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 BALANCED STRATEGY FUND (EXCEPT TOTAL RETURN STRATEGY FUND)- ANNUAL
REPORT FOR PERIOD ENDING MAY 31, 2005
[LOGO OF USAA]
USSA(R)
USAA BALANCED STRATEGY Fund
[GRAPHIC OF USAA BALANCED STRATEGY Fund]
A n n u a l R e p o r t
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MAY 31, 2005
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
FUND RECOGNITION 9
INVESTMENT OVERVIEW 10
FINANCIAL INFORMATION
Distributions to Shareholders 14
Report of Independent Registered Public Accounting Firm 15
Portfolio of Investments 16
Notes to Portfolio of Investments 34
Financial Statements 39
Notes to Financial Statements 42
EXPENSE EXAMPLE 56
ADVISORY AGREEMENTS 58
DIRECTORS' AND OFFICERS' INFORMATION 66
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2005, USAA. All rights reserved.
2
M E S S A G E
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from the PRESIDENT
"
IN THE CURRENT INVESTMENT
ENVIRONMENT . . . INVESTORS MAY
[PHOTO OF CHRISTOPHER W. CLAUS] FIND THAT QUALITY, DIVERSIFICATION,
SAFETY, LIQUIDITY, AND PATIENCE
ARE THE SMARTEST STRATEGIES.
"
June 2005
- --------------------------------------------------------------------------------
As I write to you, inflation - a key driver of both the stock
and bond markets - appears to be under control. The U.S.
economy is in good health, and I expect the gross domestic
product (GDP) to grow between 3% and 3.5% in 2005. Meanwhile,
the Federal Reserve Board (the Fed) shows signs of nearing the
end of its interest-rate tightening schedule; it is likely to
leave the federal funds rate near 3.5% or 3.75%. Oil prices
have moved higher, rising above $50 a barrel and continuing to
constrain economic growth.
Although U.S. equity valuations are trading at historically
high levels for a rising interest-rate environment,
international valuations appear a little more reasonable.
Remarkably, long-term interest rates have remained low, which
has helped to support the stock market. Why? The bond market
seems to believe that the economy will slow. Absent inflation
and a rising dollar, longer-term interest rates actually
declined in 2005, increasing the value of longer-term bonds.
In my opinion, longer-term rates will continue to have a
significant impact on the direction of the stock and bond
markets over the next few quarters.
The growth in the U.S. budget deficit is of some concern.
Sooner or later, the government must cut spending and/or raise
taxes to pay its bills - both would be challenging for the
U.S. economy over the long term.
3
. . . C O N T I N U E D
========================--------------------------------------------------------
Consumers have their own budget deficits. Some pundits scoff
at the significance; others predict a day of reckoning. I
believe Americans have to curb their spending and start saving
more to support their eventual retirements. And while greater
savings may be a plus, a slowdown in consumer spending would
hurt economic growth.
Against this backdrop, investors may find that quality,
diversification, safety, liquidity, and patience are the
smartest strategies. For short-term investors, money markets
provide yields near 3%, with relative safety and liquidity.
Investors with longer-term horizons could see annual returns
of 4% to 5% a year in bonds, particularly if they reinvest the
interest. Stocks are likely to generate only modest gains
going forward; we see the equity markets providing
mid-single-digit returns over the next several years.
In the current investment environment, it would be prudent to
take what the market offers us and resist the urge to reach
for higher returns at dramatically greater risk. Sometimes
risk is simply risk and is not always rewarded with higher
returns. We will continue to look for value in our
investments, examine the risks, and not stray from our
investment discipline.
From everyone at USAA, thank you for your business and the
opportunity to serve your investment needs.
Sincerely,
/S/ CHRISTOPHER W. CLAUS
Christopher W. Claus
President and Vice Chairman of the Board
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
Past performance is no guarantee of future results. o As
interest rates rise, existing bond prices fall.
4
M A N A G E R S '
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COMMENTARY on the Fund
[PHOTO OF MARGARET "DIDI" WEINBLATT] [PHOTO OF MATTHEW E. MEGARGEL]
MARGARET "DIDI" WEINBLATT, Ph.D., CFA MATTHEW E. MEGARGEL, CFA
USAA Investment Management Company (Bonds) Wellington Management Company,
LLP (Stocks)
[PHOTO OF ARNOLD J. ESPE]
ARNOLD J. ESPE, CFA
USAA Investment Management Company (Bonds)
HOW DID THE FUND PERFORM?
The USAA Balanced Strategy Fund had a total return of 7.67%
for the year ended May 31, 2005. This compares to a 7.28%
return for the Lipper Balanced Funds Average, 8.02% for the
Lipper Balanced Funds Index, 9.44% for the Russell 3000 Index,
and 6.82% for the Lehman Brothers U.S. Aggregate Bond Index.
HOW WERE THE FUND'S ASSETS ALLOCATED BETWEEN STOCKS AND BONDS?
The Fund began the reporting year with 65% of net assets in
stocks and other equity securities and 35% in bonds and money
market instruments. We allowed the Fund to retain this pro-
equity tilt, ending the reporting year with 65% of net assets
in stocks and other equity securities and 35% in bonds and
money market instruments.
DESCRIBE THE MARKET ENVIRONMENT FOR STOCKS, AS WELL AS YOUR OVERALL STRATEGY.
While it was a positive reporting year for U.S. stocks, the
great majority of returns were achieved in the fourth quarter
of 2004. For the 12-month period, nine of the 10 economic
sectors within the Russell 3000 Index generated positive
returns, led by energy, which benefited from higher oil
prices. Technology stocks lagged
REFER TO PAGE 12 FOR BENCHMARK DEFINITIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
5
. . . C O N T I N U E D
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due to disappointing earnings forecasts from a number of key
companies in the sector. The U.S. stock portion of the Fund
was favorably positioned to outperform the Russell 3000 Index
due to superior stock selection and overweight allocations to
both the energy and industrials sectors.
HOW DID THE FUND'S EQUITY PORTION PERFORM?
Climbing oil prices helped make Exxon Mobil Corp. a top
contributor to performance. Other strong performers in the
energy sector included Chesapeake Energy Corp. and
ConocoPhillips. Given our view that high oil prices will
persist, we have added to smaller names and oilfield services
stocks with greater earnings leverage. Holdings in consumer
staples and consumer discretionary sectors contributed
positively to our return, led by Michaels Stores, Inc. and
Altria Group, Inc., while General Electric Co. and Precision
Castparts Corp. were contributors to our strong relative
performance in the industrials sector.
In the health care sector, negative sentiment surrounding the
pharmaceutical industry weighed on shares of Pfizer, Inc., the
largest detractor from our return, and Eli Lilly and Co.
Shares of Elan Corp. plc fell when Tysabri, the promising new
multiple sclerosis treatment, was pulled from the market
following the death of a patient. We sold the stock prior to
the end of the reporting period. Other areas that hurt return
relative to the Russell 3000 Index included weaker stock
selection in materials and financials as well as our
underweight exposure to utilities.
WHAT ARE YOUR STRATEGIES MOVING FORWARD IN THE U.S. STOCK MARKET?
As the economic cycle matures, we will continue to look for
attractively valued stocks with an emphasis on superior
earnings quality. We remain underweight in financials due to
concerns
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 16-33.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
about net-interest margins and regulatory scrutiny. We
continue to be underweight in utilities given lofty valuations
and rising short-term interest rates. We remain overweight in
energy with a generally favorable view of oil and gas markets
longer term, but are cautious about a near-term trading top in
the sector as inventory levels and production rise. We are
underweight in telecommunications services due to stiff
competitive trends and pricing margins, and slightly
overweight in information technology, with sizable positions
in Microsoft Corp., Dell, Inc., and Cisco Systems, Inc., where
fundamentals remain solid.
WHAT WAS THE BOND MARKET ENVIRONMENT DURING THE PERIOD?
The dominating theme was the decline in long-term interest
rates despite the fact that the Federal Reserve Board (the
Fed) tripled the short-term federal funds rate, from 1% to 3%,
through 0.25% hikes at eight consecutive meetings of the
Federal Open Market Committee.
WHAT DROVE PERFORMANCE OF THE BOND PORTION OF THE FUND?
In this environment, the bond portion of the Fund benefited
from its allocation among bond market sectors, but was hurt by
its defensive posture on long-term interest rates.
Specifically, we were underweight in long-duration bonds,
those with maturities from 10 years to 30 years, and these had
the best total return because long-term interest rates fell.
Overall, the positive total return from coupon income and
price appreciation from our longer-term bonds more than offset
price declines on shorter-term bonds. Additionally, the fact
that we had a good part of our shorter-term exposure in
floating-rate notes helped because they did not suffer the
price erosion of fixed-rate notes as rates rose.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
7
.. . . C O N T I N U E D
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HOW WAS THE FUND ALLOCATED BY SECTOR?
We were overweight in corporate bonds, and this proved
beneficial as yield spreads relative to Treasuries narrowed.
Within the corporate sector, we found the most value in
utilities, insurance, real estate investment trusts (REITs),
and aircraft-backed paper.
Our exposure to mortgage-backed securities also helped, as did
our underweight position in traditional U.S. Treasuries. Our
holdings in U.S. Treasury inflation-protected securities,
which have been such strong performers over the past few
years, proved detrimental during this reporting year as
inflation expectations fell.
HISTORICAL YIELD CURVE*
[CHART OF HISTORICAL YIELD CURVE]
MATURITY 5/28/04 5/31/05 CHANGE
- -------- ------- ------- ------
3 MONTH 1.060 2.940 1.8798
6 MONTH 1.378 3.108 1.7299
2 YEAR 2.532 3.574 1.0413
3 YEAR 3.063 3.626 0.5622
5 YEAR 3.791 3.735 -0.0557
10 YEAR 4.647 3.981 -0.6658
30 YEAR 5.345 4.320 -1.0241
[END CHART]
*YIELD OF TREASURY BILLS, NOTES, AND BONDS. SOURCE: BLOOMBERG L.P.
8
. . . C O N T I N U E D
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COMMENTARY on the Fund
WHAT'S YOUR OUTLOOK?
As of this writing, the yield on the 10-year U.S. Treasury
bond is again below 4%. Our view remains that yields this low
do not adequately reflect inflation risk. Given that we
expect a pickup in inflation, we continue to be positioned for
an increase in long-term yields. We should note that we're
not overly bearish on long-term interest rates. We just
believe that a 10-year Treasury yield under 4% doesn't offer
much value, while one closer to 5% does. We remain overweight
in corporate bonds given our view that they will outperform
over the long term, and continue to find value in
mortgage-backed and asset-backed securities on a case-by-case
basis.
DO YOU ANTICIPATE ANY CHANGES IN THE FUND'S ASSET ALLOCATION?
In early June 2005, just after the new reporting year began,
we reduced our allocation to stocks by 5%, effectively
bringing what we believed to be our overweight position
relative to our balanced-fund peers back to a neutral stance.
While we remain positive on stocks, this move reflects a less
favorable view on their risk/reward ratio. These assets were
shifted to money market securities, and we expect to move them
to longer-term bonds when the overall bond market appears to
be more in balance.
On behalf of the managers working on the USAA Balanced
Strategy Fund, thank you for your continued support.
9
F U N D
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RECOGNITION
USAA BALANCED STRATEGY FUND
- --------------------------------------------------------------------------------
USAA BALANCED STRATEGY FUND
OVERALL MORNINGSTAR RATINGS(TM)
out of 679 moderate allocation funds for the period ending May 31, 2005:
OVERALL RATING
* * * *
3-YEAR 5-YEAR 10-YEAR
* * * * * * * n/a
out of 679 funds out of 525 funds
The Overall Morningstar Rating for a fund is derived from a weighted
average of the performance figures associated with its 3-, 5-, and
10-year (if applicable) Morningstar Ratings metrics. Ratings are
based on risk-adjusted returns.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH FUND WITH AT LEAST
A THREE-YEAR HISTORY, MORNINGSTAR CALCULATES A MORNINGSTAR RATING(TM) BASED ON A
MORNINGSTAR RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A FUND'S
MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES CHARGES, LOADS, AND
REDEMPTION FEES), PLACING MORE EMPHASIS ON DOWNWARD VARIATIONS AND REWARDING
CONSISTENT PERFORMANCE. THE TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS
RECEIVE 5 STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS,
THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10% RECEIVE 1 STAR. (EACH SHARE
CLASS IS COUNTED AS A FRACTION OF ONE FUND WITHIN THIS SCALE AND RATED
SEPARATELY, WHICH MAY CAUSE SLIGHT VARIATIONS IN THE DISTRIBUTION PERCENTAGES.)
10
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA BALANCED STRATEGY FUND
OBJECTIVE
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High total return, with reduced risk over time, through an
asset allocation strategy that seeks a combination of long-term
growth of capital and current income.
