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.
USAA PRECIOUS METALS AND MINERALS FUND - ANNUAL REPORT FOR PERIOD ENDING
MAY 31, 2005
[LOGO OF USAA]
USAA(R)
USAA PRECIOUS METALS
and MINERALS Fund
[GRAPHIC OF USAA PRECIOUS METALS AND MINERALS FUND]
A n n u a l R e p o r t
- --------------------------------------------------------------------------------
MAY 31, 2005
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGER'S COMMENTARY 4
FUND RECOGNITION 7
INVESTMENT OVERVIEW 8
FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm 12
Portfolio of Investments 13
Notes to Portfolio of Investments 16
Financial Statements 18
Notes to Financial Statements 21
EXPENSE EXAMPLE 34
ADVISORY AGREEMENTS 36
DIRECTORS' AND OFFICERS' INFORMATION 42
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
==============------------------------------------------------------------------
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
========================--------------------------------------------------------
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
==================--------------------------------------------------------------
COMMENTARY on the Fund
[PHOTO OF MARK JOHNSON] MARK JOHNSON, CFA
USAA Investment Management Company
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HOW DID THE FUND PERFORM?
The USAA Precious Metals and Minerals Fund had a total return
of -5.39% for the year ended May 31, 2005. This compares to a
-3.54% return for the Lipper Gold Oriented Funds Average,
-0.06% for the Lipper Gold Funds Index, -2.77% for the
Philadelphia Gold & Silver Index (XAU), and 8.23% for the S&P
500 Index.
Periods of underperformance are normal in any long-term fund,
especially one that invests in commodity-based companies.
Given our focus on long-term performance over many market
cycles, we're pleased to report that Lipper presented your
Fund with the "Best Gold Oriented Fund" award in the nation
for consistent return for the 10-year period ending December
31, 2004.
REFER TO PAGE 10 FOR BENCHMARK DEFINITIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE HIGHEST LIPPER LEADER FOR CONSISTENT RETURN VALUE WITHIN
EACH ELIGIBLE CLASSIFICATION DETERMINED THE FUND
CLASSIFICATION WINNER OVER THE THREE-, FIVE-, OR 10-YEAR
PERIODS ENDED DECEMBER 31, 2004. CONSISTENT RETURN IS A
QUANTITATIVE METRIC THAT INCORPORATES RISK-ADJUSTED RETURN AND
THE STRENGTH OF THE FUND'S PERFORMANCE TREND RELATIVE TO
PEERS. THE USAA PRECIOUS METALS AND MINERALS FUND WAS CHOSEN
AMONG 19 FUNDS IN THE GOLD ORIENTED FUNDS CATEGORY FOR THE
10-YEAR PERIOD. LIPPER FUND AWARDS ARE NOT INTENDED TO
PREDICT FUTURE RESULTS AND LIPPER DOES NOT GUARANTEE THE
ACCURACY OF THIS INFORMATION. A DETAILED EXPLANATION OF THE
CONSISTENT RETURN CALCULATION METHODOLOGY IS AVAILABLE ON
WWW.LIPPERLEADERS.COM. LIPPER IS A LEADING GLOBAL PROVIDER OF
MUTUAL FUND RESEARCH.
5
. . . C O N T I N U E D
========================--------------------------------------------------------
WHAT HAPPENED IN THE GOLD MARKETS DURING THE PERIOD?
The price of gold was very much driven by - and negatively
correlated to - the U.S. dollar. So as the dollar fell in the
first half of the reporting year, gold rose from $393.35 an
ounce at the end of the last fiscal year to a high of $456.89
an ounce on December 2, 2004. As the dollar subsequently
strengthened, the price of gold weakened, ending the reporting
year on May 31, 2005, at $417.25.
Gold prices ended the reporting year higher than they started;
however, we invest primarily in gold-mining companies, not
gold itself. During the reporting year, gold-mining companies
faced significantly higher fuel, reagent (chemicals), steel,
and currency-adjusted labor costs. When gold prices went up
earlier in the reporting year, these costs cut into profits
and reduced the positive leverage gold-mining companies
generally have to rising gold prices. These costs remained
high as prices fell, contributing to the Fund's negative total
return.
HOW WAS THE FUND'S STOCK SELECTION IN THE GOLD SECTOR?
For the first time since 1996, our stock selection proved
detrimental to the Fund's relative performance. We owned some
smaller gold exploration companies that lagged their peers
earlier in the year, and we also owned one that declared
bankruptcy. However, our stock selection was much better in
the second half of the reporting year, because we cut back on
smaller exploration companies.
WHAT WAS THE FUND'S ALLOCATION TO OTHER PRECIOUS METALS AND MINERALS, AND WHAT
IMPACT DID IT HAVE ON PERFORMANCE?
The Fund ended the period with 79.0% of its assets in
gold-related companies, 12.3% in platinum, 4.2% in diamonds,
and 1.9% in
FOREIGN AND PRECIOUS METALS AND MINERALS INVESTING ARE SUBJECT
TO ADDITIONAL RISKS, SUCH AS CURRENCY FLUCTUATIONS, MARKET
ILLIQUIDITY, AND POLITICAL INSTABILITY.
6
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
base metals. Overall, the non-gold-related holdings
contributed positively to relative performance.
