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 GROWTH AND TAX STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2005
[LOGO OF USAA]
USAA(R)
USAA GROWTH and
TAX STRATEGY Fund
[GRAPHIC OF USAA GROWTH AND TAX STRATEGY FUND]
A n n u a l R e p o r t
- --------------------------------------------------------------------------------
MAY 31, 2005
Table of CONTENTS
- --------------------------------------------------------------------------------
MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
INVESTMENT OVERVIEW 7
FINANCIAL INFORMATION
Distributions to Shareholders 12
Report of Independent Registered Public Accounting Firm 13
Portfolio of Investments 14
Notes to Portfolio of Investments 21
Financial Statements 23
Notes to Financial Statements 26
EXPENSE EXAMPLE 40
ADVISORY AGREEMENTS 42
DIRECTORS' AND OFFICERS' INFORMATION 50
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2005, USAA. All rights reserved.
2
M E S S A G E
==============------------------------------------------------------------------
from the PRESIDENT
"
IN THE CURRENT INVESTMENT
ENVIRONMENT . . . INVESTORS MAY
[PHOTO OF CHRISTOPHER W. CLAUS] FIND THAT QUALITY, DIVERSIFICATION,
SAFETY, LIQUIDITY, AND PATIENCE
ARE THE SMARTEST STRATEGIES.
"
June 2005
- --------------------------------------------------------------------------------
As I write to you, inflation - a key driver of both the stock
and bond markets - appears to be under control. The U.S.
economy is in good health, and I expect the gross domestic
product (GDP) to grow between 3% and 3.5% in 2005. Meanwhile,
the Federal Reserve Board (the Fed) shows signs of nearing the
end of its interest-rate tightening schedule; it is likely to
leave the federal funds rate near 3.5% or 3.75%. Oil prices
have moved higher, rising above $50 a barrel and continuing to
constrain economic growth.
Although U.S. equity valuations are trading at historically
high levels for a rising interest-rate environment,
international valuations appear a little more reasonable.
Remarkably, long-term interest rates have remained low, which
has helped to support the stock market. Why? The bond market
seems to believe that the economy will slow. Absent inflation
and a rising dollar, longer-term interest rates actually
declined in 2005, increasing the value of longer-term bonds.
In my opinion, longer-term rates will continue to have a
significant impact on the direction of the stock and bond
markets over the next few quarters.
The growth in the U.S. budget deficit is of some concern.
Sooner or later, the government must cut spending and/or raise
taxes to pay its bills - both would be challenging for the
U.S. economy over the long term.
3
. . . C O N T I N U E D
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Consumers have their own budget deficits. Some pundits scoff
at the significance; others predict a day of reckoning. I
believe Americans have to curb their spending and start saving
more to support their eventual retirements. And while greater
savings may be a plus, a slowdown in consumer spending would
hurt economic growth.
Against this backdrop, investors may find that quality,
diversification, safety, liquidity, and patience are the
smartest strategies. For short-term investors, money markets
provide yields near 3%, with relative safety and liquidity.
Investors with longer-term horizons could see annual returns
of 4% to 5% a year in bonds, particularly if they reinvest the
interest. Stocks are likely to generate only modest gains
going forward; we see the equity markets providing
mid-single-digit returns over the next several years.
In the current investment environment, it would be prudent to
take what the market offers us and resist the urge to reach
for higher returns at dramatically greater risk. Sometimes
risk is simply risk and is not always rewarded with higher
returns. We will continue to look for value in our
investments, examine the risks, and not stray from our
investment discipline.
From everyone at USAA, thank you for your business and the
opportunity to serve your investment needs.
Sincerely,
/s/ CHRISTOPHER W. CLAUS
Christopher W. Claus
President and Vice Chairman of the Board
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. O AS
INTEREST RATES RISE, EXISTING BOND PRICES FALL.
4
M A N A G E R S '
==================--------------------------------------------------------------
COMMENTARY on the Fund
[PHOTO OF CLIFFORD A. GLADSON] [PHOTO OF MARK B. BARIBEAU]
CLIFFORD A. GLADSON, CFA MARK B. BARIBEAU, CFA
USAA Investment Management Company Loomis, Sayles & Company, L.P.
[PHOTO OF PAMELA N. CZEKANSKI] [PHOTO OF RICHARD D. SKAGGS]
PAMELA N. CZEKANSKI, CFA RICHARD D. SKAGGS, CFA
Loomis, Sayles & Company, L.P. Loomis, Sayles & Company, L.P.
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
The USAA Growth and Tax Strategy Fund had a total return of
10.40% 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, 3.33% for the Russell 1000
Growth Index, and 7.96% for the Lehman Brothers Municipal Bond
Index.
WHAT LED TO THE FUND'S STRONG PERFORMANCE?
The tax-exempt municipal bond portion and the U.S. equity
portion did very well within their respective investment
categories. As always, we remind you that the structure of
your Fund is unique. Under the Internal Revenue Code, the
Fund must have at least 50% of its assets invested in
tax-exempt securities at the end of each fiscal quarter in
order to pass tax-exempt income to its shareholders, instead
of the 60% common stocks/40% bonds investment mix normally
associated with a balanced fund.
CAN YOU DESCRIBE MARKET CONDITIONS DURING THE REPORTING YEAR FOR TAX-EXEMPT
MUNICIPAL BONDS?
Despite rising short-term interest rates over the entire
period, the yield on the Bond Buyer 40-Bond Index, the
industry standard
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 9 FOR BENCHMARK DEFINITIONS.
THE BOND BUYER 40-BOND INDEX IS REPRESENTATIVE OF YIELDS OF 40
LARGE ONE-YEAR, TAX-EXEMPT NOTES.
5
. . . C O N T I N U E D
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for long-term investment grade municipal bonds, fell from
5.21% to 4.70% as market participants came to believe that the
Federal Reserve Board (the Fed) was determined to keep
inflation under control.
WHAT DROVE THE PERFORMANCE OF THE FUND'S TAX-EXEMPT MUNICIPAL BONDS?
Because we had a relatively long duration (a measure of
interest-rate sensitivity), we benefited from the decrease in
long-term interest rates. We were also helped by the continued
improvement in credit quality of a number of bonds in the
Fund. Over the course of the year, the interest-rate spread
between higher- and lower-quality bonds narrowed, so we took
the opportunity to improve the overall credit quality of the
portfolio.
WHAT'S YOUR OUTLOOK?
We expect that within the next six months, the Fed will end
its tightening regime as economic activity slows. In this
environment, we expect to continue to focus on bonds with 15-
to 25-year maturities, buying when we believe market
conditions warrant.
WHAT ABOUT THE FUND'S EQUITY PORTION?