TYPES OF INVESTMENTS
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Using preset target ranges, the Fund's strategy is to invest
its assets in a combination of stocks on the one hand and bonds
and money market instruments on the other.
- --------------------------------------------------------------------------------
5/31/05 5/31/04
- --------------------------------------------------------------------------------
Net Assets $609.8 Million $523.0 Million
Net Asset Value Per Share $15.41 $14.70
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/05
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION ON 9/1/95
- --------------------------------------------------------------------------------
7.67% 4.68% 8.52%
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.
11
.. . . C O N T I N U E D
=======================---------------------------------------------------------
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
RUSSELL 3000 USAA BALANCED LIPPER BALANCED LIPPER BALANCED LEHMAN BROTHERS U.S.
INDEX STRATEGY FUND FUNDS INDEX FUNDS AVERAGE AGGREGATE BOND INDEX
------------ ------------- --------------- --------------- --------------------
09/01/95 $10000.00 $10000.00 $10000.00 $10000.00 $10000.00
09/30/95 10387.49 10040.00 10238.83 10233.83 10097.29
10/31/95 10297.79 9870.00 10212.88 10213.46 10228.60
11/30/95 10754.50 10060.00 10530.28 10532.47 10381.87
12/31/95 10930.17 10324.29 10696.02 10683.86 10527.57
01/31/96 11247.42 10334.38 10889.09 10887.69 10597.48
02/29/96 11413.33 10304.13 10894.34 10916.95 10413.27
03/31/96 11528.06 10515.68 10935.43 10954.25 10340.89
04/30/96 11746.65 10586.67 11007.82 11055.23 10282.73
05/31/96 12047.26 10637.37 11120.63 11198.57 10261.85
06/30/96 12008.36 10648.38 11157.30 11212.05 10399.66
07/31/96 11379.75 10300.92 10870.17 10891.43 10428.12
08/31/96 11724.97 10546.18 11041.82 11091.30 10410.64
09/30/96 12363.10 10975.62 11451.38 11515.77 10592.07
10/31/96 12589.10 11233.02 11693.67 11730.24 10826.70
11/30/96 13477.10 11734.44 12238.63 12267.55 11012.14
12/31/96 13314.78 11713.31 12092.06 12132.63 10909.75
01/31/97 14051.60 12004.58 12465.99 12499.95 10943.16
02/28/97 14066.96 12077.40 12512.26 12504.63 10970.38
03/31/97 13430.42 11868.62 12148.59 12130.73 10848.81
04/30/97 14091.98 12120.03 12513.80 12490.10 11011.21
05/31/97 15054.44 12685.70 13026.25 13046.19 11115.31
06/30/97 15680.29 13031.61 13458.04 13448.81 11247.24
07/31/97 16909.54 13705.37 14224.61 14231.10 11550.54
08/31/97 16223.71 13417.40 13773.71 13839.35 11452.02
09/30/97 17143.65 13854.99 14322.73 14390.56 11620.91
10/31/97 16567.81 13575.74 14061.93 14155.12 11789.50
11/30/97 17202.16 13822.77 14320.23 14395.14 11843.79
12/31/97 17546.73 13944.80 14546.47 14608.23 11963.04
01/31/98 17637.67 13922.91 14649.84 14693.78 12116.62
02/28/98 18899.38 14481.14 15231.47 15322.65 12107.49
03/31/98 19836.05 14919.09 15697.21 15773.44 12149.10
04/30/98 20031.08 14985.15 15807.16 15890.58 12212.51
05/31/98 19536.77 14820.00 15647.34 15713.04 12328.36
06/30/98 20197.37 14828.06 15935.89 15962.65 12432.91
07/31/98 19830.64 14304.70 15749.20 15755.81 12459.36
08/31/98 16792.85 12902.28 14392.39 14329.46 12662.13
09/30/98 17938.37 13113.85 15013.59 14948.15 12958.63
10/31/98 19300.01 13836.75 15575.27 15591.85 12890.11
11/30/98 20480.43 14548.35 16145.37 16206.13 12963.27
12/31/98 21782.13 15156.72 16741.02 16809.36 13002.24
01/31/99 22522.11 15701.28 17008.72 17121.69 13095.04
02/28/99 21724.36 15349.59 16599.88 16656.49 12866.45
03/31/99 22521.48 16052.52 17009.63 17073.03 12937.75
04/30/99 23538.06 16291.43 17566.78 17585.11 12978.73
05/31/99 23090.70 15950.13 17295.91 17326.36 12865.05
06/30/99 24257.61 16725.61 17774.11 17835.81 12824.07
07/31/99 23522.07 16417.15 17441.69 17488.19 12769.47
08/31/99 23254.61 16382.88 17258.68 17276.81 12762.97
09/30/99 22660.24 16120.26 17037.56 17050.78 12911.14
10/31/99 24081.63 16854.56 17530.87 17561.36 12958.78
11/30/99 24755.59 17221.71 17719.50 17793.16 12957.85
12/31/99 26335.19 18021.46 18243.80 18375.69 12895.37
01/31/00 25302.82 17549.03 17785.48 17873.66 12853.14
02/29/00 25537.35 17514.47 17742.64 17903.10 13008.59
03/31/00 27537.91 18493.42 18787.31 18933.48 13179.96
04/30/00 26567.46 17961.40 18443.01 18561.80 13142.22
05/31/00 25821.27 17649.13 18269.48 18327.55 13136.18
06/30/00 26585.78 18042.66 18561.08 18687.78 13409.48
07/31/00 26115.87 17826.03 18510.50 18639.41 13531.20
08/31/00 28052.68 18523.41 19336.74 19530.32 13727.32
09/30/00 26782.52 17900.05 18929.79 19068.50 13813.63
10/31/00 26401.18 17715.51 18913.05 18998.10 13905.04
11/30/00 23967.74 16891.25 18226.52 18220.07 14132.40
12/31/00 24370.52 17211.05 18679.53 18694.52 14394.56
01/31/01 25204.21 18484.57 19075.97 19145.40 14629.96
02/28/01 22901.35 18051.82 18335.50 18280.34 14757.41
03/31/01 21408.50 17755.71 17743.38 17620.90 14831.49
04/30/01 23125.36 18502.27 18488.02 18410.56 14769.93
05/31/01 23311.09 18950.20 18652.69 18560.97 14859.02
06/30/01 22881.26 18777.43 18366.88 18300.97 14915.17
07/31/01 22504.16 19040.49 18353.59 18271.47 15248.63
08/31/01 21175.60 18652.17 17831.27 17703.08 15423.25
09/30/01 19307.38 17464.73 16974.37 16721.45 15602.97
10/31/01 19756.59 17817.56 17258.46 17079.70 15929.47
11/30/01 21278.30 18876.02 17945.58 17798.19 15709.85
12/31/01 21578.22 19097.83 18075.00 17922.69 15610.09
01/31/02 21307.64 18925.42 17916.47 17731.99 15736.45
02/28/02 20871.92 18567.34 17794.73 17548.77 15888.95
03/31/02 21787.05 19098.35 18183.81 17945.05 15624.62
04/30/02 20644.01 18791.60 17747.44 17515.25 15927.62
05/31/02 20404.83 18938.31 17739.16 17433.50 16062.95
06/30/02 18936.00 17872.18 16982.39 16624.38 16201.84
07/31/02 17430.53 16999.38 16111.99 15793.47 16397.34
08/31/02 17512.87 17173.94 16277.29 15958.86 16674.20
09/30/02 15672.78 16406.97 15305.47 15009.30 16944.24
10/31/02 16920.75 16947.12 15943.47 15589.62 16867.06
11/30/02 17944.65 17689.82 16590.27 16179.75 16862.58
12/31/02 16930.14 17167.90 16143.07 15736.03 17210.89
01/31/03 16515.88 16852.01 15901.25 15501.09 17225.58
02/28/03 16244.16 16783.34 15782.00 15386.15 17463.93
03/31/03 16414.98 16837.28 15846.41 15456.00 17450.47
04/30/03 17755.40 17651.54 16703.95 16275.95 17594.46
05/31/03 18827.19 18424.40 17442.75 17027.13 17922.51
06/30/03 19081.26 18636.35 17575.01 17160.67 17886.94
07/31/03 19518.98 18733.41 17615.74 17183.83 17285.59
08/31/03 19951.53 18996.87 17913.13 17478.37 17400.36
09/30/03 19734.92 18987.33 17935.86 17477.27 17860.96
10/31/03 20929.26 19725.10 18527.60 18039.63 17694.38
11/30/03 21217.54 19933.91 18691.64 18211.54 17736.76
12/31/03 22188.03 20496.24 19361.38 18833.98 17917.25
01/31/04 22650.89 20719.78 19650.48 19093.39 18061.40
02/29/04 22956.03 20999.21 19918.30 19341.10 18256.90
03/31/04 22683.54 20840.24 19823.28 19250.56 18393.63
04/30/04 22214.53 20461.84 19406.69 18813.95 17915.09
05/31/04 22537.38 20601.99 19492.37 18902.24 17843.32
06/30/04 22985.30 21006.07 19797.13 19203.71 17944.17
07/31/04 22116.11 20485.84 19424.43 18795.20 18122.04
08/31/04 22207.18 20513.96 19542.59 18889.87 18467.72
09/30/04 22548.55 20756.05 19832.91 19123.68 18517.83
10/31/04 22918.90 20939.48 20047.39 19323.62 18673.11
11/30/04 23984.30 21546.22 20587.40 19867.34 18524.17
12/31/04 24838.90 22147.47 21101.31 20356.45 18694.61
01/31/05 24177.33 21846.44 20829.48 20090.05 18812.00
02/28/05 24709.55 22075.80 21124.17 20368.07 18700.95
03/31/05 24291.61 21807.24 20833.33 20091.86 18604.90
04/30/05 23763.84 21591.33 20582.98 19831.47 18856.70
05/31/05 24664.28 22181.50 21054.96 20303.48 19060.71
[END CHART]
DATA SINCE INCEPTION ON 9/01/95 THROUGH 5/31/05.
THE PERFORMANCE OF THE LIPPER BALANCED FUNDS AVERAGE AND INDEX,
THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX, AND THE RUSSELL
3000 INDEX IS CALCULATED FROM THE END OF THE MONTH OF
AUGUST 31, 1995, WHILE THE FUND'S INCEPTION DATE IS
SEPTEMBER 1, 1995. THERE MAY BE A SLIGHT VARIATION OF THE
PERFORMANCE NUMBERS BECAUSE OF THIS DIFFERENCE.
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.
12
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
The graph on page 11 illustrates the comparison of a $10,000
hypothetical investment in the USAA Balanced Strategy Fund to
the following benchmarks:
o The Russell 3000 Index measures the performance of the 3,000
largest U.S. companies based on total market capitalization,
which represents approximately 98% of the investable U.S.
equity market.
o The Lipper Balanced Funds Index tracks the total return
performance of the 30 largest funds within the Lipper
Balanced Funds category.
o The Lipper Balanced Funds Average is an average of all
balanced funds, reported by Lipper Inc., an independent
organization that monitors the performance of mutual funds.
o The Lehman Brothers U.S. Aggregate Bond Index covers the U.S.
investment-grade fixed-rate bond market, including government
and credit securities, agency mortgage pass-through
securities, asset-backed securities, and commercial
mortgage-backed securities that have remaining maturities of
more than one year.
13
. . . C O N T I N U E D
========================--------------------------------------------------------
- ----------------------------------------------------------
TOP 5 EQUITY HOLDINGS
(% of Net Assets)
- ----------------------------------------------------------
Microsoft Corp. 1.8%
Bank of America Corp. 1.6%
Citigroup, Inc. 1.6%
General Electric Co. 1.5%
Time Warner, Inc. 1.5%
- ----------------------------------------------------------
- ----------------------------------------------------------
TOP 5 BOND HOLDINGS
(% of Net Assets)
- ----------------------------------------------------------
Consumer Funding, LLC 0.7%
Freddie Mac, Series 2389 VH, 6.00% 0.7%
Freddie Mac, Series 2427 VL, 6.50% 0.7%
U.S. Treasury Inflation-Indexed Note, 3.50% 0.6%
Government National Mortgage Assn. I, Pool 603868 0.4%
- ----------------------------------------------------------
ASSET ALLOCATION
5/31/05
[PIE CHART OF ASSET ALLOCATION]
Equity Securities 64.9%
Bonds 31.3%
Other* 6.1%
[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 16-33.
14
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA BALANCED STRATEGY FUND
The following federal tax information related to the Fund's
fiscal year ended May 31, 2005, is provided for information
purposes only and should not be used for reporting to federal
or state revenue agencies. Federal tax information for the
calendar year will be reported to you on Form 1099-DIV in
January 2006.