WHAT'S YOUR OUTLOOK?
There are two major issues - the dollar and the profit
squeeze. We suspect that eventually the dollar will weaken
again because of the large U.S. current account and budget
deficits. The most likely catalysts for a return to dollar
weakness would be either a halt to the current cycle of
Federal Reserve Board interest-rate increases or a decision by
China to permit a revaluation of its currency. As for the
profit squeeze, I believe that while costs may continue to
rise, they will do so at a much more modest pace.
As always, we remind you, our valued shareholders, that your
Fund is a long-term investment that will at times be volatile.
However, because the Fund is typically inversely correlated
with most other USAA fund offerings, a small holding in this
Fund has the potential to reduce your overall portfolio
volatility.
On behalf of everyone at USAA, we thank you for your continued
support.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
7
F U N D
========------------------------------------------------------------------------
RECOGNITION
USAA PRECIOUS METALS AND MINERALS FUND
- --------------------------------------------------------------------------------
USAA PRECIOUS METALS AND MINERALS FUND
OVERALL MORNINGSTAR RATINGS(TM)
out of 41 specialty - precious metals funds for the period ending May 31, 2005:
OVERALL RATING
* * * *
3-YEAR 5-YEAR 10-YEAR
* * * * * * * * * * * *
out of 41 funds out of 32 funds out of 22 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.
- --------------------------------------------------------------------------------
[LOGO OF LIPPER LEADER]
CONSISTENT RETURN
The Fund is listed as a Lipper Leader for Consistent Return of 41 funds within
the Lipper Gold Oriented Funds category for the overall period ended May 31,
2005.
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.)
LIPPER RATINGS FOR CONSISTENT RETURN REFLECT FUNDS' HISTORICAL RISK-ADJUSTED
RETURNS, ADJUSTED FOR VOLATILITY, RELATIVE TO PEERS AS OF MAY 31, 2005. THE FUND
RECEIVED A LIPPER LEADER RATING FOR CONSISTENT RETURN AMONG 41 AND 32 FUNDS IN
LIPPER'S GOLD ORIENTED FUNDS CATEGORY FOR THE THREE-AND FIVE-YEAR PERIODS,
RESPECTIVELY, AND A SCORE OF 4 AMONG 19 FUNDS FOR THE 10-YEAR PERIOD. RATINGS
ARE SUBJECT TO CHANGE EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF
PERCENTILE RANKS FOR THE CONSISTENT RETURN 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.
8
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA PRECIOUS METALS AND MINERALS FUND
OBJECTIVE
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Long-term capital appreciation and to protect the purchasing
power of shareholders' capital against inflation; secondary
objective of current income.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Normally invests at least 80% of the Fund's assets in equity
securities of domestic and foreign companies principally
engaged in the exploration, mining, or processing of gold and
other precious metals and minerals.
- --------------------------------------------------------------------------------
5/31/05 5/31/04
- --------------------------------------------------------------------------------
Net Assets $275.8 Million $291.6 Million
Net Asset Value Per Share $13.60 $14.52
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/05
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
- -5.39% 25.48% 5.35%
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.
9
. . . C O N T I N U E D
========================--------------------------------------------------------
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
USAA PRECIOUS LIPPER GOLD PHILADELPHIA
METALS AND MINERALS ORIENTED FUNDS LIPPER GOLD GOLD & SILVER
S&P 500 INDEX FUND AVERAGE FUNDS INDEX LONDON GOLD INDEX (XAU)
