UNREGULATED POWER (0.1%)
2,000 Duke Capital Corp., Senior Notes 5.50 3/01/2014 2,023
----------
OIL & GAS EQUIPMENT & SERVICES (0.3%)
2,000 Cooper Cameron Corp., Senior Notes 2.65 4/15/2007 1,946
1,000 Enterprise Products Operating, LP,
Senior Notes(b) 5.60 10/15/2014 999
2,000 Halliburton Co., Senior Notes 3.57(c) 10/17/2005 2,018
----------
4,963
----------
29
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
OIL & GAS EXPLORATION & PRODUCTION (0.1%)
$ 1,000 Southwestern Energy Co., MTN 7.63% 5/01/2027(o) $ 1,084
----------
OIL & GAS REFINING & MARKETING &
TRANSPORTATION (0.2%)
2,000 Magellan Midstream Partners, LP, Notes 6.45 6/01/2014 2,153
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.1%)
2,000 Citigroup, Inc., Global Notes 4.25 7/29/2009 2,014
----------
PACKAGED FOODS & MEAT (0.1%)
2,000 Kraft Foods, Inc., Notes 4.63 11/01/2006 2,042
----------
PAPER PRODUCTS (0.1%)
2,000 MeadWestVaco Corp., Notes 2.37(c) 12/01/2005 2,000
----------
PROPERTY & CASUALTY INSURANCE (0.4%)
2,000 21st Century Insurance Group, Senior Notes 5.90 12/15/2013 2,010
1,000 ACE INA Holdings, Inc., Senior Notes 5.88 6/15/2014 1,006
1,000 AXIS Capital Holdings Ltd., Senior Notes 5.75 12/01/2014 993
1,000 Ohio Casualty Corp., Notes 7.30 6/15/2014 1,047
----------
5,056
----------
RAILROADS (0.1%)
2,000 Union Pacific Railroad Corp.,
Pass-Through Certificates, Series 2004-2(b) 5.21 9/30/2014 1,988
----------
REAL ESTATE INVESTMENT TRUSTS (0.9%)
2,000 Duke Realty, LP, Notes 5.40 8/15/2014 2,018
2,000 EOP Operating, LP, Guaranteed Notes 4.75 3/15/2014 1,916
2,000 ERP Operating, LP, Notes 5.25 9/15/2014 1,995
1,500 Gables Realty, LP, Senior Notes 5.75 7/15/2007 1,556
1,000 iStar Financial, Inc., Senior Notes, Series B 5.13 4/01/2011 1,000
2,000 Liberty Property, LP, Senior Notes 5.65 8/15/2014 2,033
2,000 Union Dominion Realty Trust, Senior Notes 5.25 1/15/2015 1,964
----------
12,482
----------
REGIONAL BANKS (0.1%)
1,000 Hudson United Bank, Subordinated Notes 7.00 5/15/2012 1,112
----------
30
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
REINSURANCE (0.1%)
$ 2,000 Montpelier Re Holdings Ltd., Senior Notes 6.13% 8/15/2013 $ 2,042
----------
SPECIALTY CHEMICALS (0.1%)
1,000 The Lubrizol Corp., Senior Notes 5.50 10/01/2014 988
----------
THRIFTS & MORTGAGE FINANCE (0.3%)
2,000 Independence Community Bank Corp., Notes(l) 3.50 6/20/2013 1,921
2,000 Washington Mutual Bank, Subordinated Notes 5.65 8/15/2014 2,047
----------
3,968
----------
Total corporate obligations (cost: $100,610) 100,701
----------
EURODOLLAR AND YANKEE OBLIGATIONS (0.7%)(n)
DIVERSIFIED METALS & MINING (0.1%)
1,000 Glencore Funding LLC, Notes (Switzerland)(b) 6.00 4/15/2014 951
----------
FOREIGN GOVERNMENT (0.1%)
2,000 Republic of Poland, Notes (Poland) 5.25 1/15/2014 2,054
----------
INTEGRATED OIL & GAS (0.1%)
2,000 BP Capital plc, Company Guaranty Notes
(United Kingdom) 2.75 12/29/2006 1,980
----------
INTEGRATED TELECOMMUNICATION SERVICES (0.1%)
1,000 Telecom Italia Capital, Guaranteed Senior
Notes, Series A (Luxembourg) 4.00 11/15/2008 992
----------
OIL & GAS EXPLORATION & PRODUCTION (0.2%)
2,000 Canadian Oil Sands Ltd., Notes (Canada)(b) 5.80 8/15/2013 2,060
1,000 Nexen, Inc., Notes (Canada) 5.05 11/20/2013 981
----------
3,041
----------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
2,000 Westfield Capital Corp., Senior Notes
(Australia)(b) 5.13 11/15/2014 1,958
----------
Total Eurodollar and Yankee obligations (cost: $11,016) 10,976
----------
31
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (0.7%)
AIRLINES (0.4%)
$ 1,900 Airplanes Pass-Through Trust, Pass-Through
Certificates, Series 1R, Class A8 2.21%(c) 3/15/2019 $ 1,651