Certain dividends paid by the Fund may be subject to a maximum
tax rate of 15%, as provided for by the Jobs and Growth Tax
Relief Reconciliation Act of 2003. Of the distributions paid
during the fiscal year, the maximum amount that may be
considered qualified dividend income is $5,480,000.
55.36% of ordinary income distributions qualifies for
dividends-received deductions eligible to corporations.
The Fund has designated a portion of the amount paid to
redeeming shareholders, in the amount of $586,000, as a long-
term capital gain distribution for tax purposes.
15
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA BALANCED STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Balanced Strategy 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 Balanced Strategy Fund at May 31, 2005, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the three years
in the period then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 13, 2005
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (64.9%)
STOCKS (63.5%)
ADVERTISING (0.5%)
67,500 Lamar Advertising Co. "A"* $ 2,823
--------
AEROSPACE & DEFENSE (2.9%)
48,650 Engineered Support Systems, Inc. 1,897
98,865 European Aeronautic Defence and Space Co. EADS N.V. (Netherlands)*(o) 2,923
24,400 General Dynamics Corp. 2,635
47,700 Precision Castparts Corp. 3,708
25,800 Rockwell Collins, Inc. 1,274
49,500 United Technologies Corp. 5,282
--------
17,719
--------
ALUMINUM (0.5%)
116,100 Alcoa, Inc. 3,146
--------
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
12,600 Columbia Sportswear Co.* 569
9,400 Liz Claiborne, Inc. 353
--------
922
--------
APPAREL RETAIL (1.0%)
48,700 Chico's FAS, Inc.* 1,666
53,600 Christopher & Banks Corp. 981
72,300 Gap, Inc. 1,518
78,550 Pacific Sunwear of California, Inc.* 1,650
--------
5,815
--------
ASSET MANAGEMENT & CUSTODY BANKS (1.0%)
79,700 Northern Trust Corp. 3,660
49,600 State Street Corp. 2,381
--------
6,041
--------
AUTOMOTIVE RETAIL (0.2%)
25,732 O'Reilly Automotive, Inc.* 1,429
--------
BIOTECHNOLOGY (0.6%)
54,000 Genzyme Corp.* 3,369
--------
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE TV (0.6%)
75,400 Citadel Broadcasting Corp.* $ 895
80,000 Comcast Corp. "A"* 2,531
--------
3,426
--------
CASINOS & GAMING (0.3%)
26,400 Harrah's Entertainment, Inc. 1,896
--------
COMMUNICATIONS EQUIPMENT (2.1%)
254,600 Cisco Systems, Inc.* 4,934
242,400 Corning, Inc.* 3,801
76,600 Motorola, Inc. 1,330
171,700 Polycom, Inc.* 2,938
--------
13,003
--------
COMPUTER HARDWARE (0.7%)
106,200 Dell, Inc.* 4,236
--------
COMPUTER STORAGE & PERIPHERALS (0.3%)
14,900 QLogic Corp.* 477
46,000 SanDisk Corp.* 1,200
--------
1,677
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.6%)
21,900 Caterpillar, Inc. 2,061
18,500 Oshkosh Truck Corp. 1,475
--------
3,536
--------
CONSTRUCTION MATERIALS (0.2%)
15,500 Vulcan Materials Co. 929
--------
CONSUMER ELECTRONICS (0.2%)
29,900 Garmin Ltd.(h) 1,326
--------
CONSUMER FINANCE (0.2%)
15,600 Capital One Financial Corp. 1,176
--------
DATA PROCESSING & OUTSOURCED SERVICES (1.3%)
21,700 Affiliated Computer Services, Inc. "A"* 1,122
18,500 DST Systems, Inc.* 895
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
61,000 First Data Corp. $ 2,308
78,700 Fiserv, Inc.* 3,384
--------
7,709
--------
DIVERSIFIED BANKS (1.6%)
215,100 Bank of America Corp. 9,963
--------
DIVERSIFIED CHEMICALS (0.7%)
88,900 Du Pont (E.I.) De Nemours & Co. 4,135
--------
DRUG RETAIL (0.2%)
372,100 Rite Aid Corp.* 1,474
--------
EDUCATIONAL SERVICES (0.6%)
56,200 Career Education Corp.* 1,948
39,700 ITT Educational Services, Inc.* 1,802
--------
3,750
--------
ELECTRIC UTILITIES (1.0%)
141,100 PG&E Corp. 5,047
10,000 Southern California Edison Co., Series A (Preferred)* 1,017
--------
6,064
--------
ELECTRONIC EQUIPMENT MANUFACTURERS (0.4%)
144,800 Symbol Technologies, Inc. 1,667
42,000 Tektronix, Inc. 952
--------
2,619
--------
ELECTRONIC MANUFACTURING SERVICES (0.2%)
41,600 Benchmark Electronics, Inc.* 1,318
--------
ENVIRONMENTAL & FACILITIES SERVICES (0.3%)
45,100 Waste Connections, Inc.* 1,672
--------
GENERAL MERCHANDISE STORES (0.3%)
65,300 Dollar Tree Stores, Inc.* 1,619
--------
HEALTH CARE EQUIPMENT (2.9%)
92,600 Baxter International, Inc. 3,417
31,100 Biomet, Inc. 1,172
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
35,000 Diagnostic Products Corp. $ 1,524
75,800 Fisher Scientific International, Inc.* 4,734
7,500 Kinetic Concepts, Inc.* 482
108,000 Medtronic, Inc. 5,805
22,000 Waters Corp.* 855
--------
17,989
--------
HEALTH CARE FACILITIES (0.9%)
69,300 HCA, Inc. 3,742
33,200 Triad Hospitals, Inc.* 1,684
--------
5,426
--------
HEALTH CARE SERVICES (0.3%)
49,900 Dendrite International, Inc.* 774
27,200 Omnicare, Inc. 1,042
--------
1,816
--------
HEALTH CARE SUPPLIES (0.5%)
23,700 Cooper Companies, Inc. 1,565
26,400 Edwards Lifesciences Corp.* 1,207
--------
2,772
--------
HOME ENTERTAINMENT SOFTWARE (0.5%)
53,200 Electronic Arts, Inc.* 2,795
--------
HOME IMPROVEMENT RETAIL (0.8%)
81,600 Lowe's Companies, Inc. 4,668
--------
HOMEBUILDING (0.7%)
120,800 D.R. Horton, Inc. 4,176
--------
HOUSEHOLD PRODUCTS (1.3%)
144,300 Procter & Gamble Co. 7,958
--------
HOUSEWARES & SPECIALTIES (0.3%)
52,500 Yankee Candle Co., Inc. 1,656
--------
HYPERMARKETS & SUPER CENTERS (0.2%)
32,000 Wal-Mart Stores, Inc. 1,511
--------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES (2.0%)
257,000 General Electric Co. $ 9,376
101,700 Tyco International Ltd. 2,942
--------
12,318
--------
INDUSTRIAL GASES (0.8%)
79,700 Air Products & Chemicals, Inc. 4,800
--------
INDUSTRIAL MACHINERY (0.9%)
53,900 Ingersoll-Rand Co. Ltd. "A" 4,172
20,900 Parker Hannifin Corp. 1,261
--------
5,433
--------
INSURANCE BROKERS (0.3%)
59,200 Arthur J. Gallagher & Co. 1,635
--------
INTEGRATED OIL & GAS (2.8%)
60,200 ConocoPhillips 6,492
148,900 Exxon Mobil Corp. 8,368
40,500 Petro-Canada (Canada) 2,280
--------
17,140
--------
INTERNET SOFTWARE & SERVICES (0.7%)
119,900 Yahoo!, Inc.* 4,460
--------
INVESTMENT BANKING & BROKERAGE (1.3%)
196,800 E*TRADE Financial Corp.* 2,431
99,400 Merrill Lynch & Co., Inc. 5,393
--------
7,824
--------
LIFE & HEALTH INSURANCE (0.4%)
40,000 Aegon N.V. (Preferred) (Netherlands)* 1,002
93,600 UnumProvident Corp. 1,719
--------
2,721
--------
MANAGED HEALTH CARE (1.8%)
39,600 Coventry Health Care, Inc.* 2,757
163,400 Health Net, Inc.* 5,593
19,200 WellPoint, Inc.* 2,554
--------
10,904
--------
21
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
MOVIES & ENTERTAINMENT (2.0%)
519,100 Time Warner, Inc.* $ 9,032
94,300 Viacom, Inc. "B" 3,234
--------
12,266
--------
MULTI-LINE INSURANCE (0.5%)
58,900 American International Group, Inc. 3,272
--------
OIL & GAS DRILLING (0.7%)
114,600 GlobalSantaFe Corp. 4,199
--------
OIL & GAS EQUIPMENT & SERVICES (0.7%)
66,400 Schlumberger Ltd. 4,540
--------
OIL & GAS EXPLORATION & PRODUCTION (2.1%)
164,500 Chesapeake Energy Corp. 3,367
93,800 Noble Energy, Inc.(h) 6,976
71,000 XTO Energy, Inc. 2,210
--------
12,553
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.8%)
206,839 Citigroup, Inc. 9,744
28,600 Principal Financial Group, Inc. 1,141
--------
10,885
--------
PACKAGED FOODS & MEAT (0.7%)
45,800 General Mills, Inc. 2,267
46,100 Kellogg Co. 2,097
--------
4,364
--------
PHARMACEUTICALS (4.0%)
142,300 Abbott Laboratories 6,864
113,600 Biovail Corp. (Canada)* 1,797
44,700 Eli Lilly and Co. 2,606
152,100 Pfizer, Inc. 4,244
211,700 Schering-Plough Corp. 4,128
106,600 Wyeth 4,623
--------
24,262
--------
PROPERTY & CASUALTY INSURANCE (1.0%)
30,100 Ambac Financial Group, Inc. 2,172
105,287 St. Paul Travelers Companies, Inc. 3,988
--------
6,160
--------
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.6%)
56,500 Simon Property Group, Inc. $ 3,883
--------
REGIONAL BANKS (0.5%)
42,700 Zions Bancorp 3,025
--------
RESTAURANTS (0.5%)
48,500 CBRL Group, Inc. 1,975
19,200 Yum! Brands, Inc. 985
--------
2,960
--------
SEMICONDUCTOR EQUIPMENT (0.5%)
45,000 Lam Research Corp.* 1,381
48,300 Varian Semiconductor Equipment Associates, Inc.* 1,960
--------
3,341
--------
SEMICONDUCTORS (2.0%)
152,000 Intel Corp. 4,093
27,100 International Rectifier Corp.* 1,295
52,100 Maxim Integrated Products, Inc. 2,053
38,700 Microchip Technology, Inc. 1,147
135,500 Texas Instruments, Inc. 3,745
--------
12,333
--------
SOFT DRINKS (0.9%)
98,800 PepsiCo, Inc. 5,562
--------
SPECIALTY STORES (1.1%)
127,500 Michaels Stores, Inc. 5,369
53,600 Petco Animal Supplies, Inc.* 1,613
--------
6,982
--------
SYSTEMS SOFTWARE (1.8%)
433,500 Microsoft Corp. 11,184
--------
TECHNOLOGY DISTRIBUTORS (0.3%)
27,200 CDW Corp. 1,583
--------
THRIFTS & MORTGAGE FINANCE (1.4%)
25,400 Freddie Mac(j,+) 1,652
48,600 Golden West Financial Corp. 3,043
23
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
36,400 IndyMac Bancorp, Inc. $ 1,498
108,500 Sovereign Bancorp, Inc. 2,422
--------
8,615
--------
TOBACCO (1.0%)
90,300 Altria Group, Inc. 6,063
--------
TRADING COMPANIES & DISTRIBUTORS (0.3%)
30,600 Fastenal Co. 1,779
--------
TRUCKING (0.3%)
29,100 Yellow Roadway Corp.*(h) 1,536
--------
WIRELESS TELECOMMUNICATION SERVICES (0.8%)
158,300 Nextel Communications, Inc. "A"* 4,778
--------
Total stocks (cost: $354,502) 386,919
--------
EXCHANGE-TRADED FUNDS (1.4%)
37,400 iShares Russell 2000 Growth Index Fund (h) 2,352
50,700 MidCap SPDR Trust Series 1(h) 6,213
--------
Total exchange-traded funds (cost: $8,271) 8,565
--------
Total equity securities (cost: $362,773) 395,484
--------
PRINCIPAL
AMOUNT COUPON
(000) SECURITY RATE MATURITY
- ------------------------------------------------------------------------------------------------------
BONDS (31.3%)
CORPORATE OBLIGATIONS (18.8%)
APPAREL & ACCESSORIES & LUXURY GOODS (0.4%)
$ 1,000 Kellwood Co., Debentures 7.63% 10/15/2017 1,073
1,000 Kellwood Co., Senior Notes 7.88 7/15/2009 1,096
--------
2,169
--------
BREWERS (0.2%)
1,000 Miller Brewing Co., Guaranteed Notes(a) 4.25 8/15/2008 995
--------
24
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE TV (0.5%)
$ 1,000 Continental Cablevision, Inc., Debentures 9.50% 8/01/2013 $ 1,056
1,000 Cox Communications, Inc., Notes 4.63 6/01/2013 965
1,000 Liberty Media Corp., Senior Notes 5.70 5/15/2013 930
--------
2,951
--------
CONSUMER FINANCE (1.8%)
1,000 American Honda Finance Corp., MTN(a) 3.35(d) 5/11/2007 1,001
1,000 Ford Motor Credit Co., Senior Notes 4.95 1/15/2008 949
1,000 Ford Motor Credit Co., Notes 7.00 10/01/2013 933