------------- ------------------- -------------- ----------- ----------- -------------
5/31/1995 $10,000.00 $10,000.00 $10000.00 $10000.00 $10,000.00 $10,000.00
6/30/1995 10231.87 10011.11 10211.82 10115.45 10071.56 10,017.59
7/31/1995 10571.03 10155.56 10556.35 10580.92 9975.28 9,898.54
8/31/1995 10597.41 10100.00 10606.85 10658.87 9949.26 10,241.08
9/30/1995 11044.39 10077.78 10689.20 10714.02 9992.19 10,369.66
10/31/1995 11004.93 8866.67 9609.20 9484.52 9957.06 8,948.60
11/30/1995 11487.48 9711.11 10230.17 10016.91 10091.07 10,137.09
12/31/1995 11708.76 9930.38 10389.24 10203.69 10070.26 10,081.10
1/31/1996 12106.81 11909.78 12263.99 12151.63 10552.95 11,808.99
2/29/1996 12219.44 12065.47 12951.21 12417.09 10425.45 12,070.38
3/31/1996 12337.09 11987.62 13146.82 12457.41 10313.56 12,058.45
4/30/1996 12518.81 11932.02 13562.35 12719.52 10182.15 12,027.05
5/31/1996 12841.12 12365.71 14468.47 13524.95 10162.63 12,508.91
6/30/1996 12890.07 10742.16 12437.24 11607.33 9940.15 10,399.53
7/31/1996 12320.91 10475.27 12132.21 11367.02 10026.02 10,455.15
8/31/1996 12581.19 10897.84 12938.81 11999.45 10055.95 10,481.64
9/30/1996 13288.66 10197.26 12363.11 11376.55 9862.09 9,693.10
10/31/1996 13655.02 10119.42 12181.58 11261.98 9875.10 9,730.96
11/30/1996 14686.27 9974.86 11845.05 10890.93 9661.72 10,135.55
12/31/1996 14395.34 9930.38 11717.21 10684.98 9608.38 9,851.35
1/31/1997 15294.21 9396.61 11063.81 10076.82 8990.37 9,300.59
2/28/1997 15414.29 10553.11 12394.56 11358.43 9331.25 10,342.92
3/31/1997 14782.12 9074.12 10639.70 9767.28 9059.33 8,800.07
4/30/1997 15663.81 8518.11 9891.42 9098.00 8851.16 7,935.42
5/31/1997 16621.46 8996.28 10321.06 9445.75 8992.97 8,835.69
6/30/1997 17360.38 8351.30 9446.10 8606.27 8705.44 8,104.26
7/31/1997 18741.38 7995.46 9061.30 8267.89 8492.06 8,309.12
8/31/1997 17692.24 8162.26 9141.28 8303.85 8466.04 8,396.72
9/30/1997 18660.63 8651.55 9600.18 8699.11 8641.69 9,299.49
10/31/1997 18038.12 7350.48 8064.19 7271.29 8103.04 7,468.42
11/30/1997 18872.46 5838.13 6415.88 5731.49 7723.13 6,033.51
12/31/1997 19196.33 6138.38 6664.66 5989.92 7551.39 6,322.20
1/31/1998 19408.45 6527.58 7014.02 6337.08 7932.60 6,388.67
2/28/1998 20807.46 6405.26 6869.69 6144.20 7738.75 6,433.61
3/31/1998 21872.12 6905.67 7258.04 6500.29 7832.42 6,967.89
4/30/1998 22096.10 7550.65 7770.80 6953.74 8084.83 7,504.36
5/31/1998 21716.82 6527.58 6669.93 5925.86 7639.86 6,385.38
6/30/1998 22598.30 5938.21 6056.28 5301.31 7710.12 6,131.14
7/31/1998 22359.47 5482.28 5698.07 4980.77 7516.26 5,382.71
8/31/1998 19129.05 4103.37 4396.69 3827.02 7114.23 4,187.59
9/30/1998 20355.53 6238.46 6286.57 5513.81 7646.37 6,423.13
10/31/1998 22008.71 6305.18 6239.97 5432.15 7606.04 6,462.82
11/30/1998 23342.07 6171.74 6050.54 5250.44 7668.49 6,092.37
12/31/1998 24686.28 6205.10 5947.52 5222.95 7488.94 5,579.47
1/31/1999 25718.19 6105.01 5840.64 5102.10 7426.49 5,432.62
2/28/1999 24919.01 5915.97 5662.99 4975.32 7469.42 5,202.33
3/31/1999 25915.72 5949.33 5708.22 4999.82 7271.66 5,141.44
4/30/1999 26919.30 6838.95 6493.42 5719.14 7457.72 6,324.47
5/31/1999 26284.33 5927.09 5616.35 4896.95 6989.33 5,256.39
6/30/1999 27739.06 6193.98 5843.71 5097.15 6791.57 5,779.70
7/31/1999 26876.69 5749.17 5497.60 4837.76 6651.05 5,429.10
8/31/1999 26743.63 5904.85 5711.13 5012.91 6630.24 5,876.10
9/30/1999 26011.39 7372.72 6951.80 6121.10 7780.38 7,003.50
10/31/1999 27656.70 6761.11 6246.63 5516.45 7782.98 6,070.43
11/30/1999 28218.88 6483.10 6114.83 5365.08 7581.32 5,861.42
12/31/1999 29878.59 6649.91 6237.94 5452.46 7552.69 5,942.73
1/31/2000 28377.60 5982.69 5610.13 4913.26 7371.84 5,244.16
2/29/2000 27840.98 6027.17 5608.98 4905.70 7641.17 5,263.25
3/31/2000 30562.88 5693.57 5323.43 4633.09 7201.41 4,981.03
4/30/2000 29643.69 5348.84 4990.89 4384.67 7157.17 4,826.75
5/31/2000 29035.99 5415.56 5067.08 4441.38 7084.31 4,981.59