1,329 America West Airlines, Inc., Pass-Through
Certificates, Series 1996-1, Class A, EETC 6.85 7/02/2009 1,312
1,000 Delta Air Lines, Inc., Pass-Through Certificates,
Series 2001-1, Class A-2, EETC(g) 7.11 9/18/2011 965
1,708 Northwest Airlines Corp., Pass-Through
Certificates, Series 1999-2A, EETC(g) 7.58 3/01/2019 1,753
----------
5,681
----------
ASSET-BACKED FINANCING (0.3%)
2,000 Chase Credit Card Owner Trust,
Series 2002-5, Class A 2.20(c) 10/15/2009 2,005
2,000 SLM Student Loan Trust,
Series 2004-8, Class A2 2.12(c) 7/25/2013 2,002
----------
4,007
----------
Total asset-backed securities (cost: $9,738) 9,688
----------
COMMERCIAL MORTGAGE SECURITIES (0.3%)
COMMERICAL MORTGAGE-BACKED SECURITIES (0.2%)
905 LB Commercial Conduit Mortgage Trust,
Series 1995-C2, Class C 7.78 9/25/2025 907
2,000 Merrill Lynch Mortgage Investors, Inc.,
Series 1998-C1, Class A2 6.48 11/15/2026 2,132
----------
3,039
----------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.1%)(m)
25,018 Bear Stearns Commercial Mortgage Securities, Inc.,
Series 2004-ESA, Class X1 (acquired
6/17/2004; cost $1,000)(b,f) 1.24 5/14/2016 918
----------
Total commercial mortgage securities (cost: $3,962) 3,957
----------
U.S. GOVERNMENT AGENCY ISSUES (6.5%)(j)
ASSET-BACKED FINANCING (0.2%)
2,855 U.S. Small Business Administration,
Participation Certificates, Series 2003-20 F 4.07 6/01/2023 2,735
----------
32
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
DEBENTURES (0.9%)
Fannie Mae,(+)
$ 5,000 CPI Floating Rate Note 3.79%(c) 2/17/2009 $ 5,055
4,000 Subordinated Note 5.25 8/01/2012 4,118
3,100 Benchmark Note 7.13 6/15/2010 3,557
----------
12,730
----------
MORTGAGE-BACKED PASS-THROUGH SECURITIES (4.2%)
Fannie Mae,(+)
7,992 Pool 706349 5.00 5/01/2033 7,908
943 Pool 610989 6.50 10/01/2016 1,001
1,705 Pool 253180 6.50 2/01/2030 1,793
750 Pool 535164 7.00 2/01/2030 796
291 Pool 547483 7.00 8/01/2030 309
Freddie Mac,(+)
6,082 Pool C79394 5.50 4/01/2033 6,167
15,887 Pool C01491 6.00 2/01/2033 16,401
Government National Mortgage Assn. I,
2,487 Pool 780860 6.00 9/15/2028 2,582
1,985 Pool 603869 6.00 1/15/2033 2,056
396 Pool 340945 6.50 5/15/2023 420
564 Pool 352106 6.50 8/15/2023 598
209 Pool 366762 6.50 4/15/2024 222
1,102 Pool 577423 6.50 1/15/2032 1,163
10,509 Pool 781496 6.50 9/15/2032 11,086
1,811 Pool 575469 7.00 12/15/2031 1,927
1,406 Pool 583624 7.00 6/15/2032 1,496
36 Pool 206743 7.50 3/15/2017 39
127 Pool 207904 7.50 3/15/2017 138
18 Pool 207950 7.50 3/15/2017 19
54 Pool 166093 8.00 6/15/2016 59
20 Pool 166108 8.00 6/15/2016 22
22 Pool 177786 8.00 9/15/2016 23
42 Pool 186000 8.00 11/15/2016 46
32 Pool 193968 8.00 12/15/2016 35
38 Pool 203822 8.00 3/15/2017 42
3 Pool 034140 8.50 9/15/2009 3
13 Pool 138007 8.50 6/15/2016 14
7 Pool 164021 8.50 6/15/2016 8
32 Pool 159980 8.50 7/15/2016 35
1 Pool 171477 8.50 9/15/2016 1
33
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. I,
$ 5 Pool 176311 8.50% 9/15/2016 $ 5
10 Pool 177247 8.50 9/15/2016 12
14 Pool 174005 8.50 12/15/2016 15
27 Pool 197279 8.50 12/15/2016 30
51 Pool 190671 8.50 1/15/2017 56
5 Pool 197400 8.50 1/15/2017 6
32 Pool 201986 8.50 1/15/2017 35
26 Pool 185270 8.50 2/15/2017 29
3 Pool 157116 9.00 6/15/2016 4
1 Pool 162801 9.00 7/15/2016 1
3 Pool 166282 9.00 7/15/2016 4
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
22 Pool 031433 9.50 6/15/2009 25
2 Pool 032271 9.50 6/15/2009 3
41 Pool 034679 9.50 6/15/2009 45
9 Pool 038310 9.50 6/15/2009 10
7 Pool 035052 9.50 9/15/2009 7
26 Pool 167971 9.50 7/15/2016 29
20 Pool 172771 9.50 9/15/2016 22
3 Pool 185417 9.50 11/15/2016 3
19 Pool 186335 9.50 11/15/2016 22
11 Pool 187909 9.50 11/15/2016 12