1,000 Ford Motor Credit Co., Global Notes 7.60 8/01/2005 1,005
1,000 General Motors Acceptance Corp., MTN 4.40(d) 10/20/2005 999
1,000 General Motors Acceptance Corp., Notes 6.75 12/01/2014 850
1,000 General Motors Acceptance Corp., Notes 8.00 11/01/2031 838
2,000 Household Finance Corp., Notes 6.38 10/15/2011 2,206
2,000 SLM Corp., Notes 5.38 1/15/2013 2,126
--------
10,907
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.3%)
1,750 Fiserv, Inc., Notes 4.00 4/15/2008 1,728
--------
DIVERSIFIED BANKS (0.9%)
1,000 Bank of America Corp., Subordinated Notes 9.38 9/15/2009 1,194
1,000 Emigrant Bancorp, Inc., Senior Notes (a) 6.25 6/15/2014 1,064
2,050 First Union Corp., Bonds 6.82 8/01/2026(c) 2,646
818 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 797
--------
5,701
--------
DIVERSIFIED CHEMICALS (0.3%)
2,000 Union Carbide Corp., Debentures 6.79 6/01/2025(c) 2,000
--------
ELECTRIC UTILITIES (3.1%)
1,000 Entergy Mississippi, Inc., First Mortgage Bonds 5.15 2/01/2013 1,021
1,000 FirstEnergy Corp., Notes, Series B 6.45 11/15/2011 1,089
1,000 FPL Energy National Wind, LLC, Secured
Notes(a) 5.61 3/10/2024 1,024
1,000 Monongahela Power Co., Notes, Series A 7.36 1/15/2010 1,066
1,000 Northern States Power Co., First Mortgage
Bonds 2.88 8/01/2006 988
1,887 Oglethorpe Power Corp., Secured Series
Facility Bonds 6.97 6/30/2011 2,004
2,000 Power Contract Financing, Senior Notes(a) 6.26 2/01/2010 2,080
25
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
$ 1,000 PPL Capital Funding, Inc., Guaranteed Notes, Series A 4.33% 3/01/2009 $ 991
1,000 Public Service Electric & Gas Co.,
First Mortgage Bond, Series A 3.18(d) 6/23/2006 1,000
1,000 Sempra Energy ESOP, Series 1999 (NBGA)(a) 4.21 11/01/2014(c) 997
800 Teco Energy, Inc., Senior Notes 10.50 12/01/2007 920
2,000 Tristate General & Transport Association,
Bonds(a) 6.04 1/31/2018 2,171
2,000 TXU Energy Co., LLC, Senior Notes 7.00 3/15/2013 2,210
1,000 West Penn Power Co., Notes 6.63 4/15/2012 1,071
--------
18,632
--------
ENVIRONMENTAL & FACILITIES SERVICES (0.2%)
1,000 Waste Management, Inc., Senior Notes 7.38 8/01/2010 1,121
--------
FOOD RETAIL (0.3%)
1,000 Safeway, Inc., Notes 5.63 8/15/2014 1,028
1,000 Safeway, Inc., Notes 5.80 8/15/2012 1,044
--------
2,072
--------
GAS UTILITIES (1.3%)
1,000 Enbridge Energy Partners, LP, Senior Notes 5.35 12/15/2014 1,016
1,000 Energy Transfer Partners, Senior Notes(a) 5.95 2/01/2015 1,003
1,000 Kinder Morgan Energy Partners, LP,
Senior Notes 5.13 11/15/2014 1,007
1,000 Noram Energy Corp., Debentures 6.50 2/01/2008 1,050
1,000 Peoples Energy Corp., Notes 6.90 1/15/2011 1,130
2,000 Texas Gas Transmission Corp., LLC, Notes 4.60 6/01/2015 1,980
1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 1,048
--------
8,234
--------
HEALTH CARE FACILITIES (0.2%)
1,000 HCA, Inc., Notes 5.25 11/06/2008 1,005
--------
HOUSEHOLD APPLIANCES (0.2%)
1,000 Whirlpool Corp., Debentures 7.75 7/15/2016 1,156
--------
HOUSEWARES & SPECIALTIES (0.2%)
1,380 Newell Rubbermaid, Inc., MTN, Series A 6.35 7/15/2028(c) 1,453
--------
26
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
INTEGRATED OIL & GAS (0.5%)
$ 1,000 Amerada Hess Corp., Notes 6.65% 8/15/2011 $ 1,090
974 Merey Sweeny, LP, Senior Notes(a) 8.85 12/18/2019 1,188
1,000 Occidental Petroleum Corp., Senior Notes 5.88 1/15/2007 1,029
--------
3,307
--------
MANAGED HEALTH CARE (0.5%)
1,000 Coventry Health Care, Inc., Senior Notes 6.13 1/15/2015 1,000
2,000 Highmark, Inc., Senior Notes(a) 6.80 8/15/2013 2,214
--------
3,214
--------
METAL & GLASS CONTAINERS (0.2%)
1,000 Pactiv Corp., Notes 7.20 12/15/2005 1,017
--------
MULTI-LINE INSURANCE (0.3%)
1,000 American General Finance Corp., Notes 3.12(d) 3/29/2006 999
1,000 ASIF Global Financing XIX, Senior Notes(a) 4.90 1/17/2013 1,010
--------
2,009
--------
MULTI-SECTOR HOLDINGS (0.2%)
1,000 Leucadia National Corp., Senior Notes 7.00 8/15/2013 995
--------
MULTI-UTILITIES (0.2%)
1,000 Duke Capital Corp., LLC, Senior Notes 5.50 3/01/2014 1,027
--------
OIL & GAS EXPLORATION & PRODUCTION (0.2%)
1,000 Pioneer Natural Resource Co., Senior Notes 5.88 7/15/2016 999
--------
OIL & GAS REFINING & MARKETING (0.2%)
1,000 Magellan Midstream Partners, LP, Notes 6.45 6/01/2014 1,101
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.2%)
1,000 Textron Financial Corp., Notes 2.75 6/01/2006 981
--------
PACKAGED FOODS & MEAT (0.2%)
1,000 General Mills, Inc., Notes 2.63 10/24/2006 980
--------
PROPERTY & CASUALTY INSURANCE (1.8%)
1,000 21st Century Insurance Group, Senior Notes 5.90 12/15/2013 1,045
1,000 ACE INA Holdings, Inc., Senior Notes 5.88 6/15/2014 1,048
27
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
$ 1,000 AXIS Capital Holdings Ltd., Senior Notes 5.75% 12/01/2014 $ 1,029
2,000 Berkshire Hathaway Finance Corp.,
Senior Notes(a) 4.85 1/15/2015 2,012
1,000 Fidelity National Financial, Inc., Notes 5.25 3/15/2013 913
1,000 Fund American Companies, Inc., Notes 5.88 5/15/2013 1,039
1,000 Markel Corp., Notes 7.20 8/15/2007 1,057
1,000 Ohio Casualty Corp., Notes 7.30 6/15/2014 1,091
1,000 RLI Corp., Senior Notes 5.95 1/15/2014 1,022
1,000 W.R. Berkley Corp., Senior Notes 5.60 5/15/2015 1,016
--------
11,272
--------
RAILROADS (0.3%)
2,000 Union Pacific Railroad Corp., Pass-Through
Certificates, Series 2004-2(a) 5.21 9/30/2014 2,058
--------
REAL ESTATE INVESTMENT TRUSTS (2.2%)
1,000 Arden Realty, LP, Notes 5.25 3/01/2015 1,005
1,000 Duke Realty, LP, Notes 5.40 8/15/2014 1,034
1,000 EOP Operating, LP, Guaranteed Notes 4.75 3/15/2014 978
2,000 ERP Operating, LP, Notes 5.25 9/15/2014 2,037
1,000 Gables Realty, LP, Senior Notes 5.00 3/15/2010 995
1,000 Hospitality Properties Trust, Senior Notes 5.13 2/15/2015 981
1,000 Liberty Property, LP, Senior Notes 5.65 8/15/2014 1,047
1,000 Nationwide Health Properties, Inc., MTN,
Series B 7.60 5/10/2007 1,047
2,000 Pan Pacific Retail Properties, Inc., Notes 7.95 4/15/2011 2,315
1,000 Post Apartment Homes, LP, Senior Notes 5.45 6/01/2012 1,006
1,000 United Dominion Realty Trust, Senior Notes 5.25 1/15/2015 1,005
--------
13,450
--------
REGIONAL BANKS (0.5%)
1,000 Bank of Hawaii, Notes 6.88 3/01/2009 1,086
1,000 Imperial Bank, Subordinated Capital Notes 8.50 4/01/2009 1,138
1,000 Union Planters Bank, N.A., Subordinated Notes 6.50 3/15/2008(c) 1,059
--------
3,283
--------
REINSURANCE (0.3%)
1,000 Montpelier Re Holdings Ltd., Senior Notes 6.13 8/15/2013 1,055
1,000 Platinum Underwriters Finance, Inc., Notes(a) 7.50 6/01/2017 1,011
--------
2,066
--------
28
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE (1.1%)
$ 1,000 Countrywide Home Loan, Guaranteed Notes,
Series MTNL 4.00% 3/22/2011 $ 965
1,000 Countrywide Home Loan, Notes, Series MTN(h) 4.13 9/15/2009 986
1,000 Independence Community Bank Corp., Notes(l) 3.50 6/20/2013 964
2,000 Washington Mutual Bank, Subordinated Notes 5.65 8/15/2014 2,109
2,000 World Savings Bank Federal Savings Bank, Notes 4.13 12/15/2009 1,991
--------
7,015
--------
Total corporate obligations (cost: $112,689) 114,898
--------
EURODOLLAR AND YANKEE OBLIGATIONS (3.3%)(n)
DIVERSIFIED BANKS (1.3%)
1,000 Bayerische Landesbank, MTN (Germany) 2.60 10/16/2006 984
500 Chinatrust Commercial Bank Co. Ltd.,
Bonds (Hong Kong)(a,l) 5.63 12/29/2049 502
1,000 Chuo Mitsui Trust & Banking Co.,
Subordinated Notes (Japan)(a,h,l) 5.51 12/29/2049 958
1,000 Mizuho Finance, Notes (Japan)(a) 5.79 4/15/2014 1,049
1,000 Nordea Bank AB, Subordinated
Notes (Sweden)(a) 5.25 11/30/2012 1,048
1,000 Skandinaviska Enskilda Banken, Subordinated
Bonds (Sweden)(a,l) 5.47 3/29/2049 1,040
2,000 UFJ Finance Aruba AEC, Notes (Aruba) 8.75 11/13/2049 2,198
--------
7,779
--------
DIVERSIFIED METALS & MINING (0.5%)
2,000 Brascan Corp., Notes (Canada) 8.13 12/15/2008 2,232
1,000 Glencore Funding, LLC, Notes (Switzerland)(a) 6.00 4/15/2014 960
--------
3,192
--------
INTEGRATED OIL & GAS (0.2%)
1,000 Pemex Finance Ltd., Senior Notes (Mexico) 8.88 11/15/2010 1,130
--------
INTEGRATED TELECOMMUNICATION SERVICES (0.2%)
1,000 Deutsche Telekom International Finance B.V.,
Notes (Germany) 8.25 6/15/2005 1,002
--------
29
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
OIL & GAS DRILLING (0.2%)
$ 994 Delek & Avner-Yam Tethys Ltd., Secured
Notes (Israel)(a) 5.33% 8/01/2013 $ 991
--------
PAPER PRODUCTS (0.1%)
1,000 Domtar, Inc., Notes (Canada) 5.38 12/01/2013 910
--------
PROPERTY & CASUALTY INSURANCE (0.2%)
1,000 Mantis Reef Ltd. II, Notes (Australia)(a) 4.80 11/03/2009 1,002
--------
REAL ESTATE INVESTMENT TRUSTS (0.3%)
2,000 Westfield Capital Corp., Senior
Notes (Australia)(a) 5.13 11/15/2014 2,032
--------
REINSURANCE (0.3%)
2,000 Stingray, Pass-Through Trust, Pass-Through
Certificates (Bermuda)(a) 5.90 1/12/2015 2,017
--------
Total Eurodollar and Yankee obligations (cost: $19,787) 20,055
--------
ASSET-BACKED SECURITIES (2.8%)
AIRLINES (0.7%)
980 Aircraft Finance Trust, Notes,
Series 1999-1A, Class A2 3.59(d) 5/15/2024 924
848 Airport Airplanes, Pass-Through Certificates,
Series 1R, Class A8 3.47(d) 3/15/2019 794
613 America West Airlines, Inc., Pass-Through
Certificates, Series 1996-1, Class A, EETC 6.85 7/02/2009 610
782 American Airlines, Pass-Through Certificates,
Series 2002-1, Class G, EETC (INS) 3.67(d) 9/23/2007 785
839 Northwest Airlines Corp., Pass-Through
Certificates, Series 1999-2A, EETC 7.58 3/01/2019 838
--------
3,951
--------
ASSET-BACKED FINANCING (2.1%)
1,000 AESOP Funding II, LLC,
Series 2004-2A, Class A1(a) 2.76 4/20/2008 981
2,000 ARG Funding Corp., Subordinated Bonds,
Series 2003-1A, Class C2 6.64 3/20/2007 2,002
30
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
$ 1,000 Citibank Credit Card Issuance Trust,
Series 2005-C1, Class C1 5.50% 3/24/2017 $ 1,039
4,000 Consumers Funding, LLC,
Series 2001-1, Class A5 5.43 4/20/2015 4,244
1,000 Detroit Edison Securitization Funding, LLC,
Series 2001-1, Class A5 6.42 3/01/2015 1,126
956 Honda Auto Receivables Owner Trust, Notes,
Series 2003-3, Class A3 2.14 4/23/2007 950
10 MBNA Credit Card Master Note Trust,
Series 2002-A6, Class A6 3.90 11/15/2007 10
582 Oncor Electric Delivery Transition Bond Co.,
Bonds, Series 2003-1, Class A1 2.26 2/15/2009 575
1,959 Whole Auto Loan Trust,
Series 2003-1, Class A3B(a) 1.99 5/15/2007 1,946
--------
12,873
--------
Total asset-backed securities (cost: $16,366) 16,824
--------
COMMERCIAL MORTGAGE SECURITIES (0.9%)
COMMERCIAL MORTGAGE-BACKED SECURITIES (0.8%)
1,000 Credit Suisse First Boston Mortgage Securities