6/30/2000 29751.10 5827.01 5335.15 4689.73 7498.05 5,118.18
7/31/2000 29286.39 5404.44 4930.27 4364.28 7201.41 4,502.00
8/31/2000 31104.47 5793.65 5327.70 4652.40 7207.91 4,665.62
9/30/2000 29462.78 5371.08 4986.09 4336.84 7120.74 4,450.90
10/31/2000 29337.60 4859.55 4549.20 3951.28 6882.64 3,911.50
11/30/2000 27026.52 5148.67 4794.41 4122.67 7002.34 4,215.49
12/31/2000 27159.11 5653.97 5216.60 4506.81 7141.56 4,604.20
1/31/2001 28122.11 5575.75 5233.53 4501.03 6882.64 4,375.83
2/28/2001 25559.54 5821.58 5453.43 4685.76 6939.89 4,729.65
3/31/2001 23941.23 5341.10 4948.79 4258.11 6705.70 4,286.06
4/30/2001 25800.23 6212.66 5682.90 4888.61 6847.51 4,967.21
5/31/2001 25973.31 6525.53 5929.18 5113.76 6960.71 5,157.95
6/30/2001 25341.38 6749.01 5930.07 5147.43 7041.37 4,808.79
7/31/2001 25091.82 6369.10 5601.10 4873.50 6919.07 4,791.63
8/31/2001 23522.61 6793.70 5889.57 5150.74 7103.83 5,129.29
9/30/2001 21623.25 7095.40 6069.54 5319.10 7626.85 5,242.01
10/31/2001 22035.82 6950.14 5908.96 5208.00 7253.45 4,947.60
11/30/2001 23725.70 7006.01 5885.11 5209.71 7168.88 4,780.95
12/31/2001 23933.67 7404.91 6188.46 5464.12 7194.90 4,952.08
1/31/2002 23584.59 8383.98 6909.30 6082.29 7345.82 5,579.85
2/28/2002 23129.65 9329.29 7648.24 6696.59 7724.43 5,949.35
3/31/2002 23999.64 10285.85 8399.02 7344.02 7842.83 6,476.17
4/30/2002 22545.24 10904.80 8949.05 7784.84 8019.78 6,756.63
5/31/2002 22379.73 13178.04 10751.50 9227.80 8498.57 7,715.67
6/30/2002 20786.17 11388.71 9359.88 8099.06 8287.80 6,547.83
7/31/2002 19166.28 9453.08 7715.85 6714.04 7927.40 5,547.26
8/31/2002 19291.75 11118.62 8955.82 7797.19 8139.47 6,412.82
9/30/2002 17197.22 11141.12 9016.32 7860.34 8423.11 6,439.47
10/31/2002 18709.19 10229.58 8232.06 7205.36 8246.16 5,857.76
11/30/2002 19809.32 10274.59 8307.88 7217.60 8302.11 5,852.22
12/31/2002 18646.16 12411.32 10175.09 8782.85 9034.61 7,098.77
1/31/2003 18158.64 12750.24 10336.65 8867.55 9562.84 7,120.97
2/28/2003 17885.78 11756.87 9706.76 8328.76 9041.11 6,700.68
3/31/2003 18058.95 11114.10 8998.59 7715.58 8713.24 6,234.13
4/30/2003 19545.77 11149.16 8943.94 7693.15 8762.69 6,085.72
5/31/2003 20574.60 12504.82 9941.50 8573.88 9404.11 6,855.33
6/30/2003 20837.43 13007.35 10247.03 8828.29 9003.38 7,341.96
7/31/2003 21204.99 13953.98 10786.83 9318.95 9231.07 7,574.40
8/31/2003 21617.72 16104.34 12304.32 10654.25 9773.61 8,527.04
9/30/2003 21388.83 16875.66 12712.71 11033.70 10096.28 8,543.33
10/31/2003 22598.17 19248.07 14315.75 12347.41 10050.74 9,198.90
11/30/2003 22796.77 21889.28 16108.96 13386.89 10365.60 10,292.81
12/31/2003 23991.50 21276.52 15855.40 13557.38 10831.38 10,219.05
1/31/2004 24431.77 19118.21 14370.20 12288.96 10402.03 8,981.93
2/29/2004 24771.25 19375.74 14831.31 12527.97 10300.55 9,396.16
3/31/2004 24397.58 20687.89 15696.00 13277.49 11025.24 9,889.11
4/30/2004 24015.09 16457.12 12297.71 10510.51 10109.29 7,725.77
5/31/2004 24343.99 17806.06 13186.19 11302.01 10232.89 8,479.98
6/30/2004 24817.22 17254.22 12800.26 10952.88 10299.25 8,147.98
7/31/2004 23995.94 16665.59 12490.84 10754.66 10184.75 8,217.12
8/31/2004 24092.10 17695.69 13279.59 11457.57 10597.19 8,970.98
9/30/2004 24353.08 18934.27 14554.23 12522.90 10815.77 9,655.18
10/31/2004 24725.14 19363.48 14784.74 12770.95 11073.38 9,800.25
11/30/2004 25725.23 20185.11 15489.80 13461.17 11798.07 10,129.44
12/31/2004 26600.35 18989.03 14575.96 12722.22 11334.89 9,432.83
1/31/2005 25951.98 17948.53 13742.82 12055.97 10984.91 8,683.92
2/28/2005 26497.82 19174.83 14774.07 12994.43 11330.99 9,416.65
3/31/2005 26029.08 18307.75 14052.20 12312.13 11124.12 8,937.39
4/30/2005 25535.66 16598.37 12678.00 11137.85 11337.50 7,968.58
5/31/2005 26347.46 16846.11 12823.41 11294.87 10784.54 8,244.67
[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.
