UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-4019
Exact name of registrant as specified in charter: USAA INVESTMENT TRUST
Address of principal executive offices and zip code: 9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Name and address of agent for service: EILEEN M. SMILEY
USAA INVESTMENT TRUST
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TX 78288
Registrant's telephone number, including area code: (210) 498-4103
Date of fiscal year end: MAY 31
Date of reporting period: MAY 31, 2005
ITEM 1. REPORT TO STOCKHOLDERS.
THE USAA INTERNATIONAL FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2005
[LOGO OF USAA]
USAA(R)
USAA INTERNATIONAL Fund
[GRAPHIC OF USAA INTERNATIONAL FUND]
A n n u a l R e p o r t
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MAY 31, 2005
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
FUND RECOGNITION 7
INVESTMENT OVERVIEW 9
FINANCIAL INFORMATION
Distributions to Shareholders 14
Report of Independent Registered Public Accounting Firm 15
Portfolio of Investments 16
Notes to Portfolio of Investments 21
Financial Statements 23
Notes to Financial Statements 26
EXPENSE EXAMPLE 41
ADVISORY AGREEMENTS 43
DIRECTORS' AND OFFICERS' INFORMATION 51
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
"
IN THE CURRENT INVESTMENT
ENVIRONMENT . . . INVESTORS MAY
[PHOTO OF CHRISTOPHER W. CLAUS] FIND THAT QUALITY, DIVERSIFICATION,
SAFETY, LIQUIDITY, AND PATIENCE
ARE THE SMARTEST STRATEGIES.
"
June 2005
- --------------------------------------------------------------------------------
As I write to you, inflation - a key driver of both the stock
and bond markets - appears to be under control. The U.S.
economy is in good health, and I expect the gross domestic
product (GDP) to grow between 3% and 3.5% in 2005. Meanwhile,
the Federal Reserve Board (the Fed) shows signs of nearing the
end of its interest-rate tightening schedule; it is likely to
leave the federal funds rate near 3.5% or 3.75%. Oil prices
have moved higher, rising above $50 a barrel and continuing to
constrain economic growth.
Although U.S. equity valuations are trading at historically
high levels for a rising interest-rate environment,
international valuations appear a little more reasonable.
Remarkably, long-term interest rates have remained low, which
has helped to support the stock market. Why? The bond market
seems to believe that the economy will slow. Absent inflation
and a rising dollar, longer-term interest rates actually
declined in 2005, increasing the value of longer-term bonds. In
my opinion, longer-term rates will continue to have a
significant impact on the direction of the stock and bond
markets over the next few quarters.
The growth in the U.S. budget deficit is of some concern.
Sooner or later, the government must cut spending and/or raise
taxes to pay its bills - both would be challenging for the U.S.
economy over the long term.
3
. . . C O N T I N U E D
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Consumers have their own budget deficits. Some pundits scoff at
the significance; others predict a day of reckoning. I believe
Americans have to curb their spending and start saving more to
support their eventual retirements. And while greater savings
may be a plus, a slowdown in consumer spending would hurt
economic growth.
Against this backdrop, investors may find that quality,
diversification, safety, liquidity, and patience are the
smartest strategies. For short-term investors, money markets
provide yields near 3%, with relative safety and liquidity.
Investors with longer-term horizons could see annual returns of
4% to 5% a year in bonds, particularly if they reinvest the
interest. Stocks are likely to generate only modest gains going
forward; we see the equity markets providing mid-single-digit
returns over the next several years.
In the current investment environment, it would be prudent to
take what the market offers us and resist the urge to reach for
higher returns at dramatically greater risk. Sometimes risk is
simply risk and is not always rewarded with higher returns. We
will continue to look for value in our investments, examine the
risks, and not stray from our investment discipline.
From everyone at USAA, thank you for your business and the
opportunity to serve your investment needs.
Sincerely,
/S/ CHRISTOPHER W. CLAUS
Christopher W. Claus
President and Vice Chairman of the Board
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH
THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT
$1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN
THE FUND.
Past performance is no guarantee of future results. o As
interest rates rise, existing bond prices fall.
4
M A N A G E R S '
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COMMENTARY on the Fund
[PHOTO OF DAVID R. MANNHEIM] [PHOTO OF MARCUS L. SMITH]
DAVID R. MANNHEIM MARCUS L. SMITH
MFS Investment Management MFS Investment Management
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HOW DID THE FUND PERFORM?
The USAA International Fund had a total return of 11.91% for
the year ended May 31, 2005. This compares to a 13.31% return
for the Lipper International Funds Average, 14.20% for the
Lipper International Funds Index, and 0.05% for the Morgan
Stanley Capital International Europe, Australia and Far East
(MSCI-EAFE) Index.
CAN YOU DESCRIBE THE MARKET ENVIRONMENT?
There were two distinct phases for global markets during the
period. From June 2004 through December 2004, stocks benefited
from strong earnings growth, while dollar-denominated funds
such as ours gained from the currency's depreciation as returns
from overseas markets were translated back into dollars. So far
in 2005, the markets have struggled while adjusting to the fact
that earnings growth is decelerating after reaching a cyclical
peak in 2004. While earnings are still increasing, the rates
will be more along the long-term trend rate of 8% to 10%. At
the same time, the dollar has strengthened in 2005, so currency
translation has begun to detract from returns.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 11 FOR BENCHMARK DEFINITIONS.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
5
. . . C O N T I N U E D
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COMMENTARY on the Fund
WHAT SPECIFIC HOLDINGS OR SECTORS CONTRIBUTED POSITIVELY TO PERFORMANCE?
Even though the technology sector overall struggled, our stock
selection there was the most significant positive contributor
to the Fund's performance. Our holding in Samsung Electronics
Co. Ltd. (Korea) did very well given the company's world
leadership in semiconductors, LCD TV components, and flash
memory, which is used in MP3 players. Canon, Inc. (Japan) also
performed well on a relative basis.
Retailing was another area where our stock selection was good,
led by Hennes & Mauritz AB "B" (Sweden) and Esprit Holdings
Ltd. (Hong Kong). H&M continued to expand profit margins based
on good inventory control, and Esprit had strong growth in
same-store sales while expanding the number of stores,
especially in Germany.
Two other sectors that had a positive impact were
transportation, led by Canadian National Railway Co. (Canada),
and energy, where we overcame an underweight position in this
top-performing sector through excellent stock selection. We
owned EnCana Corp. (Canada), a company that has some
particularly productive oilfields in western Canada that are
exceeding expectations.
WHAT SECTORS OR HOLDINGS DETRACTED MOST FROM PERFORMANCE?
Leisure was a particularly poor sector. In the first half of
the reporting year, our holdings in British Sky Broadcasting
Group plc (U.K.) and News Corp. (Australia) were large
detractors. The stock of Nintendo Co. Ltd. (Japan), the world's
largest manufacturer of handheld game machines, traded lower
after management reported that software providers had delayed
the
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-20.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
release of games to be used in its DS system, a small, handheld
device that was introduced last fall. Our original thesis, that
Nintendo is well-positioned to increase earnings through a new
game cycle, remained intact.
Nok Corp. (Japan), which among other things suffered from a
lagging auto seals business, was a disappointing holding that
we eventually sold.
CAN YOU TELL US ABOUT ANY NEW PURCHASES IN THE PAST SIX MONTHS?
We've bought shares in Asahi Glass Co. (Japan), one of the few
global producers of the high-quality glass used for LCD
televisions. As the price of big-screen televisions comes down,
volumes should increase for component manufacturers such as
Asahi.
WHAT'S YOUR OUTLOOK?
We believe there will be a deceleration of global earnings
growth to normalized levels, that is, 8% to 9% earnings growth
over the next three to five years. With cash balances still at
high levels, corporate activity including capital spending and
share buybacks should continue to support opportunities for
well-positioned companies. We will continue to invest on a
security-specific basis in order to capitalize on our core
competency of bottom up, fundamental research.
On behalf of everyone at USAA, we thank you for your continued
support.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-20.
7
F U N D
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RECOGNITION
USAA INTERNATIONAL FUND
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USAA INTERNATIONAL FUND
OVERALL MORNINGSTAR RATINGS(TM)
out of 170 foreign large growth funds for the period ending May 31, 2005:
OVERALL RATING
* * * *
3-YEAR 5-YEAR 10-YEAR
* * * * * * * * * * * * *
out of 170 funds out of 126 funds out of 44 funds
The Overall Morningstar Rating for a fund is derived from a
weighted average of the performance figures associated with
its 3-, 5-, and 10-year (if applicable) Morningstar Ratings
metrics. Ratings are based on risk-adjusted returns.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH FUND WITH AT LEAST
A THREE-YEAR HISTORY, MORNINGSTAR CALCULATES A MORNINGSTAR RATING(TM) BASED ON A
MORNINGSTAR RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A FUND'S
MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES CHARGES, LOADS, AND
REDEMPTION FEES), PLACING MORE EMPHASIS ON DOWNWARD VARIATIONS AND REWARDING
CONSISTENT PERFORMANCE. THE TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS
RECEIVE 5 STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS,
THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10% RECEIVE 1 STAR. (EACH SHARE
CLASS IS COUNTED AS A FRACTION OF ONE FUND WITHIN THIS SCALE AND RATED
SEPARATELY, WHICH MAY CAUSE SLIGHT VARIATIONS IN THE DISTRIBUTION PERCENTAGES.)
8
. . . C O N T I N U E D
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RECOGNITION
[LOGO OF LIPPER LEADER]
PRESERVATION
The Fund is listed as a Lipper Leader for Preservation of 7,657 equity funds
within the Lipper International Multi-Cap Core Funds category for the overall
period ended May 31, 2005.
LIPPER RATINGS FOR PRESERVATION REFLECT FUNDS' HISTORICAL LOSS AVOIDANCE
RELATIVE TO OTHER FUNDS WITHIN THE SAME ASSET CLASS AS OF MAY 31, 2005.
PRESERVATION RATINGS ARE RELATIVE, RATHER THAN ABSOLUTE, MEASURES, AND FUNDS
NAMED LIPPER LEADERS FOR PRESERVATION MAY STILL EXPERIENCE LOSSES PERIODICALLY;
THOSE LOSSES MAY BE LARGER FOR EQUITY AND MIXED EQUITY FUNDS THAN FOR
FIXED-INCOME FUNDS. THE FUND RECEIVED A LIPPER LEADER RATING FOR PRESERVATION
AMONG 7,657 EQUITY FUNDS FOR THE THREE-YEAR PERIOD, AND A SCORE OF 2 AMONG 5,515
AND 1,882 EQUITY FUNDS IN LIPPER'S INTERNATIONAL MULTI-CAP CORE FUNDS CATEGORY
FOR THE FIVE- AND 10-YEAR PERIODS, RESPECTIVELY. RATINGS ARE SUBJECT TO CHANGE
EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF PERCENTILE RANKS FOR
THE PRESERVATION METRIC OVER THREE-, FIVE-, AND 10-YEAR PERIODS (IF APPLICABLE).