Loomis Sayles took over the equity portion on July 1, 2004,
one month after the start of the reporting period. Over the
next 11 months, the equity portion more than doubled the
return of the Russell 1000 Growth Index, with particularly
strong performance occurring in the last three months of 2004.
The Fund's stock selection in the technology sector was a key
factor. Although the sector as a whole turned in sluggish
performance, we benefited by owning Apple Computer, Inc.,
Google, Inc. "A," Autodesk, Inc., and Adobe Systems, Inc. We
were heavily overweight in Apple Computer, Inc., participating
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 14-20.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
in the rally sparked by iPod sales, before taking some profits
by reducing our position. Google, Inc. "A" was also a stock
where our high conviction and high weighting paid off, because
the company's earnings exploded through the build-out of its
paid search service.
Stock selection was equally strong in financial services, as
our focus on companies that combine excellent revenue growth
with solid bottom-line execution again proved beneficial.
Leading contributors were Legg Mason, Inc., which saw
exceptionally strong new money flows into its investment
management business, and Moody's Corp., the investor rating
service, which continued to generate outstanding free cash
flow.
One area of weakness was the consumer discretionary sector,
where two of our best performers in 2004, eBay, Inc. and
Starbucks Corp., sold off dramatically in early 2005 when
their earnings came in below expectations. We sold our
positions in both companies.
WHAT'S YOUR OUTLOOK FOR THE STOCK MARKET?
We believe the economy will grow steadily at about 3%, with
earnings growth this year in the low double digits. Our
portfolio on average has companies with expected earnings
growth of 20%. Given the sluggish returns from the stock
market so far in 2005, we're optimistic that as the market
looks to the end of the Fed tightening cycle, the overall
outlook should be good for stocks whose earnings and revenue
are growing faster than the overall market.
We thank you for the opportunity and privilege of serving you.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 14-20.
7
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA GROWTH AND TAX STRATEGY FUND
OBJECTIVE
- --------------------------------------------------------------------------------
Conservative balance for the investor between income, the
majority of which is exempt from federal income tax, and the
potential for long-term growth of capital to preserve
purchasing power.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Invests principally in tax-exempt bonds and money market
instruments and the remainder in blue chip stocks.
- --------------------------------------------------------------------------------
5/31/05 5/31/04
- --------------------------------------------------------------------------------
Net Assets $188.5 Million $186.8 Million
Net Asset Value Per Share $14.65 $14.61
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/05
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 30-DAY SEC YIELD
10.40% 0.92% 6.27% 1.91%
*CALCULATED AS PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND IS
NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE
HIGHER OR LOWER THAN THE PERFORMANCE DATA QUOTED. THE RETURN
AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE, SO THAT
AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS
THAN THEIR ORIGINAL COST. FOR PERFORMANCE DATA CURRENT TO THE
MOST RECENT MONTH-END, VISIT USAA.COM.
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL NET INVESTMENT INCOME DIVIDEND AND
REALIZED CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD
PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
8
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER BALANCED LIPPER BALANCED RUSSELL 1000 USAA GROWTH AND TAX LEHMAN BROTHERS
FUNDS INDEX FUNDS AVERAGE GROWTH INDEX STRATEGY FUND MUNICIPAL BOND INDEX
--------------- --------------- ------------ ------------------- --------------------
05/31/1995 $10000.00 $10000.00 $10000.00 $10,000.00 $10000.00
06/30/1995 10177.22 10184.88 10385.98 9,999.68 9912.60
07/31/1995 10392.37 10429.06 10817.59 10,159.74 10006.38
08/31/1995 10473.46 10510.04 10829.40 10,270.35 10133.36
09/30/1995 10723.60 10758.08 11328.58 10,484.31 10197.39
10/31/1995 10696.42 10738.19 11336.43 10,444.44 10345.62
11/30/1995 11028.85 11072.66 11777.04 10,803.22 10517.51
12/31/1995 11202.44 11231.75 11844.56 11,033.40 10618.46
01/31/1996 11404.65 11445.99 12240.76 11,202.53 10698.69
02/29/1996 11410.15 11477.08 12464.63 11,250.85 10626.43
03/31/1996 11453.19 11517.17 12480.62 11,347.28 10490.67
04/30/1996 11529.00 11623.83 12809.00 11,347.28 10460.92
05/31/1996 11647.15 11774.55 13256.57 11,461.00 10456.94
06/30/1996 11685.56 11789.30 13274.57 11,542.83 10570.90
07/31/1996 11384.83 11452.64 12496.82 11,387.77 10666.54
08/31/1996 11564.61 11664.56 12819.37 11,497.11 10664.15
09/30/1996 11993.56 12111.64 13752.85 11,808.30 10813.19
10/31/1996 12247.32 12336.36 13835.72 11,978.08 10935.39
11/30/1996 12818.09 12901.04 14874.53 12,377.07 11135.70
12/31/1996 12664.57 12760.77 14583.31 12,260.50 11088.68
01/31/1997 13056.21 13147.60 15606.15 12,508.97 11109.67
02/28/1997 13104.67 13149.60 15500.48 12,603.21 11211.68
03/31/1997 12723.79 12757.11 14661.67 12,319.62 11062.11
04/30/1997 13106.29 13132.50 15635.24 12,570.34 11154.83
05/31/1997 13643.00 13717.04 16763.57 13,089.06 11322.73
06/30/1997 14095.24 14139.35 17434.47 13,357.06 11443.34