1 Pool 184544 9.50 12/15/2016 1
7 Pool 190555 9.50 12/15/2016 8
61 Pool 189802 9.50 4/15/2017 69
27 Pool 214646 9.50 5/15/2017 31
9 Pool 225137 9.50 8/15/2017 11
25 Pool 037733 10.00 11/15/2009 27
9 Pool 037889 10.00 11/15/2009 10
20 Pool 037888 10.00 11/15/2009 22
21 Pool 036897 10.00 12/15/2009 23
8 Pool 059731 11.50 3/15/2013 9
Government National Mortgage Assn. II,
1,730 Pool 781494 6.50 8/20/2031 1,820
939 Pool 002934 7.50 6/20/2030 1,006
224 Pool 003070 7.50 4/20/2031 240
822 Pool 002958 8.00 8/20/2030 891
----------
60,966
----------
34
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.8%)
$ 5,123 Freddie Mac, Series 2389 VH(+) 6.00% 12/01/2031 $ 5,278
Government National Mortgage Assn. I,
5,000 Series 2003-50 PC 5.50 3/16/2032 5,130
91 Series 1999-11VC 6.50 5/20/2014 91
1,000 Series 2001-49 VB 7.00 11/16/2016 1,039
----------
11,538
----------
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (0.4%)
1,933 Perforadora Centrale S.A. de C.V. "A",
Guaranteed Bond, Series A, Title XI 5.24 12/15/2018 1,998
4,286 Rowan Companies, Inc., Guaranteed
Bond, Title XI 2.80 10/20/2013 4,069
----------
6,067
----------
Total U.S. government agency issues (cost: $92,534) 94,036
----------
U.S. TREASURY SECURITIES (1.8%)
INFLATION-INDEXED NOTES (1.2%)(a)
8,555 3.38%, 1/15/2012(g) 9,718
6,546 3.50%, 1/15/2011 7,438
----------
17,156
----------
NOTES (0.6%)
2,000 3.88%, 2/15/2013(g) 1,953
7,000 4.00%, 2/15/2014(g) 6,827
----------
8,780
----------
Total U.S. Treasury securities (cost: $23,972) 25,936
----------
MUNICIPAL BONDS (0.6%)
COMMUNITY SERVICE (0.1%)
2,000 Jicarilla Apache Nation, NM, RB 2.95 12/01/2006 1,978
----------
ENVIRONMENTAL SERVICES (0.3%)
2,000 California State Financing Auth. PCRB,
(Republic Services, Inc.) 2.00 12/01/2033(e) 2,000
2,500 Gulf Coast Waste Disposal Auth., TX, RB,
Waste Management of Texas, Series A 2.50 5/01/2028(e) 2,494
----------
4,494
----------
35
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
HOSPITAL (0.2%)
$ 2,000 Rhode Island State Health & Education RB,
Series C (LOC - Citizens Bank of
Rhode Island) 3.60% 9/15/2033(e) $ 1,981
----------
Total municipal bonds (cost: $8,499) 8,453
----------
Total bonds (cost: $250,331) 253,747
----------
MONEY MARKET INSTRUMENTS (1.8%)
COMMERCIAL PAPER (0.1%)
-----------------------
OTHER DIVERSIFIED FINANCIAL SERVICES
1,826 Wheels, Inc.(b,d) 2.10 12/01/2004 1,826
----------
DISCOUNT NOTE (0.5%)
--------------------
7,435 Federal Home Loan Bank(j,+) 1.93 12/01/2004 7,435
----------
NUMBER
OF SHARES
- ---------
MONEY MARKET FUND (1.2%)(h)
---------------------------
16,410,036 SSgA Prime Money Market Fund 1.82 - 16,410
----------
Total money market instruments (cost: $25,671) 25,671
----------
PRINCIPAL
AMOUNT
(000)
- ----------
SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (5.2%)
CORPORATE OBLIGATIONS (2.1%)
----------------------------
LIFE & HEALTH INSURANCE (0.7%)
$10,000 Monumental Global Funding II, Notes(b) 2.35(c) 5/02/2005 10,011
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.7%)
10,000 Wells Fargo & Co. 2.28(c) 12/16/2005 10,014
----------
REGIONAL BANKS (0.7%)
10,000 Natexis Banque NY, Yankee CD 2.13(c) 12/10/2004 10,000
----------
30,025
----------
36
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (2.4%)(i)
-------------------------------
$19,000 CS First Boston LLC, 2.06%, acquired on
11/30/2004 and due 12/01/2004 at
$19,000 (collateralized by $19,425 of Freddie
Mac Discount Notes(j,+), 2.29%(k), due
1/03/2005; market value $19,384) $ 19,000
7,500 Deutsche Bank Securities, Inc., 2.05%, acquired
on 11/30/2004 and due 12/01/2004 at
$7,500 (collateralized by $7,557 of Fannie
Mae Notes(j,+), 3.84%(e), due 10/01/2033;