THE HIGHEST 20% OF FUNDS IN EACH PEER GROUP ARE NAMED LIPPER LEADERS, THE NEXT
20% RECEIVE A SCORE OF 2, THE MIDDLE 20% ARE SCORED 3, THE NEXT 20% ARE SCORED
4, AND THE LOWEST 20% ARE SCORED 5. LIPPER RATINGS ARE NOT INTENDED TO PREDICT
FUTURE RESULTS, AND LIPPER DOES NOT GUARANTEE THE ACCURACY OF THIS INFORMATION.
MORE INFORMATION IS AVAILABLE AT WWW.LIPPERLEADERS.COM. LIPPER LEADER COPYRIGHT
2005, REUTERS, ALL RIGHTS RESERVED.
9
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA INTERNATIONAL FUND
OBJECTIVE
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Capital appreciation with current income as a secondary
objective.
TYPES OF INVESTMENTS
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Invests at least 80% of the Fund's assets in equity securities
of foreign (including emerging market) companies.
- ------------------------------------------------------------------------------
5/31/05 5/31/04
- ------------------------------------------------------------------------------
Net Assets $645.9 Million $479.5 Million
Net Asset Value Per Share $21.32 $20.45
- -------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/05
- -------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
11.91% 2.13% 6.95%
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.
10
. . . C O N T I N U E D
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OVERVIEW
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CUMULATIVE PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA INTERNATIONAL LIPPER INTERNATIONAL LIPPER INTERNATIONAL MSCI-EAFE
FUND FUNDS INDEX FUNDS AVERAGE INDEX
------------------ -------------------- -------------------- ----------
05/31/1995 $10,000.00 $10000.00 $10000.00 $10000.00
06/30/1995 10,076.05 10037.97 10034.90 9824.63
07/31/1995 10,593.51 10589.79 10571.93 10436.28
08/31/1995 10,345.37 10410.87 10358.01 10038.17
09/30/1995 10,466.26 10584.99 10532.66 10234.22
10/31/1995 10,269.02 10364.61 10332.60 9959.12
11/30/1995 10,352.03 10472.84 10437.08 10236.22
12/31/1995 10,678.33 10776.57 10739.53 10648.64
01/31/1996 11,030.23 11031.20 10990.85 10692.36
02/29/1996 11,222.17 11078.55 11056.07 10728.50
03/31/1996 11,426.90 11251.62 11241.19 10956.33
04/30/1996 11,932.35 11618.19 11589.51 11274.87
05/31/1996 11,970.74 11605.18 11595.45 11067.39
06/30/1996 12,053.91 11710.91 11677.44 11129.68
07/31/1996 11,476.76 11315.91 11249.86 10804.39
08/31/1996 11,823.55 11463.49 11424.14 10828.06
09/30/1996 12,039.48 11719.76 11677.60 11115.72
10/31/1996 11,993.68 11673.22 11632.20 11001.97
11/30/1996 12,634.28 12222.31 12159.18 11439.72
12/31/1996 12,722.71 12331.43 12230.95 11292.56
01/31/1997 13,127.98 12347.34 12241.57 10897.35
02/28/1997 13,194.41 12570.23 12402.98 11075.59
03/31/1997 13,214.34 12636.83 12438.22 11115.69
04/30/1997 13,300.71 12691.84 12458.96 11174.67
05/31/1997 13,971.73 13407.46 13187.66 11901.85
06/30/1997 14,682.61 14051.33 13804.10 12558.21
07/31/1997 15,151.12 14502.46 14222.75 12761.37
08/31/1997 14,341.41 13456.84 13226.21 11808.30
09/30/1997 15,288.36 14320.47 14073.50 12469.79
10/31/1997 14,231.62 13233.45 13044.52 11511.30
11/30/1997 13,765.01 13122.40 12942.61 11393.95
12/31/1997 13,873.01 13225.19 13049.89 11493.33
01/31/1998 13,873.01 13545.06 13359.52 12018.96
02/28/1998 14,782.00 14404.94 14264.41 12790.17
03/31/1998 15,698.21 15187.23 15033.92 13184.00
04/30/1998 16,066.14 15420.65 15261.01 13288.35
05/31/1998 15,828.07 15451.30 15295.63 13223.86
06/30/1998 15,474.57 15316.19 15174.14 13323.96
07/31/1998 15,399.14 15551.16 15395.68 13459.05
08/31/1998 12,792.79 13314.11 13151.25 11791.62
09/30/1998 12,344.70 12899.69 12698.80 11430.11
10/31/1998 13,487.32 13848.22 13665.13 12621.59
11/30/1998 13,875.65 14541.87 14374.12 13268.21
12/31/1998 14,420.82 14899.72 14813.03 13791.63
01/31/1999 14,622.46 14990.11 14976.23 13750.91
02/28/1999 14,099.70 14604.50 14593.39 13423.19
03/31/1999 14,405.89 15090.59 15118.58 13983.50
04/30/1999 15,182.56 15793.94 15852.70 14550.09
05/31/1999 14,779.29 15207.05 15205.55 13800.78
06/30/1999 15,354.33 15928.21 16004.21 14338.83
07/31/1999 15,904.36 16283.93 16421.23 14765.03
08/31/1999 16,071.29 16412.57 16569.90 14818.95
09/30/1999 16,071.29 16465.28 16630.88 14968.11
10/31/1999 16,207.88 17039.91 17277.96 15528.76
11/30/1999 17,133.61 18289.68 18612.91 16068.30
12/31/1999 18,551.90 20536.83 20913.20 17510.45
01/31/2000 17,824.06 19334.74 19765.64 16397.86
02/29/2000 18,536.07 20610.60 21045.60 16839.29
03/31/2000 19,018.66 20663.71 21109.24 17492.04
04/30/2000 18,093.04 19353.01 19727.72 16571.55
05/31/2000 17,626.28 18821.24 19040.82 16166.82
06/30/2000 18,496.52 19692.64 19914.06 16799.08
07/31/2000 17,869.85 19054.34 19252.17 16094.78
08/31/2000 18,144.77 19376.36 19607.47 16234.48
09/30/2000 17,203.38 18247.53 18449.66 15444.00
10/31/2000 16,495.25 17627.88 17787.89 15079.18
11/30/2000 15,820.44 16883.72 17009.30 14513.71
12/31/2000 16,545.23 17514.16 17650.54 15029.57
01/31/2001 16,820.15 17617.32 17741.61 15021.82
02/28/2001 15,628.83 16381.14 16444.90 13895.67
03/31/2001 14,504.16 15229.43 15210.45 12969.38
04/30/2001 15,620.50 16155.70 16214.14 13870.64
05/31/2001 15,187.29 15764.35 15798.54 13381.09
06/30/2001 14,645.78 15319.11 15252.55 12833.87
07/31/2001 14,554.14 14920.90 14841.66 12600.36
08/31/2001 14,429.18 14621.70 14480.06 12281.04
09/30/2001 12,921.28 13028.58 12923.35 11037.13
10/31/2001 13,262.85 13381.46 13261.84 11319.82
11/30/2001 13,787.69 13881.09 13782.06 11737.10
12/31/2001 14,133.64 14128.69 13980.40 11806.83
01/31/2002 13,645.11 13558.42 13400.24 11179.48
02/28/2002 13,897.80 13748.47 13481.36 11257.90
03/31/2002 14,655.86 14475.72 14204.97 11921.53
04/30/2002 14,706.40 14577.27 14268.15 11945.50
05/31/2002 14,849.59 14785.69 14433.67 12096.86
06/30/2002 14,377.91 14202.06 13857.15 11615.34
07/31/2002 12,920.74 12784.21 12483.81 10468.67
08/31/2002 12,996.55 12794.41 12457.80 10444.91
09/30/2002 12,027.92 11416.46 11138.88 9323.19
10/31/2002 12,743.86 12008.98 11676.99 9824.27
11/30/2002 12,979.70 12577.52 12197.50 10270.15
12/31/2002 12,850.83 12175.03 11799.12 9924.82
01/31/2003 12,307.24 11729.13 11339.88 9510.48
02/28/2003 12,009.96 11381.84 11057.69 9292.22
03/31/2003 11,899.54 11103.10 10825.28 9109.64
04/30/2003 13,037.69 12202.33 11836.14 10002.50
05/31/2003 13,708.68 12986.12 12560.03 10608.57
06/30/2003 13,904.03 13292.94 12836.87 10864.94
07/31/2003 14,048.43 13665.67 13153.00 11127.94
08/31/2003 14,209.80 14059.98 13494.64 11396.67
09/30/2003 14,575.03 14342.13 13777.94 11747.99
10/31/2003 15,263.01 15197.20 14609.34 12480.23
11/30/2003 15,764.13 15502.45 14904.45 12757.70
12/31/2003 16,950.57 16557.44 15959.55 13754.38
01/31/2004 17,215.96 16913.25 16246.34 13948.88
02/29/2004 17,686.81 17299.95 16584.07 14270.88
03/31/2004 17,566.95 17384.27 16637.35 14351.18
04/30/2004 17,352.93 16866.12 16142.15 14026.54
05/31/2004 17,498.47 16856.55 16155.35 14056.20
06/30/2004 17,763.86 17196.14 16475.43 14382.07
07/31/2004 17,190.28 16632.99 15941.24 13915.32
08/31/2004 17,233.08 16721.46 16029.21 13976.77
09/30/2004 17,712.49 17166.79 16495.35 14342.06
10/31/2004 18,251.83 17711.10 17023.43 14831.12
11/30/2004 19,253.45 18847.25 18111.23 15844.28
12/31/2004 20,079.43 19636.30 18870.64 16539.25
01/31/2005 19,702.65 19318.85 18532.08 16235.81
02/28/2005 20,566.48 20160.56 19334.85 16937.35
03/31/2005 20,024.29 19626.42 18818.43 16511.84
04/30/2005 19,583.19 19129.89 18356.75 16123.64
05/31/2005 19,583.18 19250.68 18406.35 16131.44
[END CHART]
DATA FROM 5/31/95 THROUGH 5/31/05.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, 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.
11
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The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA International Fund to the following
benchmarks:
o The Lipper International Funds Index tracks the total return
performance of the 30 largest funds within the Lipper
International Funds category.
o The Lipper International Funds Average is an average
performance level of all international funds, reported by
Lipper Inc., an independent organization that monitors the
performance of mutual funds.
o The Morgan Stanley Capital International Europe, Australia and
Far East (MSCI-EAFE) Index is an unmanaged index that 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.