07/31/1997 14898.10 14960.42 18976.41 13,866.78 11760.27
08/31/1997 14425.85 14550.36 17865.71 13,553.66 11650.02
09/30/1997 15000.86 15129.44 18744.87 13,947.78 11788.16
10/31/1997 14727.71 14884.45 18052.04 13,902.70 11864.14
11/30/1997 14998.24 15135.88 18818.80 14,083.02 11934.01
12/31/1997 15235.19 15360.65 19029.62 14,241.87 12108.02
01/31/1998 15343.46 15451.33 19598.64 14,342.87 12232.88
02/28/1998 15952.62 16110.65 21072.89 14,783.63 12236.60
03/31/1998 16440.42 16586.07 21912.95 15,187.52 12247.49
04/30/1998 16555.57 16707.09 22216.18 15,159.77 12192.23
05/31/1998 16388.19 16520.23 21585.78 15,085.78 12385.10
06/30/1998 16690.40 16777.89 22907.82 15,224.65 12433.99
07/31/1998 16494.87 16555.69 22756.19 15,013.26 12465.07
08/31/1998 15073.82 15062.08 19341.03 14,081.40 12657.67
09/30/1998 15724.43 15715.17 20826.76 14,635.34 12815.48
10/31/1998 16312.71 16394.54 22500.63 14,939.05 12815.21
11/30/1998 16909.80 17039.26 24212.15 15,480.05 12860.11
12/31/1998 17533.64 17667.77 26395.35 15,890.08 12892.52
01/31/1999 17814.02 17998.02 27945.24 16,390.94 13045.80
02/28/1999 17385.83 17510.39 26668.61 16,047.21 12988.95
03/31/1999 17814.97 17946.47 28073.14 16,517.80 13006.75
04/30/1999 18398.51 18488.38 28109.04 16,764.78 13039.16
05/31/1999 18114.81 18217.43 27245.17 16,458.52 12963.71
06/30/1999 18615.65 18750.26 29153.56 16,925.12 12777.22
07/31/1999 18267.49 18386.65 28227.02 16,709.83 12823.71
08/31/1999 18075.82 18162.05 28688.23 16,580.53 12720.90
09/30/1999 17844.22 17917.03 28085.58 16,341.53 12726.21
10/31/1999 18360.89 18455.47 30206.54 16,922.65 12588.33
11/30/1999 18558.45 18697.00 31836.30 17,062.92 12722.23
12/31/1999 19107.58 19305.47 35147.52 17,363.22 12627.39
01/31/2000 18627.56 18783.84 33499.51 17,020.19 12572.39
02/29/2000 18582.69 18807.16 35137.15 17,262.33 12718.51
03/31/2000 19676.82 19892.06 37652.12 18,412.15 12996.39
04/30/2000 19316.22 19502.83 35860.46 17,975.45 12919.61
05/31/2000 19134.48 19262.63 34054.67 17,548.92 12852.40
06/30/2000 19439.88 19636.65 36635.60 17,945.20 13192.98
07/31/2000 19386.90 19581.81 35108.35 17,812.27 13376.55
08/31/2000 20252.26 20516.12 38287.18 18,425.78 13582.70
09/30/2000 19826.05 20041.99 34665.41 17,495.80 13512.03
10/31/2000 19808.51 19971.27 33025.13 17,670.86 13659.48
11/30/2000 19089.47 19160.76 28157.00 17,125.08 13762.82
12/31/2000 19563.94 19669.26 27266.06 17,248.13 14102.86
01/31/2001 19979.15 20137.84 29149.76 17,403.71 14242.60
02/28/2001 19203.62 19233.80 24200.95 16,563.60 14287.76
03/31/2001 18583.46 18542.53 21567.46 15,941.38 14415.81
04/30/2001 19363.36 19374.57 24295.16 16,505.86 14259.60
05/31/2001 19535.82 19530.81 23937.61 16,589.49 14413.16
06/30/2001 19236.49 19257.36 23383.24 16,391.28 14509.59
07/31/2001 19222.57 19225.91 22798.84 16,496.62 14724.51
08/31/2001 18675.52 18626.79 20934.47 15,854.03 14967.06
09/30/2001 17778.04 17593.96 18844.35 15,044.98 14916.85
10/31/2001 18075.59 17971.03 19833.01 15,363.73 15094.57
11/30/2001 18795.23 18727.69 21738.28 15,969.36 14967.32
12/31/2001 18930.79 18859.51 21697.42 15,814.80 14825.73
01/31/2002 18764.75 18659.18 21314.11 15,868.34 15082.88
02/28/2002 18637.24 18462.74 20429.59 15,664.90 15264.60
03/31/2002 19044.74 18882.63 21136.21 15,911.69 14965.46
04/30/2002 18587.71 18433.82 19411.17 15,362.27 15257.96
05/31/2002 18579.04 18346.60 18941.56 15,329.95 15350.67
06/30/2002 17786.44 17491.63 17189.38 14,673.36 15512.99
07/31/2002 16874.83 16611.39 16244.39 14,445.45 15712.50
08/31/2002 17047.96 16786.18 16292.95 14,575.68 15901.38
09/30/2002 16030.13 15784.50 14602.90 14,123.09 16249.67
10/31/2002 16698.33 16394.27 15942.45 14,549.41 15980.29
11/30/2002 17375.75 17020.63 16808.36 14,724.31 15913.87
12/31/2002 16907.38 16549.85 15647.30 14,498.78 16249.67
01/31/2003 16654.12 16304.83 15267.62 14,288.98 16208.49
02/28/2003 16529.22 16181.72 15197.51 14,355.23 16435.10
03/31/2003 16596.67 16256.01 15480.35 14,586.45 16444.93
04/30/2003 17494.81 17122.24 16624.92 15,108.98 16553.58
05/31/2003 18268.59 17919.40 17454.75 15,553.69 16941.18
06/30/2003 18407.12 18061.42 17695.09 15,631.07 16869.19
07/31/2003 18449.77 18087.22 18135.41 15,440.99 16278.89
08/31/2003 18761.24 18398.81 18586.46 15,597.53 16400.30
09/30/2003 18785.05 18396.86 18387.48 15,787.60 16882.47
10/31/2003 19404.81 18992.33 19420.26 16,113.93 16797.46
11/30/2003 19576.61 19175.45 19623.58 16,248.97 16972.53
12/31/2003 20278.06 19833.56 20302.23 16,696.03 17113.06
01/31/2004 20580.85 20108.42 20716.85 16,843.18 17211.09
02/29/2004 20861.35 20372.53 20848.47 17,012.97 17470.11
03/31/2004 20761.83 20277.88 20461.72 16,841.19 17409.28
04/30/2004 20325.52 19818.61 20223.86 16,510.97 16996.97
05/31/2004 20415.26 19910.98 20600.80 16,636.22 16935.34
06/30/2004 20734.44 20231.58 20858.23 16,795.20 16996.97
07/31/2004 20344.10 19800.40 19679.07 16,359.85 17220.66
08/31/2004 20467.86 19898.94 19581.88 16,451.50 17565.75
09/30/2004 20771.92 20149.79 19768.12 16,876.98 17659.00
10/31/2004 20996.55 20359.72 20076.43 17,268.67 17810.96
11/30/2004 21562.13 20934.39 20767.03 17,729.47 17664.04
12/31/2004 22100.37 21450.14 21581.27 18,254.70 17879.76
01/31/2005 21815.68 21168.39 20861.57 17,967.91 18046.86
02/28/2005 22124.31 21465.30 21083.59 18,105.07 17986.82
03/31/2005 21819.70 21174.61 20699.46 17,802.82 17873.38
04/30/2005 21557.50 20899.86 20305.28 17,740.14 18155.25
05/31/2005 22051.83 21402.95 21287.70 18,366.99 18283.56
[END CHART]
DATA FROM 5/31/95 THROUGH 5/31/05.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE
CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR
THE REDEMPTION OF FUND SHARES.