market value $7,650) 7,500
7,235 Lehman Brothers, Inc., 2.05%, acquired on
11/30/2004 and due 12/01/2004 at $7,235
(collateralized by $7,415 of Fannie Mae
Discount Notes(j,+), 2.24%(k), due 2/09/2005;
market value $7,382) 7,235
1,235 Morgan Stanley & Co., Inc., 2.05%, acquired
on 11/30/2004 and due 12/01/2004 at
$1,235 (collateralized by $1,285 of Fannie
Mae Discount Notes(j,+), 2.16%(k), due
1/12/2005; market value $1,282) 1,235
----------
34,970
----------
COMMERCIAL PAPER (0.7%)
-----------------------
ASSET-BACKED FINANCING
10,082 Grenadier Funding LTD 2.15%(k) 12/10/2004 10,077
----------
NUMBER
OF SHARES
- ---------
MONEY MARKET FUNDS (0.0%)(h,p)
------------------------------
595,816 AIM Short-Term Investment Co.
Liquid Assets Portfolio 1.93 - 596
47,430 Merrill Lynch Premier Institutional Fund 1.90 - 47
----------
643
----------
Total short-term investments purchased with
cash collateral from securities loaned (cost: $75,720) 75,715
----------
TOTAL INVESTMENTS (COST: $1,301,310) $1,517,698
==========
37
N O T E S
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to Portfolio of INVESTMENTS
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
GENERAL NOTES
- --------------------------------------------------------------------------------
Market values of securities are determined by procedures and practices
discussed in Note 1 to the financial statements.
The portfolio of investments category 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.
ISHARES - exchange-traded funds, managed by Barclays Global Fund
Advisors, that represent a portfolio of stocks designed to closely
track a specific market index. iShares funds are traded on various
stock exchanges.
SPDR - Standard & Poor's depositary receipt, or "Spider," is an
exchange-traded fund based on either the S&P 500 Index or the S&P
MidCap 400 Index, and is traded on the American Stock Exchange (AMEX).
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
and interest payments when due. A high-quality bank,
38
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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 non-bank
guarantee agreement from Sempra Energy.
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 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 liquidity
guidelines approved by the Board of Trustees, unless otherwise
noted as illiquid.
(c) Variable-rate or floating-rate security - interest rate is adjusted
periodically. The interest rate disclosed represents the current
rate at November 30, 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
39
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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
liquidity 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 deemed illiquid by the Manager, under liquidity guidelines
approved by the Board of Trustees, and valued using methods
determined by a pricing service, under valuation procedures
approved by the Board of Trustees. The aggregate market value of
these securities at November 30, 2004, was $918,000, which
represented 0.1% of the Fund's net assets.
(g) The security or a portion thereof was out on loan as of
November 30, 2004.
(h) Rate represents the money market fund annualized seven-day yield
at November 30, 2004.
(i) 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.
(j) 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.
(k) Zero-coupon security. Rate represents the effective yield at date
of purchase.
40
N O T E S
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to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
(l) 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.