Corp., Series 1998-C1, Class D 7.17 5/17/2040 1,126
1,250 Merrill Lynch Mortgage Investors, Inc.,
Series 1998-C1, Class A2 6.48 11/15/2026 1,311
2,000 Wachovia Bank Commercial Mortgage Trust,
Series 2005-C18, Class APB 4.81 4/15/2042 2,035
--------
4,472
--------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.1%)(g)
9,147 Greenwich Capital Commercial Funding Corp.,
Series 2002-C1, Class XP (acquired
8/13/2003; cost $939)(a,b) 1.96 1/11/2035 722
--------
Total commercial mortgage securities (cost: $5,084) 5,194
--------
U.S. GOVERNMENT AGENCY ISSUES (4.5%)(j)
DEBENTURES (0.3%)
2,000 Fannie Mae(+), CPI Floating Rate Notes 5.25(d) 2/17/2009 1,998
--------
31
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (3.0%)
Fannie Mae(+),
$ 851 Series 1999-25 VB 6.00% 4/25/2016 $ 854
1,050 Series 2001-20 VB 6.00 9/25/2017 1,059
980 Series 2001-29 VB 6.50 8/25/2016 981
Freddie Mac(+),
2,333 Series 2435 VG 6.00 2/15/2013 2,431
4,000 Series 2389 VH 6.00 12/01/2031 4,086
4,000 Series 2427 VL 6.50 11/15/2017 4,048
2,000 Series 2445 VD 6.50 4/15/2018 2,044
Government National Mortgage Assn. I,
1,000 Series 1999-14 VD 6.00 3/20/2014 1,037
2,000 Series 2001-49 VB 7.00 11/16/2016 2,047
--------
18,587
--------
MORTGAGE-BACKED PASS-THROUGH SECURITIES (0.9%)
1,553 Freddie Mac, Pool C79394(+) 5.50 4/01/2033 1,579
Government National Mortgage Assn. I,
2,671 Pool 603868 5.50 1/15/2033 2,732
151 Pool 587184 7.00 4/15/2032 159
681 Government National Mortgage Assn. II,
Pool 781494 6.50 8/20/2031 712
--------
5,182
--------
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (0.3%)
1,619 Rowan Companies, Inc., Guaranteed Bond, Title XI 2.80 10/20/2013 1,523
--------
Total U.S. government agency issues (cost: $26,908) 27,290
--------
U.S. TREASURY SECURITIES (0.6%)
INFLATION-INDEXED NOTES(f)
3,325 3.50%, 1/15/2011 (cost: $3,383) 3,717
--------
MUNICIPAL BONDS (0.4%)
COMMUNITY SERVICE (0.1%)
690 Jicarilla Apache Nation, NM, RB 2.95 12/01/2006 682
--------
32
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- --------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES (0.2%)
$ 1,000 Ohio Edison Co., Water Development
Auth. PCRB, Series 1999A 2.25% 6/01/2033(c) $ 1,000
--------
SPECIAL ASSESSMENT/TAX/FEE (0.1%)
1,000 Short Pump Town Center Community
Development Auth., VA, RB(a) 4.85 2/01/2006 991
--------
Total municipal bonds (cost: $2,690) 2,673
--------
Total bonds (cost: $186,907) 190,651
--------
MONEY MARKET INSTRUMENTS (3.8%)
COMMERCIAL PAPER (1.8%)
-----------------------
ASSET-BACKED FINANCING (0.8%)
5,316 Tannehill Capital Co., LLC(a,k) 3.07 6/02/2005 5,316
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.0%)
5,959 Wheels, Inc.(a,k) 3.05 6/01/2005 5,959
--------
11,275
--------
VARIABLE-RATE DEMAND NOTES (0.7%)(e)
------------------------------------
ELECTRIC UTILITIES (0.1%)
480 Sempra Energy ESOP, Series 1999A (NBGA)(a) 3.48 11/01/2014 480
--------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.6%)
1,860 145 Associates Ltd., Notes, Series 2000
(LOC - Sky Bank) 4.09 10/01/2020 1,860
1,890 CAH Holdings, Inc., Notes, Series 2003
(LOC - First Commercial Bank) 3.30 8/01/2028 1,890
--------
3,750
--------
4,230
--------
NUMBER
OF SHARES
- ----------
MONEY MARKET FUNDS (1.3%)
-------------------------
7,896,200 SSgA Prime Money Market Fund 2.90(i) - 7,896
--------
Total money market instruments (cost: $23,401) 23,401
--------
33
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- --------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (2.3%)
REPURCHASE AGREEMENTS (2.1%)(m)
$13,000 CS First Boston, LLC, 3.05%, acquired on 5/31/2005 and
due 6/01/2005 at $13,000 (collateralized by $13,360
of Fannie Mac Discount Notes(j,+), 3.14%(p), due
8/24/2005; market value $13,261) $ 13,000
--------
NUMBER
OF SHARES
- ----------
MONEY MARKET FUNDS (0.2%)
1,089,757 AIM Short-Term Investment Co. Liquid Assets Portfolio, 2.97%(i) 1,090
27,427 Merrill Lynch Premier Institutional Fund, 2.87%(i) 27
--------
1,117
--------
Total short-term investments purchased with cash collateral from
securities loaned (cost: $14,117) 14,117
--------
TOTAL INVESTMENTS (COST: $587,198) $623,653
========
34
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA BALANCED STRATEGY 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%.
ISHARES - exchange-traded funds, managed by Barclays Global Fund
Advisors, that represent a portfolio of stocks designed to closely
track a specific market index. iShares funds are traded on various
stock exchanges.
SPDR - Standard & Poor's depositary receipt, or "spider," is an
exchange-traded fund based on either the S&P 500 Index or the S&P
MidCap 400 Index, and is traded on the American Stock Exchange (AMEX).
PORTFOLIO DESCRIPTION ABBREVIATIONS
CPI Consumer Price Index
EETC Enhanced Equipment Trust Certificate
ESOP Employee Stock Ownership Plan
MTN Medium-Term Note
PCRB Pollution Control Revenue Bond
RB Revenue Bond
CREDIT ENHANCEMENTS - add the financial strength of the provider of
the enhancement to support the issuer's ability to repay the principal
and interest payments when due. A high-quality bank, insurance company
or other corporation, or a collateral trust may provide the
enhancement.
(LOC) Principal and interest payments are guaranteed by a bank letter
of credit
35
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
(NBGA) Principal and interest payments are guaranteed by a non-bank
guarantee agreement from Sempra Energy.
(INS) Principal and interest payments are insured by MBIA Insurance
Corp. The insurance does not guarantee the market value of the
security.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur
in an exempt transaction to a qualified institutional buyer as
defined by Rule 144A, and as such, has been deemed liquid by USAA
Investment Management Company (the Manager) under liquidity
guidelines approved by the Board of Trustees, unless otherwise
noted as illiquid.
(b) Security deemed illiquid by the Manager, under liquidity guidelines
approved by the Board of Trustees, and valued using methods
determined by a pricing service, under valuation procedures
approved by the Board of Trustees. The market value of this
security at May 31, 2005, was $722,000, which represented 0.1% of
the Fund's net assets.
(c) Put bond - provides the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature may
shorten the effective maturity of the security.
(d) Variable-rate or floating-rate security - interest rate is
adjusted periodically. The interest rate disclosed represents the
current rate at May 31, 2005.
(e) Variable-rate demand notes (VRDNs) - provide the right to sell the
security at face value on either that day or within the rate-reset
period. The interest rate is adjusted at a stipulated daily,
weekly,
36
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
monthly, quarterly, or other specified time interval to a rate that
reflects current market conditions. VRDNs will normally trade as if
the maturity is the earlier put date, even though stated maturity
is longer.
(f) U.S. Treasury inflation-indexed notes - designed to provide a real
rate of return after being adjusted over time to reflect the impact
of inflation. Their principal value periodically adjusts to the
rate of inflation. They trade at the prevailing real, or
after-inflation, interest rates. The U.S. Treasury guarantees
repayment of these securities of at least their face value in the
event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in
interest income.
(g) Interest-only commercial mortgage-backed securities (IO CMBSs) -
represent the right to receive only the interest payments on an
underlying pool of commercial mortgage loans. The interest rate
disclosed is the purchase yield, which reflects an anticipated
yield based upon interest rates at the time of purchase and the
estimated timing and amount of future cash flows. The principal
amount represents the notional amount of the underlying pool on
which the current interest rate is calculated. IO CMBSs are backed
by loans that have various forms of prepayment protection, which
include lock-out provisions, yield maintenance provisions, and
prepayment penalties. This serves to moderate their prepayment
risk. IO CMBSs are subject to recessionary default-related
prepayments that may have a negative impact on yield.
(h) The security or a portion thereof was out on loan as of May 31,
2005.
(i) Rate represents the money market fund annualized seven-day yield at
May 31, 2005.
(j) U.S. government agency issues - mortgage-backed securities issued
by Government National Mortgage Association (GNMA)
37
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
and certain other U.S. government agencies are supported by the
full faith and credit of the U.S. government. Securities issued by
government-sponsored enterprises (GSEs) indicated with "+" are
supported only by the credit of the issuing agency,
instrumentality, or corporation, and are neither issued nor
guaranteed by the U.S. government.
(k) Commercial paper issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Unless this commercial paper is
subsequently registered, a resale of this commercial paper in the
United States must be effected in a transaction exempt from
registration under the Securities Act of 1933. Section 4(2)
commercial paper is normally resold to other investors through or
with the assistance of the issuer or an investment dealer who makes
a market in this security, and as such has been deemed liquid by
the Manager under liquidity guidelines approved by the Board of
Trustees, unless otherwise noted as illiquid.
(l) Callable security expected to be called prior to maturity due to a
scheduled change from a fixed to a floating interest rate, which is
likely to be uneconomical to the issuer.
(m) 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.
(n) Eurodollar and Yankee obligations are dollar-denominated
instruments that are issued outside the U.S. capital markets by
foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions
(Eurodollar obligations) as well as dollar-denominated instruments
that are issued by foreign issuers in the U.S. capital markets
(Yankee obligations).
38
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
(o) Security was fair valued at May 31, 2005, by the Manager in
accordance with valuation procedures approved by the Board of
Trustees.
(p) 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.