12
. . . C O N T I N U E D
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OVERVIEW
- --------------------------------------------------
TOP 10 INDUSTRIES
(% of Net Assets)
- --------------------------------------------------
Pharmaceuticals 8.0%
Diversified Banks 5.1%
Regional Banks 4.7%
Household Products 4.0%
Integrated Telecommunication Services 3.9%
Casinos & Gaming 3.6%
Apparel Retail 3.5%
Industrial Machinery 3.5%
Wireless Telecommunication Services 3.5%
Oil & Gas Exploration & Production 3.1%
- ----------------------------------------------
TOP 10 EQUITY HOLDINGS
(% of Net Assets)
- ----------------------------------------------
Reckitt Benckiser plc 4.0%
Roche Holdings AG 3.2%
Samsung Electronics Co. Ltd. 2.4%
Schneider Electric S.A. 2.4%
Vodafone Group plc 2.4%
Total S.A. ADR 2.3%
Canon, Inc. 2.2%
Sandvik AB 2.2%
Telefonica S.A. 2.2%
UBS AG 2.2%
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-20.
13
. . . C O N T I N U E D
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ASSET ALLOCATION
5/31/05
[PIE CHART OF ASSET ALLOCATION]
United Kingdom 19.5%
France 17.1%
Japan 15.8%
Switzerland 8.1%
Sweden 5.9%
Spain 5.0%
Hong Kong 3.4%
Other* 35.6%
[END CHART]
*INCLUDES COUNTRIES WITH LESS THAN 3% OF THE PORTFOLIO, MONEY
MARKET INSTRUMENTS, (2.5%), AND SHORT-TERM INVESTMENTS
PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED (10.9%).
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL
100%.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-20.
14
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA INTERNATIONAL FUND
The following federal tax information related to the Fund's fiscal year
ended May 31, 2005, is provided for information purposes only and
should not be used for reporting to federal or state revenue agencies.
Federal tax information for the calendar year will be reported to you
on Form 1099-DIV in January 2006.
Certain dividends paid by the Fund may be subject to a maximum tax rate
of 15%, as provided for by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. Of the distributions paid during the fiscal
year, the maximum amount that may be considered qualified dividend
income is $3,680,000.
The Fund has elected under Section 853 of the Internal Revenue Code to
pass through the credit for taxes paid in foreign countries. The gross
income derived from foreign sources and foreign taxes paid during the
fiscal year by the Fund are $13,997,000 and $1,254,000, respectively.
0.43% of ordinary income distributions qualifies for dividends-
received deductions eligible to corporations.
The Fund has designated a portion of the amount paid to redeeming
shareholders, in the amount of $2,344,000, as a long-term capital gain
distribution for tax purposes.
15
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA INTERNATIONAL FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
International Fund (a portfolio of USAA Investment Trust) (the "Fund"),
including the portfolio of investments, as of May 31, 2005, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the three years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The financial highlights
for each of the periods presented through May 31, 2002, were audited by other
auditors whose report dated July 5, 2002, expressed an unqualified opinion on
those statements and financial highlights.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of May 31, 2005, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA International Fund at May 31, 2005, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the three years in
the period then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ ERNST & Young LLP
San Antonio, Texas
July 13, 2005
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA INTERNATIONAL FUND
MAY 31, 2005
NUMBER MARKET
OF SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (97.0%)
STOCKS (97.0%)
AUSTRALIA (1.1%)
666,798 QBE Insurance Group Ltd. (Property & Casualty Insurance) $ 7,388
--------
AUSTRIA (1.7%)
223,000 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks) 10,968
--------
BRAZIL (0.9%)
188,400 Companhia Vale Do Rio Doce ADR (Steel) 5,469
--------
CANADA (2.9%)
174,891 Canadian National Railway Co. (Railroads) 10,717
231,140 EnCana Corp. (Oil & Gas Exploration & Production) 8,011
--------
18,728
--------
FRANCE (17.1%)
544,720 AXA S.A. (Multi-Line Insurance) 13,279
33,417 Air Liquide S.A. (Industrial Gases) 5,811
64,167 Air Liquide S.A. - Bonus Shares (Industrial Gases)
(acquired 7/02/2002-11/29/2004; cost: $9,085)(a,b) 11,157
202,660 Business Objects S.A. (Application Software)*(c) 5,808
349,040 Credit Agricole S.A. (Regional Banks)(c) 9,050
115,930 Groupe DANONE (Packaged Foods & Meat)(c) 10,664
114,690 LVMH Moet Hennessy Louis Vuitton S.A. (Apparel &
Accessories & Luxury Goods) 8,186
93,000 Sanofi-Aventis S.A. (Pharmaceuticals)(c) 8,388
210,846 Schneider Electric S.A. (Electrical Components & Equipment)(c) 15,515
98,648 Societe Television Francaise 1 (Broadcasting & Cable TV) 2,672
132,473 Total S.A. ADR (Integrated Oil & Gas)(c) 14,730
145,520 Veolia Environnement S.A. (Multi-Utilities)(c) 5,488
--------
110,748
--------
GERMANY (1.3%)
14,300 Premiere AG (Broadcasting & Cable TV)* 498
121,490 Schering AG (Pharmaceuticals) 7,635
--------
8,133
--------
HONG KONG (3.4%)
16,781,500 CNOOC Ltd. (Oil & Gas Exploration & Production) 9,221
803,000 Esprit Holdings Ltd. (Apparel Retail) 5,754
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
NUMBER MARKET
OF SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------------
7,375,000 Hutchison Telecommunications International Ltd. (Wireless
Telecommunication Services)* $ 6,967
--------
21,942
--------
HUNGARY (1.1%)
116,000 OTP Bank Ltd. GDR (Regional Banks) 7,134
--------
INDONESIA (0.4%)
6,974,000 PT Bank Central Asia Tbk (Diversified Banks) 2,546
--------
IRELAND (1.1%)
438,740 Depfa Bank plc (Specialized Finance) 7,040
--------
ISRAEL (1.1%)
306,200 Check Point Software Technologies Ltd. (Systems Software)* 6,954
--------
ITALY (1.5%)
90,765 FastWeb S.p.A. (Communications Equipment)*(c) 3,964
304,497 RAS S.p.A. (Multi-Line Insurance)(c) 5,871
--------
9,835
--------
JAPAN (15.8%)
1,021,000 Asahi Glass Co. (Building Products) 11,063
449,000 Bridgestone Corp. (Tires & Rubber) 8,874
265,000 Canon, Inc. (Electronic Equipment Manufacturers) 14,405
278,800 Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals) 4,128
307,000 Kaneka Corp. (Diversified Chemicals) 3,205
47,700 Murata Manufacturing Co. Ltd. (Electrical Components & Equipment) 2,435
78,200 Nintendo Co. Ltd. (Leisure Products) 8,315
173,300 Nitto Denko Corp. (Specialty Chemicals) 9,756
816,000 Sekisui Chemical Co. Ltd. (Homebuilding) 5,676
1,413,000 Shinsei Bank Ltd. (Diversified Banks) 7,173
2,508,000 Tokyo Gas Co. Ltd. (Gas Utilities) 9,844
1,363,000 Toray Industries, Inc. (Textiles) 6,066
305,400 Toyota Motor Corp. (Automobile Manufacturers) 10,861
--------
101,801
--------
KOREA (2.4%)
31,590 Samsung Electronics Co. Ltd. (Semiconductors) 15,333
--------
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
NUMBER MARKET
OF SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------------
MEXICO (2.0%)
137,940 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) $ 8,276
1,284,900 Wal-Mart de Mexico S.A. (General Merchandise Stores) 4,870
--------
13,146
--------
NETHERLANDS (1.0%)
489,170 Reed Elsevier N.V. (Publishing) 6,760
--------
POLAND (0.5%)
445,590 Powszechna Kasa Oszczednosci Bank Polski S.A. (Regional Banks)* 3,484
--------
SINGAPORE (2.3%)
583,000 DBS Group Holdings Ltd. (Diversified Banks) 4,862
6,562,000 Singapore Telecommunications Ltd. (Integrated
Telecommunication Services) 10,236
--------
15,098
--------
SPAIN (5.0%)
713,420 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 11,184
254,760 Iberdrola S.A. (Electric Utilities) 6,505
840,771 Telefonica S.A. (Integrated Telecommunication Services) 14,081
13,053 Telefonica S.A. ADR (Integrated Telecommunication Services) 659
--------
32,429
--------
SWEDEN (5.9%)
511,260 Atlas Copco AB "A" (Industrial Machinery) 7,799
170,420 Atlas Copco AB "A" Redemption Shares (Industrial Machinery)* 458
276,060 Hennes & Mauritz AB "B" (Apparel Retail) 9,757
1,758,910 LM Ericsson Telephone Co. "B" ADR (Communications Equipment) 5,531
362,750 Sandvik AB (Industrial Machinery) 14,308
--------
37,853
--------
SWITZERLAND (8.1%)
30,531 Nestle S.A. (Packaged Foods & Meat) 8,033
163,330 Roche Holdings AG (Pharmaceuticals) 20,592
10,980 Straumann AG (Health Care Supplies) 2,212
16,712 Syngenta AG (Specialty Chemicals)* 1,731
52,150 Synthes, Inc. (Health Care Equipment) 5,727
182,188 UBS AG (Diversified Capital Markets) 14,046
--------
52,341
--------
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
NUMBER MARKET
OF SHARES SECURITY VALUE
- -------------------------------------------------------------------------------------------------------------
TAIWAN (0.3%)
1,904,687 Compal Electronics, Inc. (Computer Hardware) $ 1,828
--------
THAILAND (0.6%)
1,313,600 Bangkok Bank Public Co. Ltd. (Diversified Banks) 3,750
--------
UNITED KINGDOM (19.5%)
1,136,720 Amvescap plc (Investment Banking & Brokerage) 6,661
262,650 AstraZeneca plc (Pharmaceuticals) 11,144
401,810 BG Group plc (Oil & Gas Exploration & Production) 3,043
170,300 BOC Group plc (Diversified Chemicals) 3,113
629,990 Diageo plc (Distillers & Vintners) 9,049
2,328,900 Hilton Group plc (Casinos & Gaming) 12,029
1,573,980 Kingfisher plc (Home Improvement Retail) 7,350
263,350 Next plc (Apparel Retail) 6,891
840,070 Reckitt Benckiser plc (Household Products) 25,645
123,935 Royal Bank Scotland Group plc (Diversified Banks) 3,639
541,915 Smith & Nephew plc (Health Care Equipment) 5,352
6,252,510 Vodafone Group plc (Wireless Telecommunication Services) 15,764
1,232,800 William Hill plc (Casinos & Gaming) 11,078
687,000 Yell Group plc (Publishing) 5,103
--------
125,861
--------
Total stocks (cost: $527,078) 626,569
--------
RIGHTS (0.0%)(i)
SWEDEN
355,750 Sandvik AB (Industrial Machinery)* (cost: $0) 209
--------
Total equity securities (cost: $527,078) 626,778
--------
PRINCIPAL
AMOUNT
(000)
- ----------
MONEY MARKET INSTRUMENTS (2.5%)
COMMERCIAL PAPER
$16,017 Morgan Stanley Dean Witter Co., 3.04%, 6/01/2005
(cost: $16,017) 16,017
--------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- -------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (10.9%)
REPURCHASE AGREEMENTS (10.5%)(E)
$13,000 CS First Boston Corp., 3.05%, acquired on 5/31/2005 and due
6/01/2005 at $13,000 (collateralized by $13,225 of Freddie Mac
Notes(f), 4.13%, due 2/24/2011; market value $13,264) $ 13,000
22,000 Deutsche Bank Securities, Inc., 3.04%, acquired on 5/31/2005 and
due 6/01/2005 at $22,000 (collateralized by $20,000 of Freddie Mac
Notes(f), 2.30%(g), due 2/24/2006; and $2,644 of Federal Farm Credit
Discount Notes(f), 3.37%(h), due 10/14/2005; combined market
value $22,440) 22,000
24,000 Lehman Brothers, Inc., 3.04%, acquired on 5/31/2005 and due
6/01/2005 at $24,000 (collateralized by $20,453 of Fannie
Mae STRIPS(f), 3.86% - 4.90%(h), due 8/15/2007 - 5/15/2029;
$17,939 of Freddie Mac STRIPS(f), 3.89% - 4.90%(h), due
8/15/2007- 3/15/2031; and $5,026 of Tennessee Valley Auth.