9
. . . C O N T I N U E D
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The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA Growth and Tax Strategy Fund to the
following benchmarks:
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 performance
level of all balanced funds, reported by Lipper Inc., an
independent organization that monitors the performance of
mutual funds.
o The Russell 1000 Growth Index measures the performance of
those Russell 1000 companies with higher price-to-book
ratios and higher forecasted growth values.
o The Lehman Brothers Municipal Bond Index is an unmanaged
benchmark of total return performance for the long-term,
investment-grade, tax-exempt bond market.
10
. . . C O N T I N U E D
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OVERVIEW
- --------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES
TOP 5 HOLDINGS
(% of Net Assets)
- --------------------------------------------------------------------------------
Wisconsin - Univ. of Wisconsin Hospitals and Clinics Auth. RB, Series 2000 3.6%
Texas - Lewisville RB, Series 1998B 3.5%
Connecticut - Mashantucket (Western) Pequot Tribe RB, Series 1997B 3.3%
Texas - Northwest ISD GO, Series 1997 3.1%
Georgia - Atlanta Airport RB, Series 2000A 2.7%
- --------------------------------------------------------------------------------
- -------------------------------------------
TOP 10 INDUSTRIES
(% of Net Assets)
- -------------------------------------------
Escrowed Bonds 9.8%
Hospital 9.5%
General Obligation 7.7%
Water/Sewer Utility 6.6%
Real Estate Tax/Fee Bonds 3.5%
Managed Health Care 3.4%
Casinos & Gaming 3.3%
Education 3.3%
Internet Software & Services 3.2%
Communications Equipment 2.8%
- -------------------------------------------
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES 14-20.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
- -------------------------------------------
TOP 5 EQUITY HOLDINGS
(% OF NET ASSETS)
- -------------------------------------------
Google, Inc. "A" 2.1%
General Electric Co. 1.9%
Procter & Gamble Co. 1.7%
Dell, Inc. 1.4%
Legg Mason, Inc. 1.4%
- -------------------------------------------
ASSET ALLOCATION
5/31/05
[PIE CHART OF ASSET ALLOCATION]
Tax-Exempt Bonds 51.1%
Blue Chip Stocks 47.6%
Tax-Exempt Money Market Instruments 2.0%
[END CHART]
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 14-20.
12
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA GROWTH AND TAX 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 $617,000.
100% of taxable ordinary income distributions of dividends
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 $816,000, as a
long-term capital gain distribution for tax purposes.
13
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 GROWTH AND TAX STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Growth and Tax 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 Growth and Tax 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
14
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------
TAX-EXEMPT SECURITIES (53.1%)
TAX-EXEMPT BONDS (51.1%)
ARIZONA (1.8%)
$ 3,000 Maricopa County School District GO (INS) 5.00% 7/01/2017 $ 3,366
ARKANSAS (1.4%)
2,500 Conway Health Facilities Board Hospital RB,
Series 1999A 6.40 8/01/2029 2,710
CALIFORNIA (1.1%)
2,000 Public Works Board RB (MLO), Series 2004F 5.00 11/01/2029 2,108
CONNECTICUT (3.3%)
6,000 Mashantucket (Western) Pequot Tribe RB,
Series 1997B(b) 5.75 9/01/2027 6,220
GEORGIA (3.2%)
4,500 Atlanta Airport RB, Series 2000A (INS)(PRE) 5.60 1/01/2030 5,027
1,000 Burke County Development Auth. PCRB,
2005 2nd Series (INS) 4.63 5/01/2034 1,000
HAWAII (1.2%)
2,000 State GO, Series 2003DA (INS) 5.25 9/01/2019 2,211
LOUISIANA (1.5%)
2,500 Local Government Environmental Facilities
and Community Development Auth. RB,
Series 2000 (INS) 6.55 9/01/2025 2,804
MAINE (1.8%)
3,000 Health and Higher Educational Facilities Auth. RB,
Series 2000C (INS) 5.75 7/01/2030 3,324
15
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------
MICHIGAN (6.2%)
$ 4,000 Detroit Sewage Disposal RB,
Series 1999A (INS)(PRE) 5.75% 7/01/2026 $ 4,489
4,000 Hospital Finance Auth. RB, Series 1996 6.25 10/01/2027 4,114
3,000 Hospital Finance Auth. RB, Series 2005 (INS) 5.00 11/15/2026 3,178
MONTANA (0.5%)
1,000 Facility Finance Auth. RB, Series 2002
(Providence Services) (INS) 4.75 12/01/2021 1,037
NEW JERSEY (0.6%)
1,000 Middlesex County Improvement Auth. RB,
Series 2004A 5.00 8/15/2023 1,045
NEW YORK (8.9%)
2,000 Housing Finance Agency RB, Series 2005A (INS) 5.00 9/15/2034 2,121
4,000 Metropolitan Transportation Auth. RB,
Series 2000A (PRE) 6.00 4/01/2030 4,535
2,395 New York City GO, Series 2000A (PRE) 6.00 5/15/2020 2,741
295 New York City GO, Series 2000A 6.00 5/15/2020 330
3,000 New York City Municipal Water Finance
Auth. RB, Series 2005D 5.00 6/15/2037 3,181
1,000 Sales Tax Asset Receivables Co. RB,
Series 2004A (INS) 5.00 10/15/2032 1,069
1,000 State Environmental Facilities Corp. RB,
Series 2004E 5.00 6/15/2025 1,073
1,500 Urban Development Corp. RB,
Series 2002C-1 (PRE) 5.00 3/15/2025 1,665
OHIO (2.0%)
1,000 Municipal Electric Generation Agency RB,
Joint Venture 5 (INS) 5.00 2/15/2023 1,069
2,470 State Univ. General Receipt Bonds,
Series 2003B 5.25 6/01/2017 2,733
RHODE ISLAND (0.1%)
205 Housing and Mortgage Finance Corp. SFH RB,
Series 15-A 6.85 10/01/2024 207
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------
TEXAS (12.0%)
$ 4,000 Houston Utility Systems RB, Series 2004A (INS) 5.13% 5/15/2028 $ 4,292