39
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
ASSETS
Investments in securities, at market value (including securities
on loan of $13,693) (identified cost of $587,198) $623,653
Cash 5
Receivables:
Capital shares sold 670
Dividends and interest 2,906
Securities sold 2,690
Other 4
USAA Investment Management Company (Note 6D) 755
--------
Total assets 630,683
--------
LIABILITIES
Payables:
Upon return of securities loaned 14,122
Securities purchased 5,687
Capital shares redeemed 666
Accrued management fees 383
Accrued transfer agent's fees 6
Other accrued expenses and payables 56
--------
Total liabilities 20,920
--------
Net assets applicable to capital shares outstanding $609,763
========
NET ASSETS CONSIST OF:
Paid-in capital $555,994
Accumulated undistributed net investment income 1,663
Accumulated net realized gain on investments 15,651
Net unrealized appreciation of investments 36,455
--------
Net assets applicable to capital shares outstanding $609,763
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 39,577
========
Net asset value, redemption price, and offering price per share $ 15.41
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
40
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA BALANCED STRATEGY FUND
YEAR ENDED MAY 31, 2005
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $11) $ 5,777
Interest 9,548
Securities lending 81
-------
Total income 15,406
-------
EXPENSES
Management fees 4,247
Administration and servicing fees 849
Transfer agent's fees 1,666
Custody and accounting fees 210
Postage 191
Shareholder reporting fees 49
Trustees' fees 8
Registration fees 36
Professional fees 41
Other 10
-------
Total expenses 7,307
Expenses paid indirectly (88)
Expenses reimbursed (1,644)
-------
Net expenses 5,575
-------
NET INVESTMENT INCOME 9,831
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain 26,559
Change in net unrealized appreciation/depreciation 5,679
-------
Net realized and unrealized gain 32,238
-------
Increase in net assets resulting from operations $42,069
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
41
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA BALANCED STRATEGY FUND
YEARS ENDED MAY 31,
2005 2004
-------------------------
FROM OPERATIONS
Net investment income $ 9,831 $ 6,054
Net realized gain on investments 26,559 24,841
Change in net unrealized appreciation/depreciation
of investments 5,679 14,033
-------------------------
Increase in net assets resulting from operations 42,069 44,928
-------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (9,475) (6,463)
Net realized gains (5,841) -
-------------------------
Distributions to shareholders (15,316) (6,463)
-------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 132,983 188,486
Shares issued for dividends reinvested 15,153 6,381
Cost of shares redeemed (88,077) (61,223)
-------------------------
Increase in net assets from capital share transactions 60,059 133,644
-------------------------
Net increase in net assets 86,812 172,109
NET ASSETS
Beginning of period 522,951 350,842
-------------------------
End of period $609,763 $522,951
=========================
Accumulated undistributed net investment income:
End of period $ 1,663 $ 1,162
=========================
CHANGE IN SHARES OUTSTANDING
Shares sold 8,850 13,103
Shares issued for dividends reinvested 995 452
Shares redeemed (5,849) (4,262)
-------------------------
Increase in shares outstanding 3,996 9,293
=========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
42
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA BALANCED STRATEGY 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 Balanced Strategy Fund
(the Fund), which is classified as diversified under the 1940 Act. The
Fund's investment objective is to seek high total return, with reduced
risk over time, through an asset allocation strategy that seeks a
combination of long-term growth of capital and current income.
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 the official closing price on the exchange or primary
market on which they trade. Equity securities traded
primarily on foreign securities exchanges or markets are
valued at the last quoted sales price, or the most recently
determined official closing price calculated according to
local market convention, available at the time the Fund is
valued. If no last sale or official closing price is
reported or available, the average of the bid and asked
prices is generally used.
2. Equity securities trading in various foreign markets may
take place on days when the NYSE is closed. Further, when
the NYSE is open, the foreign markets may be closed.
Therefore, the calculation of the Fund's net asset value
(NAV) may not take place at the same time the prices of
certain foreign securities held by the Fund are determined.
In most cases, events affecting the values of foreign
securities that occur
43
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
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, and the Fund's subadviser, if applicable, will
monitor for events that would materially affect the value of
the Fund's foreign securities and, if necessary, the Manager
will value the foreign securities in good faith, considering
such available information that the Manager deems relevant,
under valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign
market closing prices of foreign equity securities to
reflect what the Fund believes to be the fair value of the
securities as of the close of the NYSE. Fair valuation of
affected foreign equity securities may occur frequently
based on an assessment that events that occur on a fairly
regular basis (such as U.S. market movements) are
significant.
3. Investments in open-end investment companies, other than
exchange-traded funds, are valued at their NAV at the end of
each business day.
4. Debt securities purchased with original maturities of 60
days or less are stated at amortized cost, which
approximates market value. Repurchase agreements are valued
at cost.
5. Other debt securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board
of Trustees. The Service uses the mean between quoted bid
and asked prices or the last sales price to price securities
when, in the Service's judgment, these prices are readily
available and are representative of the securities' market
values. For many securities, such prices are not readily
available. The Service generally prices these securities
based on methods that include
44
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
consideration of yields or prices of securities of
comparable quality, coupon, maturity, and type; indications
as to values from dealers in securities; and general market
conditions.
6. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by the Manager in consultation with the Fund's
subadviser, if applicable, under valuation procedures
approved by the Trust's Board of Trustees. Valuing these
securities at fair value is intended to cause the Fund's NAV
to be more reliable than it otherwise would be.
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.
45
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
Discounts and premiums are amortized over the life of the
respective securities, using the effective yield method for
long-term securities and the straight-line method for
short-term securities.
D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security
dealers. These agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the
U.S. government, its agencies, or its instrumentalities.
Government-sponsored enterprises (GSEs), such as Federal
National Mortgage Association (Fannie Mae) and Federal Home
Loan Mortgage Corporation (Freddie Mac), are supported only by
the credit of the issuing U.S. government agency, and are
neither issued nor guaranteed by the U.S. government.
Obligations pledged as collateral are required to maintain a
value equal to or in excess of the repurchase agreement price
plus accrued interest and are held by the Fund, either through
its regular custodian or through a special "tri-party"
custodian that maintains separate accounts for both the Fund
and its counterparty, until maturity of the repurchase
agreement. The Fund's Manager monitors the creditworthiness of
sellers with which the Fund may enter into repurchase
agreements.
E. 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.
46
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss
from investments.
Separately, net realized foreign currency gains/losses may
arise from sales of foreign currency, currency gains/losses
realized between the trade and settlement dates on security
transactions, and from the difference between amounts of
dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the
amounts received. These net realized foreign currency
gains/losses have been reclassified from accumulated net
realized gain/loss to accumulated undistributed net investment
income on the statement of assets and liabilities as such
amounts are treated as ordinary income/loss for tax purposes.
Net unrealized foreign currency exchange gains/losses arise
from changes in the value of assets and liabilities, other
than investments in securities, resulting from changes in the
exchange rate.
F. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS - Delivery and
payment for securities that have been purchased by the Fund on
a when-issued basis can take place a month or more after the
trade date. During the period prior to settlement, these
securities do not earn interest, are subject to market
fluctuation, and may increase or decrease in value prior to
their delivery. The Fund maintains segregated assets with a
market value equal to or greater than the amount of its
purchase commitments. The purchase of securities on a
when-issued basis may increase the volatility of the Fund's
NAV to the extent that the Fund makes such purchases while
remaining substantially fully invested. The Fund had no
when-issued commitments as of May 31, 2005.
G. 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.
47
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
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 $82,000 and $6,000,
respectively, resulting in a total reduction in Fund expenses
of $88,000.
H. 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.
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) LINES OF CREDIT
- --------------------------------------------------------------------------------
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.
48
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
The USAA funds that are party to the loan agreement are assessed
facility fees by CAPCO based on the funds' assessed proportionate
share of CAPCO's operating expenses related to obtaining and
maintaining CAPCO's funding programs in total (in no event to exceed
0.09% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period.
Prior to January 6, 2005, the loan agreement with CAPCO was in the
amount of $400 million, and the Fund also participated with other USAA
funds in a joint, short-term, revolving, committed loan agreement of
$100 million with Bank of America and State Street Bank and Trust
Company (State Street), under which Bank of America and State Street
both committed $50 million. Subject to availability under its
agreement with Bank of America and State Street, the Fund could borrow
from Bank of America and State Street, at the federal funds rate plus
a 0.50% markup, an amount which, when added to outstanding borrowings
under the CAPCO agreement, did not exceed 25% of the Fund's total
assets. The USAA funds that were party to the loan agreement with Bank
of America and State Street were assessed facility fees in an annual
amount equal to 0.09% of the $100 million loan agreement, whether used
or not. The facility fees were allocated among the funds based on
their respective average net assets for the period.
For the year ended May 31, 2005, the Fund paid CAPCO facility fees of
$3,000, which represents 1.9% 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
49
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between
book-basis and tax-basis accounting resulted in reclassifications made
to the statement of assets and liabilities to increase paid-in capital
by $586,000, increase accumulated undistributed net investment income
by $145,000, and decrease accumulated net realized gain on investments
by $731,000. This includes differences in the accounting for foreign
currency gains and losses, security paydowns, and the utilization of
earnings and profits distributed to shareholders on redemption of
shares as part of the dividends-paid deduction for federal income tax
purposes. This reclassification has no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2005, and 2004, was as follows:
2005 2004
---------------------------
Ordinary income* $9,475,000 $6,463,000
Long-term realized capital gains 5,841,000 -
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
As of May 31, 2005, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 7,128,000
Undistributed long-term capital gains 10,328,000
Unrealized appreciation 36,313,000
The difference between book-basis and tax-basis unrealized
appreciation of investments is attributable to the tax deferral of
losses on wash sales.
Distributions of net investment income are made quarterly.
Distributions of realized gains from security transactions not offset
by capital losses
50
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
are made annually in the succeeding fiscal year or as otherwise
required to avoid the payment of federal taxes. For the year ended May
31, 2005, the Fund utilized capital loss carryovers of $4,191,000 to
offset capital gains.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2005, were
$419,012,000 and $372,977,000, respectively.
As of May 31, 2005, the cost of securities, including short-term
securities, for federal income tax purposes, was $587,340,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2005, for federal income tax purposes, were $45,434,000 and
$9,121,000, respectively, resulting in net unrealized appreciation of
$36,313,000.
(5) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party securities-lending agent,
Metropolitan West Securities LLC (MetWest), may lend its securities to
qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the securities loaned, initially in an amount at
least equal to 102% of the fair value of domestic securities loaned
and 105% of the fair value of international securities loaned. Cash
collateral is invested in high-quality short-term investments. The
Fund and MetWest retain 80% and 20%, respectively, of the income
earned from the investment of cash received as collateral. MetWest
receives no other fees from the Fund for its services as
securities-lending agent. Risks to the Fund in securities-lending
transactions are that the borrower may not provide additional
collateral when required or return the securities when due,
51
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
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 $81,000, 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 $13,693,000 and received cash collateral of
$14,122,000 for the loans. Of this amount, $14,117,000 was invested in
short-term investments as noted in the Fund's portfolio of
investments, and $5,000 remained in cash.
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager provides investment management
services to the Fund pursuant to an Investment Advisory
Agreement. Under this agreement, the Manager is responsible
for managing the business and affairs of the Fund and for
directly managing the day-to-day investment of a portion of
the Fund's assets, subject to the authority of and supervision
by the Trust's Board of Trustees. The Manager is also
authorized to select (with approval of the Trust's Board of
Trustees) one or more subadvisers to manage the day-to-day
investment of a portion of the Fund's assets. The Manager
monitors each subadviser's performance through quantitative
and qualitative analysis, and periodically recommends to the
Trust's Board of Trustees as to whether each subadviser's
agreement should be renewed, terminated, or modified. The
Manager also is responsible for allocating assets to the
subadvisers. The allocation for each subadviser can range from
0% to 100% of the Fund's assets, and the Manager can change
the allocations without shareholder approval.
The investment management fee for the Fund is composed of a
base fee and a performance adjustment that increases or
decreases the base fee depending upon the performance of the
Fund relative
52
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
to the performance of the Lipper Balanced Funds Index, which
tracks the total return performance of the 30 largest funds in
the Lipper Balanced Funds category. The Fund's base fee is
accrued daily and paid monthly at an annualized rate of 0.75%
of the Fund's average net assets.
The performance adjustment is calculated monthly by comparing
the Fund's performance to that of the Lipper index over the
performance period. The performance period for the Fund
consists of the current month plus the previous 35 months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance
period, which is then multiplied by a fraction, the numerator
of which is the number of days in the month and the
denominator of which is 365 (366 in leap years). The resulting
amount is then added to (in the case of overperformance) or
subtracted from (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 Balanced Funds Index
over that period, even if the Fund had overall negative
returns during the performance period.