10
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
The graph on page 9 illustrates the comparison of a $10,000
hypothetical investment in the USAA Precious Metals and
Minerals Fund to the following benchmarks:
o The S&P 500 Index is an unmanaged index representing the
weighted average performance of a group of 500 widely held,
publicly traded stocks. It is not possible to invest
directly in the S&P 500 Index.
o The Lipper Gold Oriented Funds Average is an average
performance level of all gold-oriented funds, reported by
Lipper Inc., an independent organization that monitors the
performance of mutual funds.
o The Lipper Gold Funds Index tracks the total return
performance of the 10 largest funds within the Lipper Gold
Oriented Funds category.
o London Gold represents the performance of gold bullion by
tracking the price of gold set in London.
o The Philadelphia Gold & Silver Index, typically referred to
as the XAU, represents 12 holdings in the gold and silver
sector.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
- -------------------------------------------------------------------
TOP 10 EQUITY HOLDINGS
(% of Net Assets)
- -------------------------------------------------------------------
Anglo American Platinum Corp. (Common & Preferred) 6.3%
Goldcorp. Inc. 6.2%
Impala Platinum Holdings Ltd. 6.1%
Barrick Gold Corp. 5.4%
Glamis Gold Ltd. 5.2%
Freeport-McMoRan Copper & Gold, Inc. "B" 5.1%
Newcrest Mining Ltd. 5.1%
Newmont Mining Corp. 5.0%
Meridian Gold, Inc. 4.8%
Agnico-Eagle Mines Ltd. 4.3%
- -------------------------------------------------------------------
ASSET ALLOCATION
5/31/05
[PIE CHART OF ASSET ALLOCATION]
Gold 79.0%
Platinum Group Metals 12.3%
Diamond 4.2%
Base Metals 1.9%
Other 7.8%
[END CHART]
*INCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS
PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL
100%. YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE
FUND OWNS ON PAGES 13-15. FOREIGN AND PRECIOUS METALS AND
MINERALS INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
12
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 PRECIOUS METALS AND MINERALS
FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Precious Metals and Minerals 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 Precious Metals and Minerals 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
13
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------
EQUITY SECURITIES (97.4%)
STOCKS (97.3%)
--------------
GOLD (78.9%)
AFRICAN GOLD COMPANIES (1.6%)
100,000 AngloGold Ashanti Ltd. ADR(c) $ 3,434
100,000 Gold Fields Ltd. ADR 1,099
--------
4,533
--------
AUSTRALIAN GOLD COMPANIES (7.9%)
1,400,000 Newcrest Mining Ltd. 14,064
8,400,000 Oxiana Ltd.* 5,456
2,000,000 Sino Gold Ltd.* 2,311
1,375,000 Sons of Gwalia Ltd. (acquired 3/07/2002-7/07/2004; cost $4,272)*(a,b) -
--------
21,831
--------
EUROPEAN GOLD COMPANIES (4.1%)
900,000 Randgold Resources Ltd. ADR*(c) 11,241
--------
NORTH AMERICAN GOLD COMPANIES (61.4%)
1,000,000 Agnico-Eagle Mines Ltd.(c) 11,850
750,000 American Bonanza Gold Corp.* 266
650,000 Barrick Gold Corp.(c) 14,944
1,600,000 Bema Gold Corp.* 3,312
4,000,000 Cambior, Inc.* 7,600
1,350,000 Desert Sun Mining Corp.* 1,850
3,100,000 Eldorado Gold Corp.* 7,162
400,000 Freeport-McMoRan Copper & Gold, Inc. "B" 14,120
500,000 Gabriel Resources Ltd.* 574
900,000 Gammon Lake Resources, Inc.* 5,385
1,000,000 Glamis Gold Ltd.* 14,290
1,100,000 Glencairn Gold Corp.* 416
1,250,000 Goldcorp, Inc. 16,987
2,100,000 Golden Star Resources Ltd.*(c) 5,985
1,000,000 Hecla Mining Co.* 4,480
600,000 Kinross Gold Corp.* 3,198
800,000 Meridian Gold, Inc.* 13,216
620,000 Metallic Ventures Gold, Inc.* 795
500,000 Mexgold Resources, Inc.* 1,115
500,000 Minefinders Corp. Ltd.* 2,690
14
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------
370,000 Newmont Mining Corp. $ 13,779
800,000 Placer Dome, Inc. 10,816
320,000 Royal Gold, Inc.(c) 5,616
1,000,000 Wolfden Resources, Inc.* 2,191
2,000,000 Yamana Gold, Inc.* 6,533
--------
169,170
--------
SOUTH AMERICAN GOLD COMPANIES (3.9%)
500,000 Compania de Minas Buenaventura S.A. ADR 10,690
--------
Total gold (cost: $177,069) 217,465
--------
DIAMONDS (4.2%)
400,000 Aber Diamond Corp. (cost: $6,635) 11,638
--------
PLATINUM GROUP METALS (12.3%)
380,000 Anglo American Platinum Corp. 16,293
50,000 Anglo American Platinum Corp., 6.38%
Convertible Cumulative Preferred 979
200,000 Impala Platinum Holdings Ltd. 16,741
--------
Total platinum group metals (cost: $24,807) 34,013
--------
BASE METALS (1.9%)
700,000 Ivanhoe Mines Ltd.* (cost: $1,597) 5,203
--------
Total stocks (cost: $210,108) 268,319
--------
WARRANTS (0.1%)
--------------
NORTH AMERICAN GOLD COMPANIES
1,500,000 American Bonanza Gold Corp. (acquired 11/10/2003; cost $0)*(a,b) -
250,000 Desert Sun Mining Corp. (acquired 7/14/2003; cost $0)*(a,b) 74
38,500 Desert Sun Mining Corp.* 15
1,350,000 Glencairn Gold Corp.* 113
60,000 Metallic Ventures Gold, Inc.* 7
332,500 Mexgold Resources, Inc. (acquired 2/18/2004; cost $199)*(a,b) 80
--------
Total warrants (cost: $466) 289
--------
Total equity securities (cost: $210,574) 268,608
--------
15
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- ----------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.3%)
COMMERCIAL PAPER (2.3%)
$6,534 UBS Finance, Inc., 3.04%, 6/01/2005 (cost: $6,534) $ 6,534
--------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (5.5%)
REPURCHASE AGREEMENTS (4.4%)(e)
1,000 CS First Boston LLC, 3.05%, acquired on 5/31/2005 and due
6/01/2005 at $1,000 (collateralized by $2,310 of Freddie Mac
Notes(f), 5.99%(g), due 3/18/2019; market value $1,021) 1,000
7,500 Deutsche Bank Securities, Inc., 3.04%, acquired on 5/31/2005
and due 6/01/2005 at $7,500 (collateralized by $7,200 of
Federal Home Loan Bank Bonds(f), 5.38%, due 5/15/2006,
and $321 of Freddie Mac Notes(f), 3.50%, due 4/01/2008;
combined market value $7,651) 7,500
3,500 Lehman Brothers, Inc., 3.04%, acquired on 5/31/2005 and due
6/01/2005 at $3,500 (collateralized by $4,163 of Freddie Mac