STRIPS, 4.82% - 4.92%(h), due 7/15/2025 - 1/15/2038;
combined market value $24,481) 24,000
9,000 Morgan Stanley & Co., Inc., 3.05%, acquired on 5/31/2005 and
due 6/01/2005 at $9,000 (collateralized by $9,205 of Fannie Mae
Discount Notes(f), 3.00%(h), due 7/01/2005; market value $9,181) 9,000
--------
68,000
--------
NUMBER
OF SHARES
MONEY MARKET FUNDS (0.4%)
2,603,219 AIM Short-Term Investment Co. Liquid Assets Portfolio, 2.97%(d) 2,603
--------
Total short-term investments purchased with cash collateral
from securities loaned (cost: $70,603) 70,603
--------
TOTAL INVESTMENTS (COST: $613,698) $713,398
========
21
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA INTERNATIONAL FUND
MAY 31, 2005
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.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Security deemed illiquid by USAA Investment Management Company
(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 market value of this security at May 31, 2005, was
$11,157,000, which represented 1.7% of the Fund's net assets.
(b) Security was fair valued at May 31, 2005, by the Manager in
accordance with valuation procedures approved by the Board of
Trustees.
(c) The security or a portion thereof was out on loan as of May 31,
2005.
(d) Rate represents the money market fund annualized seven-day yield
at May 31, 2005.
22
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
(e) 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.
(f) U.S. government agency issues - securities issued by government-
sponsored enterprises (GSEs) are supported only by the credit of
the issuing agency, instrumentality, or corporation, and are
neither issued nor guaranteed by the U.S. government.
(g) Variable-rate or floating-rate security - interest rate is
adjusted periodically. The interest rate disclosed represents the
current rate at May 31, 2005.
(h) Zero-coupon security. Rate represents the effective yield at date
of purchase.
(i) Represents less than 0.1% of net assets.
* Non-income-producing security for the year ended May 31, 2005.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA INTERNATIONAL FUND
MAY 31, 2005
ASSETS
Investments in securities, at market value (including securities
on loan of $66,486) (identified cost of $613,698) $713,398
Cash 7
Cash denominated in foreign currencies (identified cost of $625) 615
Receivables:
Capital shares sold 1,024
USAA Transfer Agency Company (Note 7D) 3
Dividends and interest 2,576
Securities sold 2,479
Other 195
--------
Total assets 720,297
--------
LIABILITIES
Payables:
Upon return of securities loaned 70,608
Securities purchased 2,884
Capital shares redeemed 398
Unrealized depreciation on foreign currency contracts held, at value 1
Accrued management fees 411
Accrued transfer agent's fees 9
Other accrued expenses and payables 78
--------
Total liabilities 74,389
--------
Net assets applicable to capital shares outstanding $645,908
========
NET ASSETS CONSIST OF:
Paid-in capital $520,583
Accumulated undistributed net investment income 3,438
Accumulated net realized gain on investments 22,237
Net unrealized appreciation of investments 99,700
Net unrealized depreciation on foreign currency translations (50)
--------
Net assets applicable to capital shares outstanding $645,908
========
Capital shares outstanding, unlimited number of shares authorized, no par value 30,298
========
Net asset value, redemption price, and offering price per share $ 21.32
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA INTERNATIONAL FUND
YEAR ENDED MAY 31, 2005
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $1,585) $11,742
Interest 343
Securities lending 370
-------
Total income 12,455
-------
EXPENSES
Management fees 4,221
Administration and servicing fees 829
Transfer agent's fees 1,152
Custody and accounting fees 364
Postage 120
Shareholder reporting fees 34
Trustees' fees 8
Registration fees 66
Professional fees 57
Other 9
-------
Total expenses 6,860
Expenses paid indirectly (73)
-------
Net expenses 6,787
-------
NET INVESTMENT INCOME 5,668
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 32,598
Foreign currency transactions (190)
Change in net unrealized appreciation/depreciation of:
Investments 19,169
Foreign currency translations (98)
-------
Net realized and unrealized gain 51,479
-------
Increase in net assets resulting from operations $57,147
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA INTERNATIONAL FUND
YEARS ENDED MAY 31,
2005 2004
--------------------------
FROM OPERATIONS
Net investment income $ 5,668 $ 3,764
Net realized gain on investments 32,598 37,376
Net realized loss on foreign currency transactions (190) (153)
Change in net unrealized appreciation/depreciation of:
Investments 19,169 55,707
Foreign currency translations (98) (33)
--------------------------
Increase in net assets resulting from operations 57,147 96,661
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,680) (2,281)
Net realized gains (35,604) (1,058)
--------------------------
Distributions to shareholders (39,284) (3,339)
--------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 188,433 167,465
Reinvested dividends 38,077 3,186
Cost of shares redeemed (77,945) (132,039)
--------------------------
Increase in net assets from capital share transactions 148,565 38,612
--------------------------
Capital contribution from USAA Transfer Agency
Company (Note 7D) 3 -
--------------------------
Net increase in net assets 166,431 131,934
NET ASSETS
Beginning of period 479,477 347,543
--------------------------
End of period $645,908 $ 479,477
==========================
Accumulated undistributed net investment income:
End of period $ 3,438 $ 3,546
==========================
CHANGE IN SHARES OUTSTANDING
Shares sold 8,747 9,100
Shares issued for dividends reinvested 1,766 164
Shares redeemed (3,661) (7,344)
--------------------------
Increase in shares outstanding 6,852 1,920
==========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA INTERNATIONAL FUND
MAY 31, 2005
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST (the Trust), registered under the Investment
Company Act of 1940 (the 1940 Act), as amended, is an open-end
management investment company organized as a Massachusetts business
trust consisting of 10 separate funds. The information presented in
this annual report pertains only to the USAA International Fund (the
Fund), which is classified as diversified under the 1940 Act. The
Fund's primary investment objective is capital appreciation with
current income as a secondary objective.
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. Equity securities trading in various foreign markets may
take place on days when the NYSE is closed. Further, when
the NYSE is open, the foreign markets may be closed.
Therefore, the calculation of the Fund's net asset value
(NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined.
In most cases, events affecting the values of foreign
securities that occur between the time of their last quoted
sales or official closing prices and the close of normal
trading on the NYSE on a day
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
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 subadviser, if applicable, will
monitor for events that would materially affect the value of
the Fund's foreign securities and, if necessary, the Manager
will value the foreign securities in good faith, considering
such available information that the Manager deems relevant,
under valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign
market closing prices of foreign equity securities to
reflect what the Fund believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of
affected foreign equity securities may occur frequently
based on an assessment that events that occur on a fairly
regular basis (such as U.S. market movements) are
significant.
3. Investments in open-end investment companies, 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. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by the Manager in consultation with the Fund's
subadviser, if applicable, under valuation procedures
approved by the Trust's Board of Trustees. Valuing these
securities at fair value is intended to cause the Fund's NAV
to be more reliable than it otherwise would be.
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
Fair value methods used by the Manager include, but are not
limited to, obtaining market quotations from secondary
pricing services, broker-dealers, or widely used quotation
systems. General factors considered in determining the fair
value of securities include fundamental analytical data, the
nature and duration of any restrictions on disposition of
the securities, and an evaluation of the forces that
influenced the market in which the securities are purchased
and sold.
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). Gains or losses from sales of investment securities are
computed on the identified cost basis. Dividend income, less
foreign taxes, if any, is recorded on the ex-dividend date. If
the ex-dividend date has passed, certain dividends from foreign
securities are recorded upon notification. Interest income is
recorded on the accrual basis. Discounts and premiums on
short-term securities are amortized on a straight-line basis
over the life of the respective securities.
D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security
dealers. These agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the
U.S. government, its agencies, or its instrumentalities.
Government-sponsored enterprises (GSEs), such as Federal
National Mortgage Association (Fannie Mae) and Federal Home
Loan Mortgage Corporation (Freddie Mac), are supported only by
the credit of the issuing U.S. government agency, and are
neither issued nor guaranteed by the U.S. government.
Obligations pledged as collateral are
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
required to maintain a value equal to or in excess of the
repurchase agreement price plus accrued interest and are held
by the Fund, either through its regular custodian or through a
special "tri-party" custodian that maintains separate accounts
for both the Fund and its counterparty, until maturity of the
repurchase agreement. The Fund's Manager monitors the
creditworthiness of sellers with which the Fund may enter into
repurchase agreements.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be
invested in the securities of foreign issuers and may be traded
in foreign currency. Since the Fund's accounting records are
maintained in U.S. dollars, foreign currency amounts are
translated into U.S. dollars on the following basis:
1. Purchases and sales of securities, income, and expenses at
the exchange rate obtained from an independent pricing
service on the respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at
the exchange rate obtained from an independent pricing
service on a daily basis.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from
investments.
Separately, net realized foreign currency gains/losses may
arise from sales of foreign currency, currency gains/losses
realized between the trade and settlement dates on security
transactions, and from the difference between amounts of
dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts
received. These net realized foreign currency gains/losses have
been reclassified from accumulated net realized gain/loss to
accumulated undistributed
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
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. EXPENSES PAID INDIRECTLY - A portion of the brokerage
commissions that the Fund pays may be recaptured as a credit
that is tracked and used by the custodian to reduce expenses
paid by the Fund. 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
cash balances in the Fund's bank accounts are used to reduce
the Fund's expenses. For the year ended May 31, 2005,
brokerage commission recapture credits and custodian and other
bank credits reduced the Fund's expenses by $68,000 and $5,000,
respectively, resulting in a total reduction in Fund expenses
of $73,000.
G. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liabilities arising out of the performance of their duties to
the Trust. In addition, in the normal course of business the
Trust enters into contracts that contain a variety of
representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these
arrangements is unknown, as this would involve future claims
that may be made against the Trust that have not yet occurred.
However, the Trust expects the risk of loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
(2) LINES OF CREDIT
- --------------------------------------------------------------------------------
Effective January 6, 2005, the Fund participates in a joint,
short-term, revolving, committed loan agreement of $300 million with
USAA Capital Corporation (CAPCO), an affiliate of the Manager. The
purpose of the agreement is to meet temporary or emergency cash needs,
including redemption requests that might otherwise require the untimely
disposition of securities. Subject to availability under the agreement,
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.
The USAA funds that are party to the loan agreement are assessed
facility fees 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 $300 million loan agreement). The facility fees are allocated
among the funds based on their respective average net assets for the
period.
Prior to January 6, 2005, the loan agreement with CAPCO was in the
amount of $400 million, and the Fund also participated with other USAA
funds in a joint, short-term, revolving, committed loan agreement of
$100 million with Bank of America and State Street Bank and Trust
Company (State Street), under which Bank of America and State Street
both committed $50 million. Subject to availability under its agreement
with Bank of America and State Street, the Fund could 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, did not exceed 25% of the Fund's total assets. The
USAA funds that were party to the loan agreement with Bank of America
and State Street were assessed facility fees in an annual amount equal
to 0.09% of the $100 million loan agreement, whether used or not. The
facility fees were allocated among the funds based on their respective
average net assets for the period.
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
For the year ended May 31, 2005, the Fund paid CAPCO facility fees of
$3,000, which represents 1.7% of total fees paid to CAPCO by the USAA
funds. The Fund had no borrowings under any of these agreements during
the year ended May 31, 2005.
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The character of any distributions made during the year from net
investment income or net realized gains is determined in accordance
with federal tax regulations and may differ from those determined in
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between
book-basis and tax-basis accounting resulted in reclassifications made
to the statement of assets and liabilities to increase paid-in capital
by $2,344,000, decrease accumulated undistributed net investment income
by $2,096,000, and decrease accumulated net realized gain on
investments by $248,000. This includes differences in the accounting
for foreign currency gains and losses, other security transactions, the
treatment of dividends, and the utilization of earnings and profits
distributed to shareholders on redemption of shares as part of the
dividends-paid deduction for federal income tax purposes. This
reclassification has no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2005, and 2004, was as follows:
2005 2004
------------------------------
Ordinary income* $12,638,000 $2,281,000
Long-term realized capital gains 26,646,000 1,058,000
*Includes distribution of short-term realized capital gains, if any, which are
taxable as ordinary income.
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
As of May 31, 2005, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 4,892,000
Undistributed long-term capital gains 22,370,000
Accumulated capital and other losses (182,000)
Unrealized appreciation of investments 98,294,000
Unrealized depreciation on foreign currency translations (50,000)
The difference between book-basis and tax-basis appreciation of
investments is attributable to the tax deferral of losses on wash sales
and differences in the timing of recognition of unrealized gains and
losses on certain investments.
Distributions of net investment income and realized gains from security
transactions not offset by capital losses are made annually in the
succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes. At May 31, 2005, the Fund had a current post-October
currency loss of $182,000, for federal income tax purposes, which will
be recognized on the first day of the following fiscal year.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the year ended May 31, 2005, were
$333,681,000 and $221,306,000, respectively.
As of May 31, 2005, the cost of securities, including short-term
securities, for federal income tax purposes, was $615,104,000.
Gross unrealized appreciation and depreciation of investments as of May
31, 2005, for federal income tax purposes, were $108,764,000 and
$10,470,000, respectively, resulting in net unrealized appreciation of
$98,294,000.
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
(5) FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
A forward currency contract (currency contract) is a commitment to
purchase or sell a foreign currency at a specified date, at a
negotiated price. The Fund may enter into currency contracts in
connection with the purchase or sale of a security denominated in a
foreign currency. These contracts allow the Fund to "lock in" the U.S.
dollar price of the security. The Fund may also enter into currency
contracts to hedge against foreign currency exchange risks on the
non-U.S. dollar denominated securities held in the Fund's portfolio.
Currency contracts are valued on a daily basis using foreign currency
exchange rates obtained from an independent pricing service. Risks of
entering into currency contracts include the potential inability of the
counterparty to meet the terms of the contract and the Fund's giving up
the opportunity for potential profit.
At May 31, 2005, the terms of open foreign currency contracts were as
follows (in thousands):
FOREIGN CURRENCY CONTRACTS TO BUY
- ----------------------------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE RECEIVE 5/31/2005 FOR U.S. DOLLAR (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------
6/01/2005 41 $ 75 $ 75 $ -
Pound Sterling
6/02/2005 342 622 625 (3)
Pound Sterling
6/02/2005 9 133 134 (1)
Indonesian Rupiah
6/02/2005 10 185 185 -
Indonesian Rupiah
- ----------------------------------------------------------------------------------------------------
$1,015 $1,019 $(4)
- ----------------------------------------------------------------------------------------------------
35
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
FOREIGN CURRENCY CONTRACTS TO SELL
- ----------------------------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE DELIVER 5/31/2005 FOR U.S. DOLLAR (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------
6/01/2005 16 $ 19 $ 20 $1
Euro
6/03/2005 192 236 236 -
Euro
6/01/2005 5,833 54 54 -
Japanese Yen
6/02/2005 16,592 153 154 1
Japanese Yen
6/03/2005 16,130 149 150 1
Japanese Yen
- ----------------------------------------------------------------------------------------------------
$611 $614 $3
- ----------------------------------------------------------------------------------------------------
(6) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party 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 year ended May 31, 2005, the Fund
received securities-lending income of
36
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
$370,000, which is net of the 20% income retained by MetWest. As of May
31, 2005, the Fund loaned securities having a fair market value of
approximately $66,486,000 and received cash collateral of $70,608,000
for the loans. Of this amount $70,603,000 was invested in short-term
investments, as noted in the Fund's portfolio of investments, and
$5,000 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, subject to the
authority of and supervision by the Trust's Board of Trustees.
The Manager is authorized to select (with approval of the
Trust's Board of Trustees) one or more subadvisers to manage
the actual day-to-day investment of the Fund's assets. The
Manager monitors each subadviser's performance through
quantitative and qualitative analysis, and periodically
recommends 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 International
Funds Index, which tracks the total return performance of the
30 largest funds in the Lipper International 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.
37
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
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 (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 International Funds
Index over that period, even if the Fund had overall negative
returns during the performance period.
For the year ended May 31, 2005, the Fund incurred total
management fees, paid or payable to the Manager, of $4,221,000,
which included a performance adjustment of $76,000 that
increased the base management fee of 0.75% by 0.01%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with MFS Investment Management
(MFSIM), under which MFSIM directs the
38
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
investment and reinvestment of the Fund's assets (as allocated
from time to time by the Manager). 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, plus
0.200% 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 year
ended May 31, 2005, the Manager incurred subadvisory fees, paid
or payable to MFSIM of $3,212,000 for the MFSIM Funds in total,
of which $1,376,000 was based on the average net assets of the
USAA International Fund.
C. ADMINISTRATION AND SERVICING FEES - The Manager provides
certain administration and shareholder servicing functions for
the Fund. For such services, the Manager receives a fee
accrued daily and paid monthly at an annualized rate of 0.15%
of the Fund's average net assets. For the year ended May 31,
2005, the Fund incurred administration and servicing fees, paid
or payable to the Manager, of $829,000.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a
USAA Shareholder Account Services (SAS), 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. The Fund also pays SAS fees that are
related to the administration and servicing of accounts that
are traded on an
39
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
omnibus basis. For the year ended May 31, 2005, the Fund
incurred transfer agent's fees, paid or payable to SAS, of
$1,152,000. Additionally, the Fund recorded a receivable from
SAS of $3,000 at May 31, 2005, for adjustments related to
corrections to shareholder transactions.
E. 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.
40
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
(9) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------------------------
Net asset value at beginning of period $ 20.45 $ 16.15 $ 17.63 $ 18.23 $ 22.28
-----------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .10 .15 .11 .14 .16
Net realized and unrealized gain (loss) 2.35 4.30 (1.46) (.56) (3.01)
-----------------------------------------------------------------
Total from investment operations 2.45 4.45 (1.35) (.42) (2.85)
-----------------------------------------------------------------
Less distributions:
From net investment income (.14) (.10) (.13) (.18) (.11)
From realized capital gains (1.44) (.05) - - (1.09)
-----------------------------------------------------------------
Total distributions (1.58) (.15) (.13) (.18) (1.20)
-----------------------------------------------------------------
Net asset value at end of period $ 21.32 $ 20.45 $ 16.15 $ 17.63 $ 18.23
=================================================================
Total return (%)* 11.91 27.63 (7.63) (2.22) (13.84)
Net assets at end of period (000) $645,908 $479,477 $347,543 $382,459 $419,236
Ratio of expenses to average
net assets (%)**(a) 1.24 1.31 1.42 1.32 1.14
Ratio of net investment income
to average net assets (%)** 1.02 .91 .79 .78 .84
Portfolio turnover (%) 41.11 58.70 148.14 35.63 32.75
* Assumes reinvestment of all net investment income and realized capital gain distributions during the period.
Calculated using net assets adjusted for last day trades and could differ from the Lipper reported return.
** For the year ended May 31, 2005, average net assets were $553,671,000.
(a) 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%) (.01%) (.01%) (.00%)+ (.00%)+
+ Represents less than 0.01% of average net assets.
41
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA INTERNATIONAL FUND
MAY 31, 2005
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
December 1, 2004, through May 31, 2005.
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
42
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
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 DECEMBER 1, 2004 -
DECEMBER 1, 2005 MAY 31, 2005 MAY 31, 2005
------------------------------------------------------------
Actual $1,000.00 $1,017.10 $6.10
Hypothetical
(5% return before expenses) 1,000.00 1,018.88 6.11
*Expenses are equal to the Fund's annualized expense ratio of 1.21%,
which is net of any expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 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
3.43% for the six-month period of December 1, 2004, through May 31,
2005.