53
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
For the year ended May 31, 2005, the Fund incurred total
management fees, paid or payable to the Manager, of
$4,247,000, which included no performance adjustment.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with Wellington Management
Company, LLP (Wellington Management), under which Wellington
Management directs the investment and reinvestment of the
portion of the Fund's assets invested in equity securities (as
allocated from time to time by the Manager). The Manager (not
the Fund) pays Wellington Management a subadvisory fee in an
annual amount not to exceed 0.20% of the portion of the Fund's
average net assets that Wellington Management manages. For the
year ended May 31, 2005, the Manager incurred subadvisory
fees, paid or payable to Wellington Management of $664,000.
C. ADMINISTRATION AND SERVICING FEES - The Manager provides
certain administration and shareholder servicing functions for
the Fund. For such services, the Manager receives a fee
accrued daily and paid monthly at an annualized rate of 0.15%
of the Fund's average net assets. For the year ended May 31,
2005, the Fund incurred administration and servicing fees,
paid or payable to the Manager, of $849,000.
D. EXPENSE LIMITATION - The Manager has voluntarily agreed to
limit the annual expenses of the Fund to 1.00% of its average
annual net assets, before reductions of any expenses paid
indirectly, and will reimburse the Fund for all expenses in
excess of that amount. This arrangement may be modified or
terminated at any time. For the year ended May 31, 2005, the
Fund incurred reimbursable expenses of $1,644,000.
E. 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
54
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
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 $1,666,000.
F. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(7) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors,
officers, and/or employees of the Manager. None of the affiliated
trustees or Fund officers received any compensation from the Fund.
55
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
(8) 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 $ 14.70 $ 13.35 $ 14.20 $ 15.25 $ 15.26
-------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .26 .20 .28 .35(a,c) .33
Net realized and unrealized gain (loss) .86 1.37 (.70) (.40)(a,c) .77
-------------------------------------------------------------------------------
Total from investment operations 1.12 1.57 (.42) (.05)(a,c) 1.10
-------------------------------------------------------------------------------
Less distributions:
From net investment income (.25) (.22) (.29) (.34) (.32)
From realized capital gains (.16) - (.14) (.66) (.79)
-------------------------------------------------------------------------------
Total distributions (.41) (.22) (.43) (1.00) (1.11)
-------------------------------------------------------------------------------
Net asset value at end of period $ 15.41 $ 14.70 $ 13.35 $ 14.20 $ 15.25
===============================================================================
Total return (%)* 7.67 11.82 (2.71) (.06) 7.37
Net assets at end of period (000) $609,763 $522,951 $350,842 $327,563 $184,977
Ratio of expenses to
average net assets (%)**(b,d) 1.00 1.00 1.00 1.02 1.23
Ratio of expenses to average net assets,
excluding reimbursements (%)**(d) 1.29 1.33 1.47 1.35 -
Ratio of net investment income to
average net assets (%)** 1.74 1.38 2.19 2.41(c) 2.30
Portfolio turnover (%) 68.26 55.26 113.80 42.34 80.60
* 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 $566,568,000.
(a) Calculated using average shares.
(b) Effective August 1, 2001, the Manager voluntarily agreed to limit the Fund's expense ratio to 1.00% of the Fund's average
annual net assets. Prior to this date, the voluntary expense ratio limit was 1.25% of the Fund's average annual net assets.
(c) In 2001, a change in amortization method was made as required by an accounting pronouncement. This change had no effect on
these amounts.
(d) 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:
(.02%) (.02%) (.01%) (.00%)(+) (.00%)(+)
+ Represents less than 0.01% of average net assets.
56
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
EXAMPLE
- --------------------------------------------------------------------------------
As a shareholder of the Fund, you incur two types of costs: direct
costs, such as wire fees, redemption fees, and low balance fees; and
indirect costs, including management fees, transfer agency fees, and
other Fund operating expenses. This example is intended to help you
understand your indirect costs, also referred to as "ongoing costs,"
(in dollars) of investing in the Fund and to compare these costs with
the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire six-month period of
December 1, 2004, through May 31, 2005.
ACTUAL EXPENSES
- --------------------------------------------------------------------------------
The first line of the table on the next page provides information
about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the
beginning of the period, to estimate the expenses that you paid over
the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading "Expenses
Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
- --------------------------------------------------------------------------------
The second line of the table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may
use this information to compare the ongoing costs of investing in the
57
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
Fund and other funds. To do so, compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder
reports of other funds.
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only and do not reflect any direct costs,
such as wire fees, redemption fees, or low balance fees. Therefore,
the second line of the table is useful in comparing ongoing costs
only, and will not help you determine the relative total costs of
owning different funds. In addition, if these direct costs were
included, your costs would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2004 -
DECEMBER 1, 2004 MAY 31, 2005 MAY 31, 2005
-----------------------------------------------------------
Actual $1,000.00 $1,029.50 $4.95
Hypothetical
(5% return before expenses) 1,000.00 1,020.06 4.92
*Expenses are equal to the Fund's annualized expense ratio of 0.98%,
which is net of reimbursements and 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 2.95% for the six-month period of December 1,
2004, through May 31, 2005.
58
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
At a meeting of the Board of Trustees held on April 27-28, 2005, the
Board, including the Trustees who are not "interested persons" of the
Trust (the "Independent Trustees"), approved the continuance of the
Investment Advisory Agreement between the Trust and the Manager with
respect to the Fund and the Subadvisory Agreement with respect to the
Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and Subadvisory Agreement and the Manager and the Subadviser, and were
given the opportunity to ask questions and request additional
information from management. The information provided to the Board
included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis
comparing the Fund's investment performance, expenses, and fees to
comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the
Manager's revenues and costs of providing services to the Fund and
compensation paid to affiliates of the Manager; and (iii) information
about the Manager's and Subadviser's operations and personnel. Prior
to voting, the Independent Trustees reviewed the proposed continuance
of the Investment Advisory Agreement and the Subadvisory Agreement
with management and with experienced independent counsel and received
materials from such counsel discussing the legal standards for their
consideration of the proposed continuation of the Investment Advisory
Agreement and the Subadvisory Agreement with respect to the Fund. The
Independent Trustees also reviewed the proposed continuation of the
Investment Advisory Agreement and the Subadvisory Agreement with
respect to the Fund in private sessions with their counsel at which no
representatives of management were present.
At each regularly scheduled meeting of the Board and its committees,
the Board of Trustees of the Trust receives and reviews, among other
things, information concerning the Fund's performance and related
services provided by the Manager and by the Subadviser. At the meeting
at which
59
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
the renewal of the Investment Advisory Agreement and Subadvisory
Agreement is considered, particular focus is given to information
concerning Fund performance, comparability of fees and total expenses,
and profitability. However, the Board noted that the evaluation
process with respect to the Manager and the Subadviser is an ongoing
one. In this regard, the Board's and its committees' consideration of
the Investment Advisory Agreement and Subadvisory Agreement included
certain types of information previously received at such meetings.
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the
Investment Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment
advisory services provided to the Fund, the Manager and its affiliates
provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and
regulatory requirements, and other services necessary for the
operation of the Fund and the Trust.
60
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
May 31, 2005
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
its senior and investment personnel, as well as current staffing
levels. The Board discussed the Manager's effectiveness in monitoring
the performance of the Subadviser and its timeliness in responding to
performance issues. The allocation of the Fund's brokerage, including
the Manager's process for monitoring "best execution" and the
utilization of "soft dollars," were 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
61
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
upon certain factors, including fund type, comparability of investment
objective and classification, sales load type (in this case,
investment companies with no sales loads), asset size, and expense
components (the "expense group") and (ii) a larger group of investment
companies that includes all no-load retail open-end investment
companies in the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense universe").
Among other data, the Board noted that the Fund's management fee rate
-- which includes advisory and administrative services and the effects
of any performance fee adjustment as well as any fee waivers or
reimbursements -- was below the median of both its expense group and
its expense universe. The data indicated that the Fund's total
expenses, after reimbursements, were lower than the median of both its
expense group and its expense universe. The Board took into account
the various services provided to the Fund by the Manager and its
affiliates. The Board also noted the level and method of computing the
management fee, including any performance adjustment to such fee. The
Trustees also took into account the Manager's current voluntary
undertakings to maintain expense limitations for the Fund and that the
subadvisory fees under the Subadvisory Agreement are paid by the
Manager.
In considering the Fund's performance, the Board of Trustees noted
that the Board reviews at its regularly scheduled meetings information
about the Fund's performance results. The Trustees also reviewed
various comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third
party in its report (the "performance universe"). The Fund's
performance universe consisted of the Fund and all retail and
institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or
primary channel of distribution. This comparison indicated that the
Fund's performance exceeded the average of its performance
62
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
universe for the one- and three-year periods ended December 31, 2004,
was lower than its index for the one- and three-year periods ended
December 31, 2004, and exceeded the average of its performance
universe and its Lipper index for the five-year period ended December
31, 2004. The Board also noted that the Fund's percentile performance
ranking was in the top 50% of its performance universe for the one-
and three-year periods ended December 31, 2004.
COMPENSATION AND PROFITABILITY. The Board took into consideration the
level and method of computing the management fee. The information
considered by the Board included operating profit margin information
for the Manager's business as a whole. The Board also received and
considered profitability information related to the management
revenues from the Fund. This consideration included a broad review of
the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the
Trustees noted that the Manager has reimbursed a portion of its
management fees to the Fund and also pays the subadvisory fees. The
Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax expenses. In reviewing the overall profitability
of the management fee to the Manager, the Board also considered the
fact that affiliates provide shareholder servicing and administrative
services to the Fund for which they receive compensation. The Board
also considered the possible direct and indirect benefits to the
Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its
association with the Fund.
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 also noted that the Manager pays the subadvisory fees. The Board
63
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
determined that the current investment management fee structure was
reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability and
resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is reasonable in
relation to the performance of funds with similar investment
objectives and to relevant indices; (iv) the Fund's advisory expenses
are reasonable in relation to those of similar funds and to the
services to be provided by the Manager; and (v) the Manager's level of
profitability from its relationship with the Fund is not unreasonable.
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.
SUBADVISORY AGREEMENT
- --------------------------------------------------------------------------------
In approving the Subadvisory Agreement with respect to the Fund, the
Board considered various factors, among them: (i) the nature, extent,
and quality of services provided to the Fund by the Subadviser,
including the personnel providing services; (ii) the Subadviser's
compensation and any other benefits derived from the subadvisory
relationship; (iii) comparisons of subadvisory fees and performance to
comparable investment companies; and (iv) the terms of the Subadvisory
Agreement. The Board's analysis of these factors is set forth below.
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Subadvisory Agreement. In approving the Subadvisory Agreement, the
Trustees did not identify any single factor as controlling, and each
Trustee attributed different weights to various factors. Throughout
their deliberations, the Independent Trustees were represented and
assisted by independent counsel.
64
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Trustees considered information provided to them
regarding the services provided by the Subadviser, including
information presented periodically throughout the previous year. The
Board considered the Subadviser's level of knowledge and investment
style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment
of portfolio securities with respect to the Fund and the Subadviser's
level of staffing. The Trustees noted that the materials provided to
them by the Subadviser indicated that the method of compensating
portfolio managers is reasonable and includes appropriate mechanisms
to prevent a manager with underperformance from taking undue risks.
The Trustees also noted the Subadviser's brokerage practices. The
Board also considered the Subadviser's regulatory and compliance
history. The Board noted that the Manager's monitoring processes of
the Subadviser include: (i) regular telephonic meetings to discuss,
among other matters, investment strategies, and to review portfolio
performance; (ii) monthly portfolio compliance checklists and
quarterly compliance certifications to the Board; and (iii) due
diligence visits to the Subadviser.
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of the Subadviser. In considering the cost of
services to be provided by the Subadviser and the profitability to the
Subadviser of its relationship with the Fund, the Trustees noted the
undertakings of the Manager to maintain expense limitations for the
Fund and also noted that the fees under the Subadvisory Agreement were
paid by the Manager. The Trustees also relied on the ability of the
Manager to negotiate the Subadvisory Agreement and the fees thereunder
at arm's length. The Board also considered information relating to the
cost of services to be provided by the Subadviser, the Subadviser's
profitability with respect to the Fund, and the potential economies of
scale in the Subadviser's management of the Fund, to the extent
available. However, for the reasons noted above, this information was
65
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2005
less significant to the Board's consideration of the Subadvisory
Agreement than the other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that the Subadviser
charges to comparable clients. The Board considered that the Fund pays
a management fee to the Manager and that, in turn, the Manager pays a
subadvisory fee to the Subadviser.
As noted above, the Board considered the Fund's performance during the
one-, three-, and five-year periods ended December 31, 2004, as
compared to the Fund's respective peer group and noted that the Board
reviews at its regularly scheduled meetings information about the
Fund's performance results. The Board also considered the performance
of the Subadviser. The Board noted the Manager's expertise and
resources in monitoring the performance, investment style, and
risk-adjusted performance of the Subadviser. The Board was mindful of
the Manager's focus on the Subadviser's performance and the
explanations of management regarding the factors that contributed to
the recent performance of the Fund. The Board also noted the
Subadviser's long-term performance record for similar accounts.