Notes(f), 3.36% - 4.36%(g), due 11/15/2005 - 5/15/2012;
market value $3,571) 3,500
-------
12,000
-------
NUMBER
OF SHARES
- ---------
MONEY MARKET FUNDS (1.1%)
3,074,120 AIM Short-Term Investment Co. Liquid Assets Portfolio, 2.97%(d) 3,074
11,966 Merrill Lynch Premier Institutional Fund, 2.87%(d) 12
--------
3,086
--------
Total short-term investments purchased with cash collateral
from securities loaned (cost: $15,086) 15,086
--------
TOTAL INVESTMENTS (COST: $232,194) $290,228
========
16
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA PRECIOUS METALS AND MINERALS 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.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Security that has been deemed illiquid by USAA Investment
Management Company (the Manager), under liquidity guidelines
approved by the Board of Trustees. The aggregate market value of
these securities at May 31, 2005, was $154,000, which
represented 0.06% 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.
(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.
17
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
May 31, 2005
(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) Zero-coupon security. Rate represents the effective yield at date
of purchase.
* Non-income-producing security for the year ended May 31, 2005.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
18
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
ASSETS
Investments in securities, at market value (including securities
on loan of $14,463) (identified cost of $232,194) $290,228
Cash 4
Cash denominated in foreign currencies (identified cost of $645) 647
Receivables:
Capital shares sold 340
Dividends and interest 97
Other 5
--------
Total assets 291,321
--------
LIABILITIES
Payables:
Upon return of securities loaned 15,089
Capital shares redeemed 210
Accrued management fees 183
Accrued transfer agent's fees 4
Other accrued expenses and payables 67
--------
Total liabilities 15,553
--------
Net assets applicable to capital shares outstanding $275,768
========
NET ASSETS CONSIST OF:
Paid-in capital $236,038
Accumulated undistributed net investment loss (13,935)
Accumulated net realized loss on investments (4,371)
Net unrealized appreciation of investments 58,034
Net unrealized appreciation on foreign currency translations 2
--------
Net assets applicable to capital shares outstanding $275,768
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 20,270
========
Net asset value, redemption price, and offering price per share $ 13.60
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
19
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA PRECIOUS METALS AND MINERALS FUND
YEAR ENDED MAY 31, 2005
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $81) $ 3,580
Interest 295
Securities lending 54
--------
Total income 3,929
--------
EXPENSES
Management fees 2,383
Administration and servicing fees 457
Transfer agent's fees 692
Custody and accounting fees 133
Postage 69
Shareholder reporting fees 16
Trustees' fees 8
Registration fees 41
Professional fees 40
Other 13
--------
Total expenses 3,852
Expenses paid indirectly (99)
--------
Net expenses 3,753
--------
NET INVESTMENT INCOME 176
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain on:
Investments 1,875
Foreign currency transactions 139
Change in net unrealized appreciation/depreciation of:
Investments (18,366)
Foreign currency translations (95)
--------
Net realized and unrealized loss (16,447)
--------
Decrease in net assets resulting from operations $(16,271)
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
S T A T E M E N T S
=====================----------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA PRECIOUS METALS AND MINERALS FUND
YEARS ENDED MAY 31,
2005 2004
-----------------------
FROM OPERATIONS
Net investment income (loss) $ 176 $ (1,290)
Net realized gain on investments 1,875 17,171
Net realized gain on foreign currency transactions 139 39
Change in net unrealized appreciation/depreciation of:
Investments (18,366) 45,008
Foreign currency translations (95) 128
-----------------------
Increase (decrease) in net assets resulting
from operations (16,271) 61,056
-----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - (15,511)
Net realized gains (3,247) -
-----------------------
Distributions to shareholders (3,247) (15,511)
-----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 109,059 265,904
Reinvested dividends 2,711 12,770
Cost of shares redeemed (108,097) (188,802)
-----------------------
Increase in net assets from capital share transactions 3,673 89,872
-----------------------
Capital contribution from USAA Investment
Management Company (Note 7A) 4 -
-----------------------
Net increase (decrease) in net assets (15,841) 135,417
NET ASSETS
Beginning of period 291,609 156,192
-----------------------
End of period $ 275,768 $ 291,609
=======================
Accumulated undistributed net investment loss:
End of period $ (13,935) $ (16,782)
=======================
CHANGE IN SHARES OUTSTANDING
Shares sold 7,429 17,476
Shares issued for dividends reinvested 178 734
Shares redeemed (7,420) (12,725)
-----------------------
Increase in shares outstanding 187 5,485
=======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA PRECIOUS METALS AND MINERALS 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 Precious Metals and
Minerals Fund (the Fund), which is classified as diversified under the
1940 Act. The Fund's primary investment objective is to seek long-term
capital appreciation and to protect the purchasing power of
shareholders' capital against inflation. Current income is a secondary
objective. The Fund concentrates its investments in equity securities
of domestic and foreign companies engaged in the exploration, mining,
or processing of gold and other precious metals and minerals, such as
platinum, silver, and diamonds. As such, the Fund may be exposed to
more risk than portfolios with a broader industry diversification.