43
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA INTERNATIONAL FUND
MAY 31, 2005
At a meeting of the Board of Trustees held on April 27-28, 2005, the
Board, including the Trustees who are not "interested persons" of the
Trust (the "Independent Trustees"), approved the continuance of the
Investment Advisory Agreement between the Trust and the Manager with
respect to the Fund and the Subadvisory Agreement with respect to the
Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and Subadvisory Agreement and the Manager and the Subadviser, and were
given the opportunity to ask questions and request additional
information from management. The information provided to the Board
included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis
comparing the Fund's investment performance, expenses, and fees to
comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the
Manager's revenues and costs of providing services to the Fund and
compensation paid to affiliates of the Manager; and (iii) information
about the Manager's and Subadviser's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of
the Investment Advisory Agreement and the Subadvisory Agreement with
management and with experienced independent counsel and received
materials from such counsel discussing the legal standards for their
consideration of the proposed continuation of the Investment Advisory
Agreement and the Subadvisory Agreement with respect to the Fund. The
Independent Trustees also reviewed the proposed continuation of the
Investment Advisory Agreement and the Subadvisory Agreement with
respect to the Fund in private sessions with their counsel at which no
representatives of management were present.
At each regularly scheduled meeting of the Board and its committees,
the Board of Trustees of the Trust receives and reviews, among other
things, information concerning the Fund's performance and related
44
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
services provided by the Manager and by the Subadviser. At the meeting
at which the renewal of the Investment Advisory Agreement and
Subadvisory Agreement is considered, particular focus is given to
information concerning Fund performance, comparability of fees and
total expenses, and profitability. However, the Board noted that the
evaluation process with respect to the Manager and the Subadviser is an
ongoing one. In this regard, the Board's and its committees'
consideration of the Investment Advisory Agreement and Subadvisory
Agreement included certain types of information previously received at
such quarterly meetings.
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the
Investment Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment
advisory services provided to the Fund, the Manager and its affiliates
provide administrative services, stockholder services, oversight of
45
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
Fund accounting, marketing services, assistance in meeting legal and
regulatory requirements, and other services necessary for the operation
of the Fund and the Trust.
The Board considered the level and depth of knowledge of the Manager,
including the professional experience and qualifications of senior
personnel, as well as current staffing levels. The Board discussed the
Manager's effectiveness in monitoring the performance of the Subadviser
and its timeliness in responding to performance issues. The allocation
of the Fund's brokerage, including the Manager's process for monitoring
"best execution," was also considered. The Manager's role in
coordinating the activities of the Fund's other service providers was
also considered. The Board considered the Manager's financial condition
and that it had the financial wherewithal to continue to provide the
same scope and high quality of services under the Investment Advisory
Agreement. In reviewing the Investment Advisory Agreement, the Board
focused on the experience, resources, and strengths of the Manager and
its affiliates in managing investment companies, including the Fund.
The Board also reviewed the compliance and administrative services
provided to the Fund by the Manager, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager and
its affiliates provide compliance and administrative services to the
Fund. The Trustees, guided also by information obtained from their
experiences as directors/trustees of the Fund and other investment
companies managed by the Manager, also focused on the quality of the
Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE. In connection with its consideration of the
Investment Advisory Agreement, the Board evaluated the Fund's advisory
fees and total expense ratio as compared to other open-end investment
companies deemed to be comparable to the Fund as determined by the
independent third party in its report. The Fund's expenses were
compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based
46
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
upon certain factors, including fund type, comparability of investment
objective and classification, sales load type (in this case, investment
companies with no sales loads), asset size and expense components (the
"expense group") and (ii) a larger group of investment companies that
includes all no-load retail open-end investment companies in the same
investment classification/objective as the Fund regardless of asset
size, excluding outliers (the "expense universe"). Among other data,
the Board noted that the Fund's management fee rate -- which includes
advisory and administrative services and the effects of any performance
adjustment -- was above the median of both its expense group and its
expense universe. The data indicated that the Fund's total expenses
were above the median of its expense group and below the median of its
expense universe. The Board took into account the various services
provided to the Fund by the Manager and its affiliates. The Board also
noted the level and method of computing the management fee, including
the performance adjustment to such fee. The Trustees also took into
account that the subadvisory fees under the Subadvisory Agreement are
paid by the Manager.
In considering the Fund's performance, the Board of Trustees noted that
the Board reviews at its regularly scheduled meetings information about
the Fund's performance results. The Trustees also reviewed various
comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other mutual
funds deemed to be in its peer group by the independent third party in
its report (the "performance universe"). The Fund's performance
universe consisted of the Fund and all retail and institutional
open-end investment companies with the same classification/objective as
the Fund regardless of asset size or primary channel of distribution.
This comparison indicated that the Fund's performance exceeded the
average of its performance universe and its Lipper index for the three-
and
47
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
five-year periods ended December 31, 2004, exceeded the average of its
performance universe for the one-year period ended December 31, 2004,
and was comparable to its Lipper index for the one-year period ended
December 31, 2004. The Board also noted that the Fund's percentile
performance ranking was in the top 50% of its performance universe for
the one- and three-year periods ended December 31, 2004.
COMPENSATION AND PROFITABILITY. The Board took into consideration the
level and method of computing the management fee. The information
considered by the Board included operating profit margin information
for the Manager's business as a whole. The Board also received and
considered profitability information related to the management revenues
from the Fund. This consideration included a broad review of the
methodology used in the allocation of certain costs to the Fund. In
considering the profitability data with respect to the Fund, the
Trustees noted that the Manager pays the subadvisory fees. The Trustees
reviewed the profitability of the Manager's relationship with the Fund
before tax expenses. In reviewing the overall profitability of the
management fee to the Manager, the Board also considered the fact that
affiliates provide shareholder servicing and administrative services to
the Fund for which they receive compensation. The Board also considered
the possible direct and indirect benefits to the Manager from its
relationship with the Trust, including that the Manager may derive
reputational and other benefits from its association with the Fund. The
Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it
provides to the Fund and the entrepreneurial risk that it assumes as
Manager.
ECONOMIES OF SCALE. The Board considered whether there should be
changes in the management fee rate or structure in order to enable the
Fund to participate in any economies of scale that the Manager may
experience as a result of growth in the Fund's assets. The Board noted
that the Fund's contractual management fees are only slightly higher
than the asset-weighted average of funds at all asset levels in its
peer
48
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
May 31, 2005
group as set forth in the report prepared by the independent third
party. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability and
resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is reasonable in
relation to the performance of funds with similar investment objectives
and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to
be provided by the Manager; and (v) the Manager's level of
profitability from its relationship with the Fund is reasonable. Based
on their conclusions, the Board determined that continuation of the
Investment Advisory Agreement would be in the interests of the Fund and
its shareholders.
SUBADVISORY AGREEMENT
- --------------------------------------------------------------------------------
In approving the Fund's Subadvisory Agreement, the Board considered
various factors, among them: (i) the nature, extent, and quality of
services provided to the Fund, including the personnel providing
services; (ii) the Subadviser's compensation and any other benefits
derived from the subadvisory relationship; (iii) comparisons of
subadvisory fees and performance to comparable investment companies;
and (iv) the terms of the Subadvisory Agreement. The Board's analysis
of these factors is set forth below.
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Subadvisory Agreement. In approving the Subadvisory Agreement, the
Trustees did not identify any single factor as controlling, and each
Trustee attributed
49
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
different weights to various factors. Throughout their deliberations,
the Independent Trustees were represented and assisted by independent
counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT PERSONNEL.
The Trustees considered information provided to them regarding the
services provided by the Subadviser, including information presented
periodically throughout the previous year. The Board considered the
Subadviser's level of knowledge and investment style. The Board
reviewed the experience and credentials of the investment personnel who
are responsible for managing the investment of portfolio securities
with respect to the Fund and the Subadviser's level of staffing. The
Trustees noted that the materials provided to them indicated that the
method of compensating portfolio managers is reasonable and includes
appropriate mechanisms to prevent a manager with underperformance from
taking undue risks. The Trustees also noted the Subadviser's brokerage
practices. The Board also considered the Subadviser's regulatory and
compliance history. The Board noted that the Manager's monitoring
processes of the Subadviser include: (i) regular telephonic meetings to
discuss, among other matters, investment strategies and to review
portfolio performance; (ii) monthly portfolio compliance checklists and
quarterly compliance certifications to the Board; and (iii) due
diligence visits to the Subadviser.
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of the Subadviser. In considering the cost of
services to be provided by the Subadviser and the profitability to the
Subadviser of its relationship with the Fund, the Trustees noted that
the fees under the Subadvisory Agreement were paid by the Manager. The
Trustees also relied on the ability of the Manager to negotiate the
Subadvisory Agreement and the fees thereunder at arm's length. The
Board also considered information relating to the cost of services to
be provided by the Subadviser, the Subadviser's profitability with
respect to the Fund, and the potential economies of scale in the
Subadviser's management
50
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2005
of the Fund, to the extent available. However, for the reasons noted
above, this information was less significant to the Board's
consideration of the Subadvisory Agreement than the other factors
considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that the Subadviser charges
to comparable clients. The Board considered that the Fund pays a
management fee to the Manager and that, in turn, the Manager pays a
subadvisory fee to the Subadviser.
As noted above, the Board considered the Fund's performance during the
one-, three-, and five-year periods ended December 31, 2004, as
compared to the Fund's respective peer group and noted that the Board
reviews at its regularly scheduled meetings information about the
Fund's performance results. The Board noted the Manager's expertise and
resources in monitoring the performance, investment style, and
risk-adjusted performance of the Subadviser. The Board was mindful of
the Manager's focus on the Subadviser's performance and the
explanations of management regarding the factors that contributed to
the short-term performance of the Fund. The Board also noted the
Subadviser's long-term performance record for similar accounts.
CONCLUSION. The Board reached the following conclusions regarding the
Subadvisory Agreement, among others: (i) the Subadviser is qualified to
manage the Fund's assets in accordance with its investment objectives
and policies; (ii) the Subadviser maintains an appropriate compliance
program; (iii) the performance of the Fund is reasonable in relation to
the performance of funds with similar investment objectives and to
relevant indices; and (iv) the Fund's advisory expenses are reasonable
in relation to those of similar funds and to the services to be
provided by the Manager and the Subadviser. Based on the Board's
conclusions, the Board of Trustees determined that approval of the
Subadvisory Agreement with respect to the Fund would be in the
interests of the Fund and its shareholders.
51
D I R E C T O R S ' A N D O F F I C E R S '
====================------------------------------------------------------------
INFORMATION
DIRECTORS* AND OFFICERS OF THE COMPANY
- --------------------------------------------------------------------------------
The Board of Directors of the Company consists of six Directors. These
Directors and the Company's Officers supervise the business affairs of
the USAA family of funds. The Board of Directors is responsible for the
general oversight of the funds' business and for assuring that the
funds are managed in the best interests of each fund's respective
shareholders. The Board of Directors periodically reviews the funds'
investment performance as well as the quality of other services
provided to the funds and their shareholders by each of the fund's
service providers, including USAA Investment Management Company (IMCO)
and its affiliates. The term of office for each Director shall be 20
years or until the Director reaches age 70. All members of the Board of
Directors shall be presented to shareholders for election or
reelection, as the case may be, at least once every five years.