5,675 Lewisville RB, Series 1998B (INS) 5.80 9/01/2025 6,533
30,270 Northwest ISD GO, Series 1997 (NBGA) 6.38(a) 8/15/2032 5,890
2,000 Pflugerville GO, Series 2003A (INS) 5.00 8/01/2028 2,106
3,420 San Antonio Water System RB,
Series 2002A (INS) 5.50 5/15/2018 3,813
VIRGINIA (1.1%)
2,000 Tobacco Settlement Financing Corp. RB 5.50 6/01/2026 2,001
WASHINGTON (0.5%)
1,000 Vancouver Downtown Redevelopment Auth. RB,
Series 2003A (INS) 5.00 1/01/2023 1,024
WISCONSIN (3.9%)
500 Muskego Norway School District GO (INS) 5.00 4/01/2022 531
6,030 Univ. of Wisconsin Hospitals and Clinics
Auth. RB, Series 2000 (INS) 6.13 4/01/2021 6,765
--------
Total tax-exempt bonds (cost: $88,244) 96,312
--------
TAX-EXEMPT MONEY MARKET INSTRUMENTS (2.0%)
VARIABLE-RATE DEMAND NOTES (0.7%)(c)
------------------------------------
CALIFORNIA (0.0%)(e)
100 State Financing Auth. PCRB, Series 1996C
(LOC - JPMorgan Chase Bank, N.A.) 2.96 11/01/2026 100
MISSOURI (0.2%)
300 Health and Educational Facilities Auth. RB,
Series 2004A (LOC - Bank of America, N.A.) 2.98 7/01/2029 300
NEW MEXICO (0.5%)
1,040 Albuquerque Educational Facilities RB,
Series 2002 (LOC - Bank of America, N.A.) 3.01 10/15/2016 1,040
--------
1,440
--------
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER COUPON VALUE
OF SHARES SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS (1.3%)
-------------------------
2,413,976 SSgA Tax Free Money Market Fund 2.24%(d) - $ 2,414
--------
Total tax-exempt money market instruments
(cost: $3,854) 3,854
--------
Total tax-exempt securities (cost: $92,098) 100,166
--------
BLUE CHIP STOCKS (47.6%)
APPAREL & ACCESSORIES & LUXURY GOODS (1.3%)
83,700 Coach, Inc.* 2,431
--------
APPAREL RETAIL (1.8%)
39,075 American Eagle Outfitters, Inc. 1,106
69,100 Chico's FAS, Inc.* 2,364
--------
3,470
--------
APPLICATION SOFTWARE (0.4%)
19,725 Autodesk, Inc. 781
--------
ASSET MANAGEMENT & CUSTODY BANKS (2.1%)
31,862 Legg Mason, Inc. 2,618
22,675 T. Rowe Price Group, Inc. 1,353
--------
3,971
--------
BIOTECHNOLOGY (0.7%)
15,350 Genentech, Inc.* 1,216
--------
COMMUNICATIONS EQUIPMENT (2.8%)
49,150 Cisco Systems, Inc.* 952
73,500 Corning, Inc.* 1,152
43,750 Juniper Networks, Inc.* 1,122
67,175 Motorola, Inc. 1,167
24,825 QUALCOMM, Inc. 925
--------
5,318
--------
COMPUTER HARDWARE (2.0%)
30,000 Apple Computer, Inc.* 1,191
65,725 Dell, Inc.* 2,622
--------
3,813
--------
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------
DEPARTMENT STORES (0.7%)
9,225 Sears Holdings Corp.* $ 1,353
--------
DRUG RETAIL (1.0%)
42,550 Walgreen Co. 1,929
--------
FOOD RETAIL (1.0%)
15,550 Whole Foods Market, Inc. 1,850
--------
HEALTH CARE EQUIPMENT (2.8%)
16,225 C.R. Bard, Inc. 1,107
44,225 St. Jude Medical, Inc.* 1,774
21,250 Stryker Corp. 1,034
17,050 Zimmer Holdings, Inc.* 1,306
--------
5,221
--------
HEALTH CARE FACILITIES (0.9%)
32,500 HCA, Inc. 1,755
--------
HEALTH CARE SERVICES (2.0%)
45,450 Caremark Rx, Inc.* 2,030
33,000 Medco Health Solutions, Inc.* 1,650
--------
3,680
--------
HOMEBUILDING (2.6%)
45,308 D.R. Horton, Inc. 1,566
19,900 Pulte Homes, Inc. 1,522
19,300 Toll Brothers, Inc.* 1,787
--------
4,875
--------
HOMEFURNISHING RETAIL (0.7%)
31,475 Bed Bath & Beyond, Inc.* 1,279
--------
HOUSEHOLD PRODUCTS (1.7%)
58,375 Procter & Gamble Co. 3,219
--------
INDUSTRIAL CONGLOMERATES (1.9%)
96,300 General Electric Co. 3,513
--------
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------
INTEGRATED OIL & GAS (0.7%)
21,775 Exxon Mobil Corp. $ 1,224
--------
INTERNET SOFTWARE & SERVICES (3.2%)
14,150 Google, Inc. "A"* 3,940
55,600 Yahoo!, Inc.* 2,068
--------
6,008
--------
INVESTMENT BANKING & BROKERAGE (1.2%)
23,825 Lehman Brothers Holdings, Inc. 2,197
--------
IT CONSULTING & OTHER SERVICES (0.5%)
20,750 Cognizant Technology Solutions Corp. "A"* 996
--------
LIFE & HEALTH INSURANCE (1.5%)
27,650 MetLife, Inc. 1,233
25,675 Prudential Financial, Inc. 1,626
--------
2,859
--------
MANAGED HEALTH CARE (3.4%)
27,600 Aetna, Inc. 2,153
36,100 UnitedHealth Group, Inc. 1,754
18,925 WellPoint, Inc.* 2,517
--------
6,424
--------
MULTI-LINE INSURANCE (0.6%)
15,800 Hartford Financial Services Group, Inc. 1,182
--------
OIL & GAS EXPLORATION & PRODUCTION (1.0%)
17,975 EOG Resources, Inc. 897
28,483 XTO Energy, Inc. 886
--------
1,783
--------
PHARMACEUTICALS (1.9%)
33,425 Abbott Laboratories 1,613
29,900 Johnson & Johnson, Inc. 2,006
--------
3,619
--------
PUBLISHING (0.6%)
15,325 Getty Images, Inc.* 1,147
--------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------
SEMICONDUCTORS (2.8%)
25,525 Broadcom Corp. "A"* $ 906
89,800 Intel Corp. 2,418
69,925 Texas Instruments, Inc. 1,933
--------
5,257
--------
SOFT DRINKS (0.9%)
31,000 PepsiCo, Inc. 1,745
--------
SPECIALIZED FINANCE (1.2%)
51,850 Moody's Corp. 2,243
--------
SYSTEMS SOFTWARE (1.7%)
43,900 Adobe Systems, Inc. 1,452
34,425 Microsoft Corp. 888
72,175 Oracle Corp.* 925
--------
3,265
--------
Total blue chip stocks (cost: $78,878) 89,623
--------
TOTAL INVESTMENTS (COST: $170,976) $189,789
========
21
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA GROWTH AND TAX 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%.
PORTFOLIO DESCRIPTION ABBREVIATIONS
GO General Obligation
ISD Independent School District
MLO Municipal Lease Obligation
PRE Prerefunded to a date prior to maturity
PCRB Pollution Control Revenue Bond
RB Revenue Bond
SFH Single-Family Housing
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.