(m) Interest-only commercial mortgage-backed securities (IO CMBSs) -
represent the right to receive only the interest payments on an
underlying pool of commercial mortgage loans. The interest rate
disclosed is the purchase yield, which reflects an anticipated
yield based upon interest rates at the time of purchase and the
estimated timing and amount of future cash flows. The principal
amount represents the notional amount of the underlying pool on
which current interest is calculated. IO CMBSs are backed by loans
that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayments
penalties. This serves to moderate their prepayment risk. IO
CMBSs are subject to recessionary default-related prepayments that
may have a negative impact on yield.
(n) Eurodollar and Yankee obligations are dollar-denominated
instruments that are issued outside the U.S. capital markets by
foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions
(Eurodollar obligations) as well as dollar-denominated instruments
that are issued by foreign issuers in the U.S. capital markets
(Yankee obligations).
(o) Put bond - provides the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature may
shorten the effective maturity of the security.
(p) Represents less than 0.1% of net assets.
* Non-income-producing security for the 12 months preceding
November 30, 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
NOVEMBER 30, 2004 (UNAUDITED)
ASSETS
Investments in securities, at market value (including securities
on loan of $70,267) (identified cost of $1,301,310) $1,517,698
Cash denominated in foreign currencies (identified cost of $280) 286
Receivables:
Capital shares sold 458
Foreign currency sold 620
Dividends and interest 6,945
Securities sold 9,608
Other 24
Unrealized appreciation on foreign currency contracts held, at value 3
----------
Total assets 1,535,642
----------
LIABILITIES
Payables:
Upon return of securities loaned 75,721
Securities purchased 9,687
Capital shares redeemed 429
Upon settlement of delayed trades 694
Unrealized depreciation on foreign currency contracts held, at value 3
Accrued management fees 884
Accrued transfer agent's fees 6
Other accrued expenses and payables 80
----------
Total liabilities 87,504
----------
Net assets applicable to capital shares outstanding $1,448,138
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,153,063
Accumulated undistributed net investment income 14,715
Accumulated net realized gain on investments 63,944
Net unrealized appreciation of investments 216,388
Net unrealized appreciation on foreign currency translations 28
----------
Net assets applicable to capital shares outstanding $1,448,138
==========
Capital shares outstanding, unlimited number of shares
authorized, no par value 52,718
==========
Net asset value, redemption price, and offering price per share $ 27.47
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
42
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA CORNERSTONE STRATEGY FUND
SIX-MONTH PERIOD ENDED NOVEMBER 30, 2004 (UNAUDITED)
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $304) $ 9,652
Interest 5,621
Securities lending 129
-------
Total income 15,402
-------
EXPENSES
Management fees 5,141
Administrative and servicing fees 1,028
Transfer agent's fees 1,392
Custody and accounting fees 270
Postage 136
Shareholder reporting fees 63
Trustees' fees 3
Registration fees 16
Professional fees 45
Other 8
-------
Total expenses 8,102
Expenses paid indirectly (82)
-------
Net expenses 8,020
-------
NET INVESTMENT INCOME 7,382
-------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments: 29,571
Foreign currency transactions (86)
Change in net unrealized appreciation/depreciation of:
Investments 50,944
-------
Net realized and unrealized gain 80,429
-------
Increase in net assets resulting from operations $87,811
=======
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
SIX-MONTH PERIOD ENDED NOVEMBER 30, 2004 (UNAUDITED),
AND YEAR ENDED MAY 31, 2004
11/30/2004 5/31/2004
----------------------------
FROM OPERATIONS
Net investment income $ 7,382 $ 10,212
Net realized gain on investments 29,571 94,063
Net realized loss on foreign currency transactions (86) (253)
Change in net unrealized appreciation/depreciation of:
Investments 50,944 89,628
Foreign currency translations - (26)
----------------------------
Increase in net assets resulting from operations 87,811 193,624
----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - (10,866)
----------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 73,968 146,191
Shares issued for dividends reinvested - 10,569
Cost of shares redeemed (63,685) (122,018)
----------------------------
Increase in net assets from capital
share transactions 10,283 34,742
----------------------------
Net increase in net assets 98,094 217,500
NET ASSETS
Beginning of period 1,350,044 1,132,544
----------------------------
End of period $1,448,138 $1,350,044
============================
Accumulated undistributed net investment income:
End of period $ 14,715 $ 7,333
============================
CHANGE IN SHARES OUTSTANDING
Shares sold 2,838 5,904
Shares issued for dividends reinvested - 416
Shares redeemed (2,448) (4,956)
----------------------------
Increase in shares outstanding 390 1,364
============================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
44
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
(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
semiannual 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. Equity 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. Equity 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
45
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
normal trading on the NYSE on a day the Fund's NAV 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 subadvisers, 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, other than
exchange-traded funds, are valued at their NAV at the end of
each business day.