Vacancies on the Board of Directors can be filled by the action of a
majority of the Directors, provided that at least two-thirds of the
Directors have been elected by the shareholders.
Set forth below are the Directors and Officers of the Company, their
respective offices and principal occupations during the last five
years, length of time served, and information relating to any other
directorships held. Each serves on the Board of Directors of the USAA
family of funds consisting of four registered investment companies
offering 39 individual funds as of May 31, 2005. Unless otherwise
indicated, the business address of each is 9800 Fredericksburg Road,
San Antonio, TX 78288.
If you would like more information about the funds' Directors, you may
call (800) 531-8181 to request a free copy of the funds' statement of
additional information (SAI).
* FOR SIMPLICITY THROUGHOUT THIS SECTION, THE BOARDS OF DIRECTORS AND
BOARDS OF TRUSTEES OF THE FOUR LEGAL ENTITIES THAT COMPRISE THE USAA
FAMILY OF FUNDS WILL BE IDENTIFIED AS THE BOARD OF DIRECTORS.
52
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED DIRECTOR(1)
- --------------------------------------------------------------------------------
CHRISTOPHER W. CLAUS(2,4)
Director
Born: December 1960
Year of Election or Appointment: 2001
President, Chief Executive Officer, Director, and Chairman of the
Board of Directors, IMCO (12/04-present); President and Chief
Executive Officer, Director, and Vice Chairman of the Board of
Directors, IMCO (2/01-12/04); Senior Vice President, Investment Sales
and Service, IMCO (7/00-2/01); Vice President, Investment Sales and
Service, IMCO (12/94-7/00). Mr. Claus serves as President,
Director/Trustee, and Vice Chairman of the Boards of Director/Trustee
of the USAA family of funds. He also serves as President, Director,
and Chairman of the Board of Directors of USAA Shareholder Account
Services. He also holds the Officer position of Senior Vice President
of USAA Life Investment Trust, a registered investment company
offering five individual funds.
(1) INDICATES THE DIRECTOR IS AN EMPLOYEE OF USAA INVESTMENT MANAGEMENT
COMPANY OR AFFILIATED COMPANIES AND IS CONSIDERED AN "INTERESTED
PERSON" UNDER THE INVESTMENT COMPANY ACT OF 1940.
(2) MEMBER OF EXECUTIVE COMMITTEE
(3) MEMBER OF AUDIT COMMITTEE
(4) MEMBER OF PRICING AND INVESTMENT COMMITTEE
(5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE
(6) The address for all non-interested directors is that of the USAA
Funds, P.O. Box 659430, San Antonio, TX 78265-9430.
53
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
NON-INTERESTED (INDEPENDENT) DIRECTORS
- --------------------------------------------------------------------------------
BARBARA B. DREEBEN(3,4,5,6)
Director
Born: June 1945
Year of Election or Appointment: 1994
President, Postal Addvantage (7/92-present), a postal mail list
management service. Mrs. Dreeben serves as Director/Trustee of the USAA
family of funds. Mrs. Dreeben holds no other directorships of any
publicly held corporations or other investment companies outside the
USAA family of funds.
ROBERT L. MASON, PH.D.(3,4,5,6)
Director
Born: July 1946
Year of Election or Appointment: 1997
Institute Analyst, Southwest Research Institute (3/02-present); Staff
Analyst, Southwest Research Institute (9/98-3/02), which focuses in the
fields of technological research. Dr. Mason serves as a
Director/Trustee of the USAA family of funds. Dr. Mason holds no other
directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
MICHAEL F. REIMHERR(3,4,5,6)
Director
Born: August 1945
Year of Election or Appointment: 2000
President of Reimherr Business Consulting (5/95-present), an
organization that performs business valuations of large companies to
include the development of annual business plans, budgets, and internal
financial reporting. Mr. Reimherr serves as a Director/Trustee of the
USAA family of funds. Mr. Reimherr holds no other directorships of any
publicly held corporations or other investment companies outside the
USAA family of funds.
54
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
LAURA T. STARKS, PH.D.(3,4,5,6)
Director
Born: February 1950
Year of Election or Appointment: 2000
Charles E. and Sarah M. Seay Regents Chair Professor of Finance,
University of Texas at Austin (9/96-present). Dr. Starks serves as a
Director/Trustee of the USAA family of funds. Dr. Starks holds no other
directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
RICHARD A. ZUCKER(2,3,4,5,6)
Director and Chairman of the Board of Directors
Born: July 1943
Year of Election or Appointment: 1992(+)
Vice President, Beldon Roofing Company (7/85-present). Mr. Zucker
serves as a Director/Trustee of the USAA family of funds. Mr. Zucker
holds no other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
(1) INDICATES THE DIRECTOR IS AN EMPLOYEE OF USAA INVESTMENT MANAGEMENT
COMPANY OR AFFILIATED COMPANIES AND IS CONSIDERED AN "INTERESTED
PERSON" UNDER THE INVESTMENT COMPANY ACT OF 1940.
(2) MEMBER OF EXECUTIVE COMMITTEE
(3) MEMBER OF AUDIT COMMITTEE
(4) MEMBER OF PRICING AND INVESTMENT COMMITTEE
(5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE
(6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE
USAA FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430.
(+) MR. ZUCKER WAS ELECTED AS CHAIRMAN OF THE BOARD IN 2005.
55
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED OFFICERS(1)
- --------------------------------------------------------------------------------
CLIFFORD A. GLADSON
Vice President
Born: November 1950
Year of Appointment: 2002
Senior Vice President, Fixed Income Investments, IMCO (9/02-present);
Vice President, Fixed Income Investments, IMCO (5/02-9/02); Vice
President, Mutual Fund Portfolios, IMCO (12/99-5/02); Assistant Vice
President, Fixed Income Investments, IMCO (11/94-12/99). Mr. Gladson
also holds the Officer position of Vice President of USAA Life
Investment Trust, a registered investment company offering five
individual funds.
STUART WESTER
Vice President
Born: June 1947
Year of Appointment: 2002
Vice President, Equity Investments, IMCO (1/99-present); Vice
President, Investment Strategy and Analysis, USAA Capital Corporation
(CAPCO) (6/96-1/99). Mr. Wester also holds the Officer position of Vice
President of USAA Life Investment Trust, a registered investment
company offering five individual funds.
MARK S. HOWARD
Secretary
Born: October 1963
Year of Appointment: 2002
Senior Vice President, Life/IMCO/USAA Financial Planning Services (FPS)
General Counsel, USAA (10/03-present); Senior Vice President,
Securities Counsel, USAA (12/02-10/03); Senior Vice President,
Securities Counsel & Compliance, IMCO (1/02-12/02); Vice President,
Securities Counsel & Compliance, IMCO (7/00-1/02); and Assistant Vice
President, Securities Counsel, USAA (2/98-7/00). Mr. Howard also holds
the Officer positions of Senior Vice President, Secretary, and Counsel
for USAA Life Insurance Company, IMCO, USAA Financial Advisers, Inc.
(FAI), FPS, and USAA Shareholder Account Services; and Secretary for
USAA Life Investment Trust, a registered investment company offering
five individual funds.
56
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
DEBRA K. DUNN
Treasurer
Born: August 1969
Year of Appointment: 2005
Assistant Vice President, IMCO/FPS Finance, USAA (9/04-present);
Executive Director, IMCO/FPS Finance, USAA (12/03-9/04); Executive
Director, FPS Finance, USAA (2/03-12/03); Director, FPS Finance, USAA
(12/02-2/03); Director, Strategic Financial Analysis, IMCO
(1/01-12/02). Financial Business Analyst, Strategic Financial Analysis,
IMCO (3/00-1/01). Ms. Dunn also holds the officer positions of
Assistant Vice President and Treasurer for IMCO, USAA Shareholder
Account Services, FPS, and FAI.
EILEEN M. SMILEY
Assistant Secretary
Born: November 1959
Year of Appointment: 2003
Vice President, Securities Counsel, USAA (2/04-present); Assistant Vice
President, Securities Counsel, USAA (1/03-2/04); Attorney, Morrison &
Foerster, LLP (1/99-1/03). Ms. Smiley also holds the Officer position
of Vice President and Assistant Secretary of IMCO, FAI, and FPS; and
Assistant Secretary of USAA Life Investment Trust, a registered
investment company offering five individual funds.
ROBERTO GALINDO, JR.
Assistant Treasurer
Born: November 1960
Year of Appointment: 2000
Assistant Vice President, Portfolio Accounting/Financial
Administration, USAA (12/02-present); Assistant Vice President, Mutual
Fund Analysis & Support, IMCO (10/01-12/02); Executive Director, Mutual
Fund Analysis & Support, IMCO (6/00-10/01); Director, Mutual Fund
Analysis, IMCO (9/99-6/00); Vice President, Portfolio Administration,
Founders Asset Management LLC (7/98-8/99). Mr. Galindo also holds the
Officer position of Assistant Treasurer of USAA Life Investment Trust,
a registered investment company offering five individual funds.
57
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
JEFFREY D. HILL
Chief Compliance Officer
Born: December 1967
Year of Appointment: 2004
Assistant Vice President, Mutual Funds Compliance, USAA (9/04-present);
Assistant Vice President, Investment Management Administration &
Compliance, USAA (12/02-9/04); Assistant Vice President, Investment
Management Administration & Compliance, IMCO (9/01-12/02); Senior
Manager, Investment Management Assurance and Advisory Services, KPMG
LLP (6/98-8/01). Mr. Hill also serves as Chief Compliance Officer of
USAA Life Investment Trust, a registered investment company offering
five individual funds.
(1) INDICATES THOSE OFFICERS WHO ARE EMPLOYEES OF USAA INVESTMENT
MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE CONSIDERED
"INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT OF 1940.
58
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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 AND State Street Bank and Trust Company
ACCOUNTING AGENT 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.
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 FORMS N-Q 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 FORMS N-Q 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.
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INSURANCE o MEMBER SERVICES
23409-0705 (C)2005, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On June 25, 2003, the Board of Trustees of USAA Investment Trust approved a Code
of Ethics (Sarbanes Code) applicable solely to its senior financial officers,
including its principal executive officer (President), as defined under the
Sarbanes-Oxley Act of 2002 and implementing regulations of the Securities and
Exchange Commission. A copy of the Sarbanes Code is attached as an Exhibit to
this Form N-CSR.