(NBGA) Principal and interest payments are guaranteed by a non-bank
guarantee agreement from Texas Permanent School Fund.
(INS) Principal and interest payments are insured by one of the
following companies: ACA Financial Guaranty Corp., AMBAC
Assurance Corp., Financial Guaranty Insurance Co., Financial
Security Assurance Holdings Ltd., or MBIA Insurance Corp. The
insurance does not guarantee the market value of the security.
22
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Zero-coupon security. Rate represents the effective yield at date
of purchase.
(b) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur
in an exempt transaction to a qualified institutional buyer as
defined by Rule 144A, and as such, has been deemed liquid by USAA
Investment Management Company (the Manager) under liquidity
guidelines approved by the Board of Trustees, unless otherwise
noted as illiquid.
(c) Variable-rate 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, 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.
(d) Rate represents the money market fund annualized seven-day yield at
May 31, 2005.
(e) Represents less than 0.1% of net assets.
* Non-income-producing security for the year ended May 31, 2005.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
ASSETS
Investments in securities, at market value (identified cost of $170,976) $189,789
Cash 82
Receivables:
Capital shares sold 25
Dividends and interest 1,136
--------
Total assets 191,032
--------
LIABILITIES
Payables:
Securities purchased 2,359
Capital shares redeemed 84
Accrued management fees 85
Other accrued expenses and payables 35
--------
Total liabilities 2,563
--------
Net assets applicable to capital shares outstanding $188,469
========
NET ASSETS CONSIST OF:
Paid-in capital $160,739
Accumulated undistributed net investment income 725
Accumulated net realized gain on investments 8,192
Net unrealized appreciation of investments 18,813
--------
Net assets applicable to capital shares outstanding $188,469
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 12,865
========
Net asset value, redemption price, and offering price per share $ 14.65
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
YEAR ENDED MAY 31, 2005
INVESTMENT INCOME
Dividends $ 839
Interest 5,033
-------
Total income 5,872
-------
EXPENSES
Management fees 852
Administration and servicing fees 280
Transfer agent's fees 197
Custody and accounting fees 80
Postage 17
Shareholder reporting fees 4
Trustees' fees 7
Registration fees 35
Professional fees 29
Other 4
-------
Total expenses 1,505
Expenses paid indirectly (60)
-------
Net expenses 1,445
-------
NET INVESTMENT INCOME 4,427
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain:
Unaffiliated transactions 17,824
Affiliated transactions 52
Change in net unrealized appreciation/depreciation (3,838)
-------
Net realized and unrealized gain 14,038
-------
Increase in net assets resulting from operations $18,465
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA GROWTH AND TAX STRATEGY FUND
YEARS ENDED MAY 31,
2005 2004
-------------------------
FROM OPERATIONS
Net investment income $ 4,427 $ 4,569
Net realized gain on investments 17,876 6,985
Change in net unrealized appreciation/depreciation
of investments (3,838) 1,197
-------------------------
Increase in net assets resulting from operations 18,465 12,751
-------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,465) (4,421)
Net realized gains (13,663) (106)
-------------------------
Distributions to shareholders (18,128) (4,527)
-------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 6,987 9,102
Shares issued for dividends reinvested 16,551 4,050
Cost of shares redeemed (22,165) (21,546)
-------------------------
Increase (decrease) in net assets from capital
share transactions 1,373 (8,394)
-------------------------
Net increase (decrease) in net assets 1,710 (170)
NET ASSETS
Beginning of period 186,759 186,929
-------------------------
End of period $188,469 $186,759
=========================
Accumulated undistributed net investment income:
End of period $ 725 $ 763
=========================
CHANGE IN SHARES OUTSTANDING
Shares sold 478 629
Shares issued for dividends reinvested 1,129 282
Shares redeemed (1,522) (1,489)
-------------------------
Increase (decrease) in shares outstanding 85 (578)
=========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA GROWTH AND TAX 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 Growth and Tax Strategy
Fund (the Fund), which is classified as diversified under the 1940
Act. The Fund's investment objective is to seek a conservative balance
between income, the majority of which is exempt from federal income
tax, and the potential for long-term growth of capital to preserve
purchasing power.
A. SECURITY VALUATION - The value of each security is determined
(as of the close of trading on the New York Stock Exchange
(NYSE) on each business day the exchange is open) as set forth
below:
1. Equity securities, except as otherwise noted, traded
primarily on a domestic securities exchange or the Nasdaq
over-the-counter markets are valued at the last sales price
or official closing price on the exchange or primary market
on which they trade. Equity securities traded primarily on
foreign securities exchanges or markets are valued at the
last quoted sales price, or the most recently determined
official closing price calculated according to local market
convention, available at the time the Fund is valued. If no
last sale or official closing price is reported or
available, the average of the bid and asked prices is
generally used.
2. Equity securities trading in various foreign markets may take
place on days when the NYSE is closed. Further, when the
NYSE is open, the foreign markets may be closed. Therefore,
the calculation of the Fund's net asset value (NAV) may not
take place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
events affecting the values of foreign securities that occur
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE
on a day the Fund's NAV is calculated will not be reflected
in the value of the Fund's foreign securities. However, USAA
Investment Management Company (the Manager), an affiliate of
the Fund, 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
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
securities, such prices are not readily available. The
Service generally prices these securities based on methods
that include consideration of yields or prices of securities
of comparable quality, coupon, maturity, and type;
indications as to values from dealers in securities; and
general market conditions.
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).
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
Gains or losses from sales of investment securities are
computed on the identified cost basis. Dividend income, less
foreign taxes, if any, is recorded on the ex-dividend date. If
the ex-dividend date has passed, certain dividends from foreign
securities are recorded upon notification. Interest income is
recorded on the accrual basis. Discounts and premiums 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. The Fund did not invest in any repurchase
agreements as of May 31, 2005.
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
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
in U.S. dollars, foreign currency amounts are translated into
U.S. dollars on the following basis:
1. Purchases and sales of securities, income, and expenses at
the exchange rate obtained from an independent pricing
service on the respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at
the exchange rate obtained from an independent pricing
service on a daily basis.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from
investments.
Separately, net realized foreign currency gains/losses may
arise from sales of foreign currency, currency gains/losses
realized between the trade and settlement dates on security
transactions, and from the difference between amounts of
dividends, interest, and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent of the amounts
received. These net realized foreign currency gains/losses have
been reclassified from accumulated net realized gain/loss to
accumulated undistributed 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
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
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. 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 $58,000 and $2,000,
respectively, resulting in a total reduction in Fund expenses
of $60,000.
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.