4. Debt securities purchased with original 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
46
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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.
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
subadvisers, if applicable, under valuation procedures
approved by the Trust's Board of Trustees. Valuing securities
at fair value is intended to cause the Fund's NAV to be more
reliable than it otherwise would be.
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.
47
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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. 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.
48
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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. At the Fund's tax year-end of May 31, 2005, net
realized foreign currency gains/losses will be reclassified
from accumulated net realized gain/loss to accumulated
undistributed net investment income on the statement of assets
and liabilities as such amounts are treated as ordinary
income/loss for tax purposes. Net unrealized foreign currency
exchange gains/losses arise from changes in the value of
assets and liabilities, other than investments in securities,
resulting from changes in the exchange rate.
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
NAV to the extent that the Fund makes such purchases while
remaining substantially fully invested. The Fund had no
when-issued commitments as of November 30, 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 arrangements
with the Fund's custodian and other banks utilized by the Fund
for cash management purposes, realized credits, if any,
generated from
49
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
cash balances in the Fund's bank accounts are used to reduce
the Fund's expenses. For the six-month period ended November
30, 2004, brokerage commission reimbursements and custodian
and other bank credits reduced the Fund's expenses by $80,000
and $2,000, respectively, resulting in a total reduction in
Fund expenses of $82,000.
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.
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.
50
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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 a
rate per annum equal to the rate at which CAPCO obtains funding in the
capital markets, 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 six-month period ended
November 30, 2004, the Fund paid CAPCO facility fees of $5,000. The
Fund had no borrowings under either of these agreements during the
six-month period ended November 30, 2004.
On November 17, 2004, the Trust's Board of Trustees approved,
effective January 6, 2005, the termination of the $100 million line of
credit with Bank of America and State Street and the renewal of the
line of credit with CAPCO at a reduced amount of $300 million.
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The tax basis of distributions and accumulated undistributed net
investment income will be determined based upon the Fund's tax
year-end of May 31, 2005, in accordance with applicable tax law.
51
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the six-month period ended
November 30, 2004, were $430,482,000 and $417,040,000, respectively.
As of November 30, 2004, the cost of securities, for federal income
tax purposes, was approximately the same as that reported in the
financial statements.
Gross unrealized appreciation and depreciation of investments as of
November 30, 2004, were $225,401,000 and $9,013,000, respectively,
resulting in net unrealized appreciation of $216,388,000.
(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.
52
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
At November 30, 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 11/30/2004 FOR U.S. DOLLAR (DEPRECIATION)
- -------------------------------------------------------------------------------------------
12/02/2004 78 $104 $104 $-
Euro
12/03/2004 251 332 333 (1)
Euro
12/01/2004 7,494 73 73 -
Japanese Yen
12/03/2004 49,556 481 482 (1)
Japanese Yen
12/01/2004 2,043 620 620 -
Polish Zloty
12/02/2004 435 138 138 -
Polish Zloty
12/03/2004 813 257 258 (1)
Polish Zloty
- -------------------------------------------------------------------------------------------
$2,005 $2,008 $(3)
- -------------------------------------------------------------------------------------------
FOREIGN CURRENCY CONTRACTS TO SELL
- -------------------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE DELIVER 11/30/2004 FOR U.S. DOLLAR (DEPRECIATION)
- -------------------------------------------------------------------------------------------
12/02/2004 40,848 $396 $397 $1
Japanese Yen
12/02/2004 647 566 566 -
Swiss Franc
12/03/2004 1,051 920 922 2
Swiss Franc
- -------------------------------------------------------------------------------------------
$1,882 $1,885 $3
- -------------------------------------------------------------------------------------------
53
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
(6) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its securities-lending agent, Metropolitan West
Securities LLC (MetWest), 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 to the
fair value of the securities loaned, initially in an amount at least
equal to 102% of the fair value of domestic securities loaned and 105%
of the fair value of international securities loaned. Cash collateral
is invested in high- quality short-term investments. The Fund and
MetWest retain 80% and 20%, respectively, of the income earned from
the investment of cash received as collateral. MetWest receives no
other fees from the Fund for its services as securities-lending agent.