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
22
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
NYSE is open, the foreign markets may be closed. Therefore,
the calculation of the Fund's net asset value (NAV) may not
take place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE on
a day the Fund's NAV 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, 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
23
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
valued in good faith at fair value, using methods determined
by the Manager 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.
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
24
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
U.S. government, its agencies, or its instrumentalities.
Government-sponsored enterprises (GSEs), such as Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan
Mortgage Corporation (Freddie Mac), are supported only by the
credit of the issuing U.S. government agency, and are neither
issued nor guaranteed by the U.S. government. Obligations
pledged as collateral are required to maintain a value equal to
or in excess of the repurchase agreement price plus accrued
interest and are held by the Fund, either through its regular
custodian or through a special "tri-party" custodian that
maintains separate accounts for both the Fund and its
counterparty, until maturity of the repurchase agreement. The
Fund's Manager monitors the creditworthiness of sellers with
which the Fund may enter into repurchase agreements.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be
invested in the securities of foreign issuers and may be traded
in foreign currency. Since the Fund's accounting records are
maintained in U.S. dollars, foreign currency amounts are
translated into U.S. dollars on the following basis:
1. Purchases and sales of securities, income, and expenses at
the exchange rate obtained from an independent pricing
service on the respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at
the exchange rate obtained from an independent pricing
service on a daily basis.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included with
the net realized and unrealized gain or loss from investments.
Separately, net realized foreign currency gains/losses may arise
from sales of foreign currency, currency gains/losses realized
25
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
between the trade and settlement dates on security transactions,
and the difference between amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books and the
U.S. dollar equivalent of the amounts received. These net
realized foreign currency gains/losses have been reclassified
from accumulated net realized gain/loss to accumulated
undistributed net investment income on the statement of assets
and liabilities as 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 $97,000 and $2,000,
respectively, resulting in a total reduction in Fund expenses of
$99,000.
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.
26
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
H. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) LINES OF CREDIT
- --------------------------------------------------------------------------------
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
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
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.
For the year ended May 31, 2005, the Fund paid CAPCO facility fees of
$2,000, which represents 1.0% 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 decrease paid-in capital
by $896,000, decrease accumulated undistributed net investment loss by
$2,671,000, and increase accumulated net realized loss on investments
by $1,775,000. This includes differences in accounting for foreign
currency gains and losses, other security transactions, and net
operating losses. 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* $ - $15,276,000
Long-term realized capital gains 3,247,000 1,142,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
As of May 31, 2005, the components of net assets representing
distributable earnings on a tax basis were as follows:
Accumulated capital and other losses $(1,808,000)
Unrealized appreciation of investments 41,536,000
Unrealized appreciation on foreign currency translations 2,000
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
deferred passive foreign investment corporation loss of $1,273,000 and
capital loss carryovers of $535,000, for federal income tax purposes.
The post-October loss will be recognized on the first day of the
following fiscal year. If not offset by subsequent capital gains, the
capital loss carryovers will expire in 2013. It is unlikely that the
Trust's Board of Trustees will authorize a distribution of capital
gains realized in the future until the capital loss carryovers have
been used or expire.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the year ended May 31, 2005, were
$86,750,000 and $77,731,000, respectively.
As of May 31, 2005, the cost of securities, including short-term
securities, for federal income tax purposes, was $248,692,000.
Gross unrealized appreciation and depreciation of investments as of May
31, 2005, for federal income tax purposes, were $59,784,000 and
$18,248,000, respectively, resulting in net unrealized appreciation of
$41,536,000.
29
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS 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 SELL
- ---------------------------------------------------------------------------------
IN
U.S. DOLLAR EXCHANGE UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF FOR U.S. APPRECIATION/
DATE DELIVER 5/31/2005 DOLLAR (DEPRECIATION)
- ---------------------------------------------------------------------------------
6/01/2005 782 $623 $623 $-
Canadian Dollar
(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
30
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
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 $54,000, 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 $14,463,000 and received cash collateral of
$15,089,000 for the loans. Of this amount $15,086,000 was invested in
short-term investments, as noted in the Fund's portfolio of
investments, and $3,000 remained in cash.