CONCLUSION. The Board reached the following conclusions regarding the
Subadvisory Agreement, among others: (i) the Subadviser is qualified
to manage the Fund's assets in accordance with its investment
objectives and policies; (ii) the Subadviser maintains an appropriate
compliance program; (iii) the performance of the Fund is reasonable in
relation to the performance of funds with similar investment
objectives and to relevant indices; and (iv) the Fund's advisory
expenses are reasonable in relation to those of similar funds and to
the services to be provided by the Manager and the Subadviser. Based
on the Board's conclusions, the Board of Trustees determined that
approval of the Subadvisory Agreement with respect to the Fund would
be in the interests of the Fund and its shareholders.
66
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.
67
. . . 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.
68
. . . 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.
69
. . . 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.
70
. . . 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.
71
. . . 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.
72
. . . 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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26889-0705 (C)2005, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On June 25, 2003, the Board of Trustees of USAA Investment Trust approved a Code
of Ethics (Sarbanes Code) applicable solely to its senior financial officers,
including its principal executive officer (President), as defined under the
Sarbanes-Oxley Act of 2002 and implementing regulations of the Securities and
Exchange Commission. A copy of the Sarbanes Code is attached as an Exhibit to
this Form N-CSR.
No amendments have been made to the Sarbanes Code since it was adopted, and no
waivers (explicit or implicit) from a provision of the Sarbanes Code have been
granted.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Dr. Laura T. Starks, Ph.D. has been designated as an audit committee financial
expert for USAA Investment Trust. Dr. Starks has served as a professor of
Finance at the University of Texas at Austin since 1987, and has served as the
Chair Professor of Finance since 1996. Dr. Starks also has served as a
consultant to numerous clients, including accounting firms, on a range of
finance, accounting and auditing issues. Dr. Starks is an independent director
who serves as a member of the Audit Committee, Pricing and Investment Committee
and the Corporate Governance Committee of the Board of Trustees of USAA
Investment Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 10 funds in
all. Only 9 funds of the Registrant (excluding the Total Return Strategy Fund)
have a fiscal year-end of May 31 and are included within this report (the
Funds). The aggregate fees billed by the Registrant's independent auditor, Ernst
& Young LLP, for professional services rendered for the audit of the Funds'
annual financial statements and services provided in connection with statutory
and regulatory filings by the Registrant for the Funds for fiscal years ended
May 31, 2005 and 2004 were $150,400 and $154,195, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid by the Funds' transfer
agent USAA Transfer Agency Company (dba USAA Shareholder Account Services) for
professional services rendered by Ernst & Young, LLP for audit related services
related to the annual study of internal controls of the transfer agent for
fiscal years ended May 31, 2005 and 2004 were $15,500 and $15,000, respectively.
All services were preapproved by the Audit Committee.
(c) TAX FEES. The aggregate fees paid or accrued by the Registrant for
professional services rendered by Ernst & Young, LLP for tax services are
detailed in the table below:
- ----------------------------------------------------------------------------------------------
Review of Federal, Review of
State and City Passive Quarterly US/UK Tax
Income and tax Foreign Diversification Treaty and issues
returns and excise Investment Review under related to grantor
tax calculations Company Subchapter M trust TOTAL
- ----------------------------------------------------------------------------------------------
FYE 5-31-2005 $41,100 $14,050 $10,993 0 $ 66,143
FYE 5-31-2004 $39,700 $ 9,167 $ 5,400 $ 1,547 $ 55,814
- ----------------------------------------------------------------------------------------------
TOTAL $80,800 $23,217 $16,393 $ 1,547 $121,957
- ----------------------------------------------------------------------------------------------
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2005 or 2004.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, and
the Funds' transfer agent, SAS, for May 31, 2005 and 2004 were $109,143 and
$92,814, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2005 and 2004 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
funds. The Board of Directors/Trustees will consider Ernst & Young LLP's
independence and will consider whether the provision of these non-audit services
to IMCO is compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 10. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA
Investment Trust (Trust) have concluded that the Trust's disclosure controls and
procedures are sufficient to ensure that information required to be disclosed by
the Trust in this Form N-CSR was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. Disclosure controls and
procedures were established for the new section of the shareholder reports
detailing the factors considered by the Funds' Board in approving the Funds'
advisory agreements.
ITEM 11. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUND, INC.
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA STATE TAX-FREE TRUST
USAA LIFE INVESTMENT TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment
Trust, USAA State Tax-Free Trust and USAA Life Investment Trust (collectively,
the Funds, and each a Company) have adopted this code of ethics (the Code) to
comply with Section 406 of the Sarbanes-Oxley Act of 2002 (the Act) and
implementing regulations of the Securities and Exchange Commission (SEC). The
Code applies to each Company's Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer (each a Covered Officer), as detailed
in Appendix A.
The purpose of the Code is to promote:
o honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between the Covered Officers' personal
and professional relationships;
o full, fair, accurate, timely and understandable disclosure in reports
and documents that each Company files with, or submits to, the SEC and
in other public communications made by each Company;
o compliance with applicable laws and governmental rules and regulations;
o prompt internal reporting of violations of the Code to the Chief Legal
Officer of each Company, the President of each Company (if the
violation concerns the Treasurer) and the Chairman of the Board of
Directors/Trustees of each Company; and
o accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically. In
addition, it is recognized by each Company's Board of Directors/Trustees (each a
Board, and collectively the Boards) that the Covered Officers also may be
officers or employees of one or more other investment companies covered by this
joint USAA Funds' Code.
B. GENERAL RULE. Covered Officers Should Avoid Actual and
Apparent Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
o use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the detriment
of the Funds and their shareholders;
o cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
o accept gifts, gratuities, entertainment or any other benefit from any
person or entity that does business or is seeking to do business with
the Funds during contract negotiations.
o accept gifts, gratuities, entertainment or any other benefit with a
market value over $100 per person, per year, from or on behalf of any
person or entity that does, or seeks to do, business with or on behalf
of the Funds.
o EXCEPTION. Business-related entertainment such as meals, and
tickets to sporting or theatrical events, which are infrequent
and not lavish are excepted from this prohibition. Such
entertainment must be appropriate as to time and place,
reasonable and customary in nature, modest in cost and value,
incidental to the business, and not so frequent as to raise any
question of impropriety (Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
o service as a director on the board or an officer of any public or
private company, other than a USAA company or a Company, must be
approved by the USAA Funds' and IMCO's Code of Ethics Committee and
reported to each affected Company.
o the receipt of any non-nominal (i.e., valued over $25) gifts from any
person or entity with which a Company has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of Secretary of
a Company shall be considered the Chief Legal Officer of a Company.
o the receipt of any business-related entertainment from any person or
entity with which the Funds have current or prospective business
dealings must be approved in advance by the Chief Legal Officer unless
such entertainment qualifies as Customary Business Entertainment.
o any ownership interest in, or any consulting or employment relationship
with, any of the Company's service providers, other than IMCO or any
other USAA company, must be approved by the Chairman of the Board of
the Directors/Trustees and reported to each affected Board.
o any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other than an
interest arising from the Covered Officer's employment, such as
compensation or equity ownership should be approved by the Chairman of
the Board of Directors/Trustees and reported to each affected Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
o Each Covered Officer should familiarize himself with the disclosure
requirements applicable to the Funds, and the procedures and policies
implemented to promote full, fair, accurate, timely and understandable
disclosure by each Company.
o Each Covered Officer should not knowingly misrepresent, or cause others
to misrepresent, facts about the Funds to others, whether within or
outside the Funds, including to the Funds' Directors/Trustees and
auditors, and to government regulators and self-regulatory
organizations.
o Each Covered Officer should, to the extent appropriate within his area
of responsibility, consult with other officers and employees of the
Funds and IMCO with the goal of promoting full, fair, accurate, timely
and understandable disclosure in the reports and documents filed by a
Company with, or submitted to, the SEC, and in other public
communications made by the Funds.
o Each Covered Officer is responsible for promoting compliance with the
standards and restrictions imposed by applicable laws, rules and
regulations, and promoting compliance with the USAA Funds' and IMCO's
operating policies and procedures.
o A Covered Officer should not retaliate against any person who reports a
potential violation of this Code in good faith.
o A Covered Officer should notify the Chief Legal Officer promptly if he
knows of any violation of the Code. Failure to do so itself is a
violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of each
Company is responsible for applying this Code to specific
situations in which questions are presented under it and has the
authority to interpret the Code in any particular situation. The
Chief Legal Officer should consult, if appropriate, the USAA
Funds' outside counsel or counsel for the Independent
Directors/Trustees. However, any approvals or waivers sought by a
Covered Officer will be reported initially to the Chairman of the
Board of Directors/Trustees and will be considered by the Board
of Directors/Trustees.
B. REQUIRED REPORTS
o EACH COVERED OFFICER MUST:
o Upon adoption of the Code, affirm in writing to the Boards
that he has received, read and understands the Code.
o Annually thereafter affirm to the Chief Legal Officer that
he has complied with the requirements of the Code.
o THE CHIEF LEGAL OFFICER MUST:
o report to the Board about any matter or situation submitted
by a Covered Officer for interpretation under the Code, and
the advice given by the Chief Legal Officer;
o report annually to the Board and the Corporate Governance
Committee describing any issues that arose under the Code,
or informing the Board and Corporate Governance Committee
that no reportable issues occurred during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
o INITIAL COMPLAINT. All complaints or other inquiries concerning
potential violations of the Code must be reported to the Chief
Legal Officer. The Chief Legal Officer shall be responsible for
documenting any complaint. The Chief Legal Officer also will
report immediately to the President of the Company (if the
complaint involves the Treasurer), the Chairman of the Board (or
for the USAA Life Investment Trust (LIT) the Chairman/CEO of USAA
if the complaint involves the Chairman of the LIT Board) and the
Chairperson of the Audit Committee any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints, the
Chief Legal Officer will report quarterly to the Board.
o INVESTIGATIONS. The Chief Legal Officer will take all appropriate
action to investigate any potential violation unless the Chairman
of the Board or the Chairperson of the Audit Committee direct
another person to undertake such investigation. The Chief Legal
Officer may utilize USAA's Office of Ethics to do a unified
investigation under this Code and USAA's Code of Conduct. The
Chairman of the Board, or the Board as a whole, may direct the
Company's outside counsel or the counsel to the Independent
Directors/Trustees (if any) to participate in any investigation
under this Code.
o STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
o VIOLATIONS OF THE CODE. If after investigation, the Chief Legal
Officer, or other investigating person, believes that a violation
of the Code has occurred, he will report immediately to the
Chairman of the Board (and for the USAA LIT the Chairman/CEO of
USAA if the violation involves the Chairman of the LIT Board) the
nature of the violation, and his recommendation regarding the
materiality of the violation. If, in the opinion of the
investigating person, the violation could materially affect the
Funds' financial condition or reputation, the Chief Legal Officer
also will notify the Chairperson of the Audit Committee of each
Company.
The Chief Legal Officer will inform, and make a recommendation
to, the Board, which will consider what further action is
appropriate. Appropriate action could include: (1) review of, and
modifications to, the Code or other applicable policies or
procedures; (2) notifications to appropriate personnel of IMCO or
USAA; (3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
o The Boards of Directors/Trustees understand that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates USAA's
Code of Business Conduct, these procedures do not limit or
restrict USAA's ability to discipline such Covered Officer
under USAA's Code of Business Conduct. In that event, the
Chairman of the Board of Directors/Trustees will report to
the Boards the action taken by USAA with respect to a
Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of a Company, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The USAA Funds' and IMCO's Joint Code of
Ethics under Rule 17j-1 under the 1940 Act, and IMCO's more detailed compliance
policies and procedures (including its Insider Trading Policy) are separate
requirements applying to Covered Officers and other IMCO employees, and are not
part of this Code. Also, USAA's Code of Conduct imposes separate requirements on
Covered Officers and all employees of USAA, and also is not part of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Directors/Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the
appropriate Board of Directors/Trustees and counsel for the Independent
Directors/Trustees (if any), the appropriate Company and its counsel, IMCO, and
other personnel of USAA as determined by the affected Company's Chief Legal
Officer or the Chairman of the Board of Directors/Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003 Approved
and adopted by the Boards of Directors/Trustees of USAA Mutual Fund, Inc., USAA
Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free Trust: June
25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
APPENDIX A
COVERED OFFICERS
TITLE COMPANY
PRESIDENT USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
TREASURER USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA INVESTMENT TRUST (EXCEPT TOTAL RETURN STRATEGY FUND)
By:* /s/ EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: July 26, 2005
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: August 2, 2005
------------------------------
By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: August 2, 2005
------------------------------
*Print the name and title of each signing officer under his or her signature.