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. For the six-month period ended
November 30, 2004, the Fund received securities-lending income of
$129,000, which is net of the 20% income retained by MetWest. As of
November 30, 2004, the Fund loaned securities having a fair market
value of approximately $70,267,000 and received cash collateral of
$75,721,000 for the loans. Of this amount, $75,720,000 was invested in
short-term investments, as noted in the Fund's portfolio of
investments, and $1,000 remained in cash.
(7) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager provides investment
management services to the Fund pursuant to an Investment
Advisory Agreement. Under this agreement, the Manager is
responsible for managing the business and affairs of the Fund and
54
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
for directly managing the day-to-day investment of a portion of
the Fund's assets, subject to the authority of and supervision by
the Trust's Board of Trustees. The Fund is also authorized to
select (with approval of the Trust's Board of Trustees) one or
more subadvisers to manage the day-to-day investment of a portion
of the Fund's assets. The Manager monitors each subadviser's
performance through quantitative and qualitative analysis, and
periodically reports to the Trust's Board of Trustees as to
whether each subadviser's agreement should be renewed,
terminated, or modified. The Manager also is responsible for
allocating assets to the subadvisers. The allocation for each
subadviser can range from 0% to 100% of the Fund's assets, and
the Manager can change the allocations without shareholder
approval.
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 10 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 consists
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
55
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
(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%.
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
whenever the Fund outperforms the Lipper Global Flexible Funds
Index over that period, even if the Fund had overall negative
returns during the performance period.
For the six-month period ended November 30, 2004, the Fund
incurred total management fees, paid or payable to the Manager,
of $5,141,000, 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 (MFSIM), 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 MFSIM 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 a
subadvisory fee in the annual amount of 0.40% of the first $50
million of the portion of the Fund's average net assets that
56
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
Wellington Management manages and invests in real estate
securities, plus 0.35% of the portion of the Fund's average net
assets over $50 million that Wellington Management manages and
invests in real estate securities, plus 0.20% of the portion of
the Fund's average net assets that Wellington Management manages
and invests in securities other than real estate securities. The
Manager (not the Fund) pays MFSIM a subadvisory fee in the annual
amount of 0.335% of the first $350 million of the aggregate
average net assets of the USAA World Growth Fund, the USAA
International Fund, the USAA Life Investment Trust World Growth
Fund, and the portion of the USAA Cornerstone Strategy Fund that
MFSIM manages (MFSIM Funds), plus 0.225% of the aggregate average
net assets of the MFSIM Funds over $350 million but not over $1
billion, and 0.220% of the aggregate average net assets of the
MFSIM Funds over $1 billion. Prior to August 1, 2004, the Manager
(not the Fund) paid MFSIM a subadvisory fee in the annual amount
of 0.335% of the first $350 million of the aggregate average net
assets of the MFSIM Funds, plus 0.225% of the aggregate average
net assets of the MFSIM Funds over $350 million. For the
six-month period ended November 30, 2004, the Manager paid
subadvisory fees of $644,000 to Wellington Management and paid
subadvisory fees of $1,542,000 to MFSIM for the MFSIM Funds in
total, of which $507,000 was based on the portion of the average
net assets of the USAA Cornerstone Strategy Fund that MFSIM
manages.
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 six-month period ended November 30, 2004, the
Fund incurred administrative and servicing fees, paid or payable
to the Manager, of $1,028,000.
57
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
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. The Fund had no reimbursable expenses as
of November 30, 2004.
E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a
USAA Shareholder Account Services, an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket
expenses. For the six-month period ended November 30, 2004, the
Fund incurred transfer agent's fees, paid or payable to USAA
Transfer Agency Company, of $1,392,000.
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.
58
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
(9) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
SIX-MONTH
PERIOD ENDED
NOVEMBER 30, YEAR ENDED MAY 31,
----------------------------------------------------------------------------------------------
2004 2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------------
Net asset value at
beginning of period $ 25.80 $ 22.22 $ 23.57 $ 25.26 $ 26.27 $ 27.29
----------------------------------------------------------------------------------------------
Income (loss) from
investment operations:
Net investment income .14 .22 .27 .39(d) .58 .63
Net realized and
unrealized gain (loss) 1.53 3.57 (.93) (1.16)(d) (.40) .80
----------------------------------------------------------------------------------------------
Total from investment operations 1.67 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 $ 27.47 $ 25.80 $ 22.22 $ 23.57 $ 25.26 $ 26.27
==============================================================================================
Total return (%)* 6.47 17.08 (2.59) (2.96) .58 5.49
Net assets at end of period (000) $1,448,138 $1,350,044 $1,132,544 $1,197,131 $1,016,101 $1,097,170
Ratio of expenses to
average net assets (%)** 1.18(a,b,c) 1.19(b,c) 1.19(b,c) 1.16(b,c) 1.07(b) 1.09(b)
Ratio of expenses to average net
assets, excluding
reimbursements (%)** - 1.20(b) 1.27(b) 1.17(b) - -
Ratio of net investment
income to average
net assets (%)** 1.08(a) .81 1.34 1.69(d) 2.26 2.43
Portfolio turnover (%) 31.01 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 six-month period ended November 30, 2004, average net assets were $1,368,203,000.