No amendments have been made to the Sarbanes Code since it was adopted, and no
waivers (explicit or implicit) from a provision of the Sarbanes Code have been
granted.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Dr. Laura T. Starks, Ph.D. has been designated as an audit committee financial
expert for USAA Investment Trust. Dr. Starks has served as a professor of
Finance at the University of Texas at Austin since 1987, and has served as the
Chair Professor of Finance since 1996. Dr. Starks also has served as a
consultant to numerous clients, including accounting firms, on a range of
finance, accounting and auditing issues. Dr. Starks is an independent director
who serves as a member of the Audit Committee, Pricing and Investment Committee
and the Corporate Governance Committee of the Board of Trustees of USAA
Investment Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 10 funds in
all. Only 9 funds of the Registrant (excluding the Total Return Strategy Fund)
have a fiscal year-end of May 31 and are included within this report (the
Funds). The aggregate fees billed by the Registrant's independent auditor, Ernst
& Young LLP, for professional services rendered for the audit of the Funds'
annual financial statements and services provided in connection with statutory
and regulatory filings by the Registrant for the Funds for fiscal years ended
May 31, 2005 and 2004 were $150,400 and $154,195, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid by the Funds' transfer
agent USAA Transfer Agency Company (dba USAA Shareholder Account Services) for
professional services rendered by Ernst & Young, LLP for audit related services
related to the annual study of internal controls of the transfer agent for
fiscal years ended May 31, 2005 and 2004 were $15,500 and $15,000, respectively.
All services were preapproved by the Audit Committee.
(c) TAX FEES. The aggregate fees paid or accrued by the Registrant for
professional services rendered by Ernst & Young, LLP for tax services are
detailed in the table below:
- ----------------------------------------------------------------------------------------------
Review of Federal, Review of
State and City Passive Quarterly US/UK Tax
Income and tax Foreign Diversification Treaty and issues
returns and excise Investment Review under related to grantor
tax calculations Company Subchapter M trust TOTAL
- ----------------------------------------------------------------------------------------------
FYE 5-31-2005 $41,100 $14,050 $10,993 0 $ 66,143
FYE 5-31-2004 $39,700 $ 9,167 $ 5,400 $ 1,547 $ 55,814
- ----------------------------------------------------------------------------------------------
TOTAL $80,800 $23,217 $16,393 $ 1,547 $121,957
- ----------------------------------------------------------------------------------------------
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2005 or 2004.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, and
the Funds' transfer agent, SAS, for May 31, 2005 and 2004 were $109,143 and
$92,814, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2005 and 2004 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
funds. The Board of Directors/Trustees will consider Ernst & Young LLP's
independence and will consider whether the provision of these non-audit services
to IMCO is compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 10. CONTROLS AND PROCEDURES
The 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.
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. Disclosure controls and
procedures were established for the new section of the shareholder reports
detailing the factors considered by the Funds' Board in approving the Funds'
advisory agreements.
ITEM 11. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUND, INC.
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA STATE TAX-FREE TRUST
USAA LIFE INVESTMENT TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment
Trust, USAA State Tax-Free Trust and USAA Life Investment Trust (collectively,
the Funds, and each a Company) have adopted this code of ethics (the Code) to
comply with Section 406 of the Sarbanes-Oxley Act of 2002 (the Act) and
implementing regulations of the Securities and Exchange Commission (SEC). The
Code applies to each Company's Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer (each a Covered Officer), as detailed
in Appendix A.
The purpose of the Code is to promote:
o honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between the Covered Officers' personal
and professional relationships;
o full, fair, accurate, timely and understandable disclosure in reports
and documents that each Company files with, or submits to, the SEC and
in other public communications made by each Company;
o compliance with applicable laws and governmental rules and regulations;
o prompt internal reporting of violations of the Code to the Chief Legal
Officer of each Company, the President of each Company (if the
violation concerns the Treasurer) and the Chairman of the Board of
Directors/Trustees of each Company; and
o accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically. In
addition, it is recognized by each Company's Board of Directors/Trustees (each a
Board, and collectively the Boards) that the Covered Officers also may be
officers or employees of one or more other investment companies covered by this
joint USAA Funds' Code.
B. GENERAL RULE. Covered Officers Should Avoid Actual and
Apparent Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
o use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the detriment
of the Funds and their shareholders;
o cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
o accept gifts, gratuities, entertainment or any other benefit from any
person or entity that does business or is seeking to do business with
the Funds during contract negotiations.
o accept gifts, gratuities, entertainment or any other benefit with a
market value over $100 per person, per year, from or on behalf of any
person or entity that does, or seeks to do, business with or on behalf
of the Funds.
o EXCEPTION. Business-related entertainment such as meals, and
tickets to sporting or theatrical events, which are infrequent
and not lavish are excepted from this prohibition. Such
entertainment must be appropriate as to time and place,
reasonable and customary in nature, modest in cost and value,
incidental to the business, and not so frequent as to raise any
question of impropriety (Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
o service as a director on the board or an officer of any public or
private company, other than a USAA company or a Company, must be
approved by the USAA Funds' and IMCO's Code of Ethics Committee and
reported to each affected Company.
o the receipt of any non-nominal (i.e., valued over $25) gifts from any
person or entity with which a Company has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of Secretary of
a Company shall be considered the Chief Legal Officer of a Company.
o the receipt of any business-related entertainment from any person or
entity with which the Funds have current or prospective business
dealings must be approved in advance by the Chief Legal Officer unless
such entertainment qualifies as Customary Business Entertainment.
o any ownership interest in, or any consulting or employment relationship
with, any of the Company's service providers, other than IMCO or any
other USAA company, must be approved by the Chairman of the Board of
the Directors/Trustees and reported to each affected Board.
o any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other than an
interest arising from the Covered Officer's employment, such as
compensation or equity ownership should be approved by the Chairman of
the Board of Directors/Trustees and reported to each affected Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
o Each Covered Officer should familiarize himself with the disclosure
requirements applicable to the Funds, and the procedures and policies
implemented to promote full, fair, accurate, timely and understandable
disclosure by each Company.
o Each Covered Officer should not knowingly misrepresent, or cause others
to misrepresent, facts about the Funds to others, whether within or
outside the Funds, including to the Funds' Directors/Trustees and
auditors, and to government regulators and self-regulatory
organizations.
o Each Covered Officer should, to the extent appropriate within his area
of responsibility, consult with other officers and employees of the
Funds and IMCO with the goal of promoting full, fair, accurate, timely
and understandable disclosure in the reports and documents filed by a
Company with, or submitted to, the SEC, and in other public
communications made by the Funds.
o Each Covered Officer is responsible for promoting compliance with the
standards and restrictions imposed by applicable laws, rules and
regulations, and promoting compliance with the USAA Funds' and IMCO's
operating policies and procedures.
o A Covered Officer should not retaliate against any person who reports a
potential violation of this Code in good faith.
o A Covered Officer should notify the Chief Legal Officer promptly if he
knows of any violation of the Code. Failure to do so itself is a
violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of each
Company is responsible for applying this Code to specific
situations in which questions are presented under it and has the
authority to interpret the Code in any particular situation. The
Chief Legal Officer should consult, if appropriate, the USAA
Funds' outside counsel or counsel for the Independent
Directors/Trustees. However, any approvals or waivers sought by a
Covered Officer will be reported initially to the Chairman of the
Board of Directors/Trustees and will be considered by the Board
of Directors/Trustees.
B. REQUIRED REPORTS
o EACH COVERED OFFICER MUST:
o Upon adoption of the Code, affirm in writing to the Boards
that he has received, read and understands the Code.
o Annually thereafter affirm to the Chief Legal Officer that
he has complied with the requirements of the Code.
o THE CHIEF LEGAL OFFICER MUST:
o report to the Board about any matter or situation submitted
by a Covered Officer for interpretation under the Code, and
the advice given by the Chief Legal Officer;
o report annually to the Board and the Corporate Governance
Committee describing any issues that arose under the Code,
or informing the Board and Corporate Governance Committee
that no reportable issues occurred during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
o INITIAL COMPLAINT. All complaints or other inquiries concerning
potential violations of the Code must be reported to the Chief
Legal Officer. The Chief Legal Officer shall be responsible for
documenting any complaint. The Chief Legal Officer also will
report immediately to the President of the Company (if the
complaint involves the Treasurer), the Chairman of the Board (or
for the USAA Life Investment Trust (LIT) the Chairman/CEO of USAA
if the complaint involves the Chairman of the LIT Board) and the
Chairperson of the Audit Committee any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints, the
Chief Legal Officer will report quarterly to the Board.
o INVESTIGATIONS. The Chief Legal Officer will take all appropriate
action to investigate any potential violation unless the Chairman
of the Board or the Chairperson of the Audit Committee direct
another person to undertake such investigation. The Chief Legal
Officer may utilize USAA's Office of Ethics to do a unified
investigation under this Code and USAA's Code of Conduct. The
Chairman of the Board, or the Board as a whole, may direct the
Company's outside counsel or the counsel to the Independent
Directors/Trustees (if any) to participate in any investigation
under this Code.
o STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
o VIOLATIONS OF THE CODE. If after investigation, the Chief Legal
Officer, or other investigating person, believes that a violation
of the Code has occurred, he will report immediately to the
Chairman of the Board (and for the USAA LIT the Chairman/CEO of
USAA if the violation involves the Chairman of the LIT Board) the
nature of the violation, and his recommendation regarding the
materiality of the violation. If, in the opinion of the
investigating person, the violation could materially affect the
Funds' financial condition or reputation, the Chief Legal Officer
also will notify the Chairperson of the Audit Committee of each
Company.
The Chief Legal Officer will inform, and make a recommendation
to, the Board, which will consider what further action is
appropriate. Appropriate action could include: (1) review of, and
modifications to, the Code or other applicable policies or
procedures; (2) notifications to appropriate personnel of IMCO or
USAA; (3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
o The Boards of Directors/Trustees understand that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates USAA's
Code of Business Conduct, these procedures do not limit or
restrict USAA's ability to discipline such Covered Officer
under USAA's Code of Business Conduct. In that event, the
Chairman of the Board of Directors/Trustees will report to
the Boards the action taken by USAA with respect to a
Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of a Company, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The USAA Funds' and IMCO's Joint Code of
Ethics under Rule 17j-1 under the 1940 Act, and IMCO's more detailed compliance
policies and procedures (including its Insider Trading Policy) are separate
requirements applying to Covered Officers and other IMCO employees, and are not
part of this Code. Also, USAA's Code of Conduct imposes separate requirements on
Covered Officers and all employees of USAA, and also is not part of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Directors/Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the
appropriate Board of Directors/Trustees and counsel for the Independent
Directors/Trustees (if any), the appropriate Company and its counsel, IMCO, and
other personnel of USAA as determined by the affected Company's Chief Legal
Officer or the Chairman of the Board of Directors/Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003 Approved
and adopted by the Boards of Directors/Trustees of USAA Mutual Fund, Inc., USAA
Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free Trust: June
25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
APPENDIX A
COVERED OFFICERS
TITLE COMPANY
PRESIDENT USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
TREASURER USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA INVESTMENT TRUST (EXCEPT TOTAL RETURN STRATEGY FUND)
By:* /s/ EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: July 26, 2005
------------------------------
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: August 2, 2005
------------------------------
By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: August 2, 2005
------------------------------
*Print the name and title of each signing officer under his or her signature.