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
(2) LINES OF CREDIT
- --------------------------------------------------------------------------------
Effective January 6, 2005, the Fund participates in a joint,
short-term, revolving, committed loan agreement of $300 million with
USAA Capital Corporation (CAPCO), an affiliate of the Manager. The
purpose of the agreement is to meet temporary or emergency cash needs,
including redemption requests that might otherwise require the
untimely disposition of securities. Subject to availability under the
agreement, the Fund may borrow from CAPCO an amount up to 5% of the
Fund's total assets at a rate per annum equal to the rate at which
CAPCO obtains funding in the capital markets, with no markup.
The USAA funds that are party to the loan agreement are assessed
facility fees by CAPCO based on the funds' assessed proportionate
share of CAPCO's operating expenses related to obtaining and
maintaining CAPCO's funding programs in total (in no event to exceed
0.09% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period.
Prior to January 6, 2005, the loan agreement with CAPCO was in the
amount of $400 million, and the Fund also participated with other USAA
funds in a joint, short-term, revolving, committed loan agreement of
$100 million with Bank of America and State Street Bank and Trust
Company (State Street), under which Bank of America and State Street
both committed $50 million. Subject to availability under its
agreement with Bank of America and State Street, the Fund could borrow
from Bank of America and State Street, at the federal funds rate plus
a 0.50% markup, an amount which, when added to outstanding borrowings
under the CAPCO agreement, did not exceed 25% of the Fund's total
assets. The USAA funds that were party to the loan agreement with Bank
of America and State Street were assessed facility fees in an annual
amount equal to 0.09% of the $100 million loan agreement, whether used
or not. The facility fees
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
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
$1,000, which represents 0.6% of total fees paid to CAPCO by the USAA
funds. The Fund had no borrowings under any of these agreements during
the year ended May 31, 2005.
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The character of any distributions made during the year from net
investment income or net realized gains is determined in accordance
with federal tax regulations and may differ from those determined in
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between
book-basis and tax-basis accounting resulted in reclassifications made
to the statement of assets and liabilities to increase paid-in capital
and decrease accumulated net realized gain on investments by $815,000.
This includes the utilization of earnings and profits distributed to
shareholders on redemptions 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* $ 645,000 $ 661,000
Tax-exempt income 3,849,000 3,760,000
Long-term realized capital gains 13,634,000 221,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
As of May 31, 2005, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed tax-exempt income $ 622,000
Undistributed ordinary income 2,549,000
Undistributed long-term capital gains 5,789,000
Unrealized appreciation 18,769,000
The difference between book-basis and tax-basis 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 are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2005, were
$222,444,000 and $238,651,000, respectively.
As of May 31, 2005, the cost of securities, including short-term
securities, for federal income tax purposes, was $171,020,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2005, for federal income tax purposes, were $19,126,000 and
$357,000, respectively, resulting in net unrealized appreciation of
$18,769,000.
(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
35
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
with cash collateral in an amount at least equal to the fair value of
the securities loaned, initially in an amount at least equal to 102%
of the fair value of domestic securities loaned and 105% of the fair
value of international securities loaned. Cash collateral is invested
in high-quality short-term investments. The Fund and MetWest retain
80% and 20%, respectively, of the income earned from the investment of
cash received as collateral. MetWest receives no other fees from the
Fund for its services as securities-lending agent. Risks to the Fund
in securities-lending transactions are that the borrower may not
provide additional collateral when required or return the securities
when due, and that the value of the short-term investments will be
less than the amount of cash collateral required to be returned to the
borrower. The Fund had no securities-lending transactions during the
year ended May 31, 2005.
(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.
36
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
The investment management fee for the Fund is composed of a
base fee and a performance adjustment that increases or
decreases the base fee depending upon the performance of the
Fund relative to the performance of the Lipper 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 0.50% 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
- --------------------------------------------------------------------------------
+/-0.20% to 0.50% +/-0.04%
+/-0.51% to 1.00% +/-0.05%
+/-1.01% and greater +/-0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
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
37
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
Index over that period, even if the Fund had overall negative
returns during the performance period.
For the year ended May 31, 2005, the Fund incurred total
management fees, paid or payable to the Manager, of $852,000,
which is net of a performance adjustment of $(81,000) that
decreased the base management fee of 0.50% by 0.04%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with Loomis, Sayles & Company,
L.P. (Loomis Sayles), under which Loomis Sayles directs the
investment and reinvestment of the portion of the Fund's assets
invested in blue chip stocks (as allocated from time to time by
the Manager). The Manager (not the Fund) pays Loomis Sayles a
subadvisory fee in the annual amount of 0.20% of the portion of
the Fund's average net assets that Loomis Sayles manages. Prior
to July 1, 2004, RCM Capital Management LLC (RCM) was the
subadviser of the Fund and was paid subadvisory fees in the
annual amount of 0.20% of the portion of the Fund's average net
assets that RCM managed. For the year ended May 31, 2005, the
Manager incurred subadvisory fees, paid or payable to Loomis
Sayles and RCM, of $166,000 and $15,000, respectively.
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 $280,000.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a
USAA Shareholder Account Services (SAS), an affiliate of the
Manager, provides transfer agent services to the Fund based on
an annual charge of $25.50 per shareholder account plus out-of-
38
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
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
$197,000.
E. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(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.
(8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2005, in accordance with affiliated
transaction procedures approved by the Trust's Board of Trustees,
purchases and sales of security transactions were executed between the
Fund and the following affiliated USAA fund at the then-current market
price with no brokerage commissions incurred:
NET REALIZED
COST TO GAIN (LOSS)
SELLER PURCHASER PURCHASER TO SELLER
--------------------------------------------------------------------------------
USAA Growth and Tax USAA Intermediate-Term Fund $2,118,000 $ 66,000
Strategy Fund
USAA Growth and Tax USAA Long-Term Fund 3,523,000 (14,000)
Strategy Fund
39
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
(9) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------------------------
Net asset value at beginning of period $ 14.61 $ 13.99 $ 14.23 $ 15.87 $ 17.28
-----------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .34 .35 .35 .41 .49
Net realized and unrealized gain (loss) 1.15 .62 (.17) (1.60) (1.42)
-----------------------------------------------------------------
Total from investment operations 1.49 .97 .18 (1.19) (.93)
-----------------------------------------------------------------
Less distributions:
From net investment income (.35) (.34) (.37) (.45) (.48)
From realized capital gains (1.10) (.01) (.05) - -
-----------------------------------------------------------------
Total distributions (1.45) (.35) (.42) (.45) (.48)
-----------------------------------------------------------------
Net asset value at end of period $ 14.65 $ 14.61 $ 13.99 $ 14.23 $ 15.87
=================================================================
Total return (%)* 10.40 6.96 1.46 (7.59) (5.47)
Net assets at end of period (000) $188,469 $186,759 $186,929 $205,108 $238,813
Ratio of expenses to average net assets (%)**(a) .81 .80 .91 .83 .70
Ratio of net investment income to average
net assets (%)** 2.37 2.41 2.67 2.75 2.91
Portfolio turnover (%) 119.99 43.22 52.38 31.81 35.69
* 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 $186,655,000.