(a) Annualized. The ratio is not necessarily indicative of 12 months of operations.
(b) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses
paid indirectly decreased the expense ratios as follows:
(.01%) (.02%) (.01%) - - -
(c) 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.
(d) 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%
59
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
EXAMPLE
- --------------------------------------------------------------------------------
As a shareholder of the Fund, you incur two types of costs: direct
costs, such as wire fees, redemption fees, and low balance fees; and
indirect costs, including management fees, transfer agency fees, and
other Fund operating expenses. This Example is intended to help you
understand your indirect costs, also referred to as "ongoing costs,"
(in dollars) of investing in the Fund and to compare these costs with
the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire six-month period of
June 1, 2004, through November 30, 2004.
ACTUAL EXPENSES
- --------------------------------------------------------------------------------
The first line of the table on the next page provides information
about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the
beginning of the period, to estimate the expenses that you paid over
the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading "Expenses
Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
- --------------------------------------------------------------------------------
The second line of the table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may
use this information to compare the ongoing costs of investing in the
60
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE
(continued)
USAA CORNERSTONE STRATEGY FUND
NOVEMBER 30, 2004 (UNAUDITED)
Fund and other funds. To do so, compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder
reports of other funds.
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only and do not reflect any direct costs,
such as wire fees, redemption fees, or low balance fees. Therefore,
the second line of the table is useful in comparing ongoing costs
only, and will not help you determine the relative total costs of
owning different funds. In addition, if these direct costs were
included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JUNE 1, 2004 -
JUNE 1, 2004 NOVEMBER 30, 2004 NOVEMBER 30, 2004
---------------------------------------------------------------
Actual $1,000.00 $1,064.70 $6.05
Hypothetical
(5% return before expenses) 1,000.00 1,019,21 5.92
*Expenses are equal to the Fund's annualized expense ratio of 1.17%, which is
net of any expenses paid indirectly, multiplied by the average account value
over the period, multiplied by 183 days/365 days (to reflect the one-half
year period). The Fund's ending account value on the first line in the table
is based on its actual total return of 6.47% for the six-month period of
June 1, 2004, through November 30, 2004.
TRUSTEES Christopher W. Claus
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 (800) 531-8181
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions
(800) 531-8448
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES (800) 531-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
(800) 531-8777
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 MANAGER'S PROXY VOTING POLICIES AND PROCEDURES, APPROVED BY THE
TRUST'S BOARD OF TRUSTEES FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND, ARE
AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND
(III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
AS A RESULT OF RULES RECENTLY ADOPTED BY THE SEC, THE FUND FILES ITS COMPLETE
SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FIRST AND THIRD QUARTERS OF
EACH FISCAL YEAR ON FORM N-Q. THESE FORM N-QS ARE AVAILABLE (I) BY CALLING
(800)531-8448; (II) AT USAA.COM; AND (III) ON THE SEC'S WEB SITE AT
HTTP://WWW.SEC.GOV. THESE FORM N-QS ALSO MAY BE REVIEWED AND COPIED AT THE SEC'S
PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE
PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800) SEC-0330.
[LOGO OF RECYCLED PAPER]
Recycled
Paper
- --------------------------------------------------------------------------------
[LOGO OF USAA] 9800 Fredericksburg Road -------------
USAA(R) San Antonio, Texas 78288 PRSRT STD
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- --------------------------------------------------------------------------------
[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
27800-0105 (C)2005, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
NOT APPLICABLE. This item must be disclosed only in annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NOT APPLICABLE. This item must be disclosed only in annual reports.
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 principal executive officer and principal 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.
In October 2004, certain changes were made to the policies and procedures to
address the reporting of audit and non-audit fees required in annual reports on
Form N-CSR. None of these changes are relevant to this semi-annual 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). NOT APPLICABLE. This item must be disclosed only in annual reports.
(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: 01/25/05
------------------------------
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: 01/25/05
------------------------------
By:* /s/ DAVID HOLMES
--------------------------------------------
Signature and Title: David Holmes/Treasurer
Date: 01/25/05
------------------------------
*Print the name and title of each signing officer under his or her signature.