(7) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's
investment policies and manages the Fund's portfolio. The
investment management fee for the Fund is composed of a base fee
and a performance adjustment that increases or decreases the
base fee depending upon the performance of the Fund relative to
the performance of the Lipper Gold Funds Index, which tracks the
total return performance of the 10 largest funds in the Lipper
Gold Oriented Funds category. The Fund's base fee is accrued
daily and paid monthly at an annualized rate of 0.75% of the
Fund's average net assets.
The performance adjustment will be 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.
31
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
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 Gold 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 $2,383,000,
which included a performance adjustment of $96,000 that
increased the base management fee of 0.75% by 0.03%.
During the year ended May 31, 2005, the Manager reimbursed the
Fund in the amount of $4,000 for a fund pricing adjustment.
B. 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
32
N O T E S
==========---------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
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 $457,000.
C. 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
omnibus basis. For the year ended May 31, 2005, the Fund
incurred transfer agent's fees, paid or payable to SAS, of
$692,000.
D. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(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.
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA PRECIOUS METALS AND MINERALS 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 $ 14.52 $ 10.70 $ 11.71 $ 5.84 $ 4.87
-------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss)(a) .01 (.07) .02 (.01) .01
Net realized and unrealized gain (loss)(a) (.78) 4.75 (.65) 5.93 .98
-------------------------------------------------------------------
Total from investment operations(a) (.77) 4.68 (.63) 5.92 .99
-------------------------------------------------------------------
Less distributions:
From net investment income - (.86) (.38) (.05) (.02)
From realized capital gains (.15) - - - -
-------------------------------------------------------------------
Total distributions (.15) (.86) (.38) (.05) (.02)
-------------------------------------------------------------------
Net asset value at end of period $ 13.60 $ 14.52 $ 10.70 $ 11.71 $ 5.84
===================================================================
Total return (%)* (5.39) 42.39 (5.11) 101.95 20.50
Net assets at end of period (000) $275,768 $291,609 $156,192 $149,679 $70,459
Ratio of expenses to average
net assets (%)**(b) 1.26 1.26 1.47 1.56 1.68
Ratio of net investment income (loss)
to average net assets (%)** .06 (.49) .20 (.16) .17
Portfolio turnover (%) 26.74 27.09 31.39 40.61 52.74
* Assumes reinvestment of all net investment income and realized capital gain distributions during the period.
** For the year ended May 31, 2005, average net assets were $305,358,000.
(a) Calculated using average shares. For the year ended May 31, 2005, average shares were 20,759,000.
(b) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses
paid indirectly decreased the expense ratios as follows:
(.03%) (.03%) (.00%)+ (.00%)+ (.00%)+
+ Represents less than 0.01% of average net assets.
34
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA PRECIOUS METALS AND MINERALS 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
35
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
the 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, 2004 MAY 31, 2005 MAY 31, 2005
-----------------------------------------------------------
Actual $1,000.00 $ 834.60 $5.55
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 (16.54)% for the six-month period of
December 1, 2004, through May 31, 2005.
36
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
USAA PRECIOUS METALS AND MINERALS 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.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and the Manager, 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 operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of
the Investment Advisory 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 with respect to the
Fund. The Independent Trustees also reviewed the proposed continuation
of the Investment Advisory 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
services provided by the Manager. At the meeting at which the renewal
of the Investment Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, comparability of
37
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
fees and total expenses, and profitability. However, the Board noted
that the evaluation process with respect to the Manager is an ongoing
one. In this regard, the Board's and its Committees' consideration of
the Investment Advisory Agreement included certain types of information
previously received at such meetings.
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
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 Manager's management style and the performance
of its duties under the Investment Advisory Agreement. The Board
considered the level and depth of knowledge of the Manager, including
the professional experience and qualifications of
38
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
its senior and investment personnel, as well as current staffing
levels. 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 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
39
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
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 below the median of both its expense group and
expense universe. The data indicated that the Fund's total expenses
were below the median of both its expense group and 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.
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 five-year periods ended December 31, 2004, and was below the
average of its performance universe and its Lipper index for the
one-year period ended December 31, 2004. The Board also noted that
while the Fund's percentile performance ranking was in the top 50% of
its performance universe for the three-year period ended December 31,
2004, its ranking was not in the top 50% for the one-year period ended
December 31, 2004. The Trustees considered the Manager's discussion of
its plan to address the Fund's performance.
40
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
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. 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. The Trustees also noted the relatively low
management fee and total expenses of the Fund as compared to its peer
group and peer universe.
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 took
into account management's discussion of the relatively small universe
of funds that currently have breakpoints in their advisory fee. 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
41
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA PRECIOUS METALS AND MINERALS FUND
MAY 31, 2005
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 its conclusions, the Board determined that continuation of the
Investment Advisory Agreement would be in the interests of the Fund and
its shareholders.
42
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.
43
. . . 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.
44
. . . 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.
45
. . . 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.
46
. . . 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.
47
. . . 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.
48
. . . 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.
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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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23407-0705 (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
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Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: July 26, 2005
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: August 2, 2005
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By:* /s/ DEBRA K. DUNN
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Signature and Title: Debra K. Dunn/Treasurer
Date: August 2, 2005
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*Print the name and title of each signing officer under his or her signature.