(a) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses
paid indirectly decreased the expense ratios as follows:
(.03%) (.01%) (.00%)(+) (.02%) (.01%)
+ Represents less than 0.01% of average net assets.
40
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA GROWTH AND TAX 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
41
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA GROWTH AND TAX 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 $1,036.00 $3.81
Hypothetical
(5% return before expenses) 1,000.00 1,021.18 3.79
*Expenses are equal to the Fund's annualized expense ratio of 0.75%, which is
net of any expenses paid indirectly, multiplied by the average account value
over the period, multiplied by 182 days/365 days (to reflect the one-half year
period). The Fund's ending account value on the first line in the table is
based on its actual total return of 3.60% for the six-month period of December
1, 2004, through May 31, 2005.
42
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA GROWTH AND TAX 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
43
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
at which the renewal of the Investment Advisory Agreement and
Subadvisory Agreement is considered, particular focus is given to
information concerning Fund performance, comparability of fees and
total expenses, and profitability. However, the Board noted that the
evaluation process with respect to the Manager and the Subadviser is
an ongoing one. In this regard, the Board's and its committees'
consideration of the Investment Advisory Agreement and Subadvisory
Agreement included certain types of information previously received
at such 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
44
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
regulatory requirements, and other services necessary for the
operation of the Fund and the Trust.
The Board considered the Manager's management style and the
performance of its duties under the Investment Advisory Agreement.
The Board considered the level and depth of knowledge of the Manager,
including the professional experience and qualifications of 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," was also
considered. The Manager's role in coordinating the activities of the
Fund's other service providers was also considered. The Board
considered the Manager's financial condition and that it had the
financial wherewithal to continue to provide the same scope and high
quality of services under the Investment Advisory Agreement. In
reviewing the Investment Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its
affiliates in managing investment companies, including the Fund.
The Board also reviewed the compliance and administrative services
provided to the Fund by the Manager, including oversight of the
Fund's day-to-day operations and oversight of Fund accounting. The
Manager and its affiliates provide compliance and administrative
services to the Fund. The Trustees, guided also by information
obtained from their experiences as directors/trustees of the Fund and
other investment companies managed by the Manager, also focused on
the quality of the Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE. In connection with its consideration of the
Investment Advisory Agreement, the Board evaluated the Fund's
advisory fees and total expense ratio as compared to other open-end
investment companies deemed to be comparable to the Fund as
determined by the independent third party in its report. The Fund's
expenses were compared to (i) a group of investment companies
45
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
chosen by the independent third party to be comparable to the Fund
based upon certain factors, including fund type, comparability of
investment objective and classification, sales load type (in this
case, investment companies with no sales loads), asset size, and
expense components (the "expense group") and (ii) a larger group of
investment companies that includes all no-load retail open-end
investment companies in the same investment classification/objective
as the Fund regardless of asset 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 -- was below the median of its expense group and below the
median of its expense universe. The data indicated that the Fund's
total expenses were lower than the median of its expense group and of
its expense universe. The Board took into account the various
services provided to the Fund by the Manager and its affiliates. The
Board also noted the level and method of computing the management
fee, including any performance adjustment to such fee. The Trustees
also took into account that the subadvisory fees under the
Subadvisory Agreement are paid by the Manager.
In considering the Fund's performance, the Board of Trustees noted
that the Board reviews at its regularly scheduled meetings
information about the Fund's performance results. The Trustees also
reviewed various comparative data provided to them in connection with
their consideration of the renewal of the Investment Advisory
Agreement, including, among other information, a comparison of the
Fund's average annual total return with its Lipper index and with
that of other mutual funds deemed to be in its peer group by the
independent third party in its report (the "performance universe").
The Fund's performance universe consisted of the Fund and all retail
and institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or
primary channel of distribution. This comparison indicated that the
Fund's performance exceeded the average of its performance universe
for the one- and three-year periods ended December 31, 2004, exceeded
its Lipper index for the one-year
46
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
period ended December 31, 2004, and was below 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 pays the subadvisory fees. The
Trustees reviewed the profitability of the Manager's relationship
with the Fund before tax expenses. In reviewing the overall
profitability of the management fee to the Manager, the Board also
considered the fact that affiliates provide shareholder servicing and
administrative services to the Fund for which they receive
compensation. The Board also considered the possible direct and
indirect benefits to the Manager from its relationship with the
Trust, including that the Manager may derive reputational and other
benefits from its association with the Fund. The Trustees recognized
that the Manager should be entitled to earn a reasonable level of
profits in exchange for the level of services it provides to the Fund
and the entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE. The Board considered whether there should be
changes in the management fee rate or structure in order to enable
the Fund to participate in any economies of scale that the Manager
may experience as a result of growth in the Fund's assets. The Board
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 also
47
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
took into account other economies of scale achieved by the Fund with
respect to certain fixed expenses as a result of the Fund's asset
size. The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding
the Fund's Investment Advisory Agreement with the Manager, among
others: (i) the Manager has demonstrated that it possesses the
capability and resources to perform the duties required of it under
the Investment Advisory Agreement; (ii) the Manager maintains an
appropriate compliance program; (iii) the performance of the Fund is
reasonable in relation to the performance of funds with similar
investment objectives and to relevant indices; (iv) the Fund's
advisory expenses are reasonable in relation to those of similar
funds and to the services to be provided by the Manager; and (v) the
Manager's level of profitability from its relationship with the Fund
is reasonable. Based on 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
48
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
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 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
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
49
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA GROWTH AND TAX STRATEGY FUND
MAY 31, 2005
of the Fund, to the extent available. However, for the reasons noted
above, this information was less significant to the Board's
consideration of the Subadvisory Agreement than the other factors
considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that the Subadviser
charges to comparable clients. The Board considered that the Fund
pays a management fee to the Manager and that, in turn, the Manager
pays a subadvisory fee to the Subadviser.
As noted above, the Board considered the Fund's performance during
the one-, three-, and five-year periods ended December 31, 2004, as
compared to the Fund's respective peer group and noted that the Board
reviews at its regularly scheduled meetings information about the
Fund's performance results. The Board 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.
50
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.
51
. . . 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.
52
. . . 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.
53
. . . 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.
54
. . . 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.
55
. . . 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.
56
. . . 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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- --------------------------------------------------------------------------------
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USAA(R) San Antonio, Texas 78288 PRSRT STD
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USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23403-0705 (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
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By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: August 2, 2005
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*Print the name and title of each signing officer under his or her signature.