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 CORNERSTONE STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2005
[LOGO OF USAA]
USAA(R)
USAA CORNERSTONE
STRATEGY Fund
[GRAPHIC OF USAA CORNERSTONE STRATEGY FUND]
A n n u a l R e p o r t
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MAY 31, 2005
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
FUND RECOGNITION 11
INVESTMENT OVERVIEW 12
FINANCIAL INFORMATION
Distributions to Shareholders 17
Report of Independent Registered Public Accounting Firm 18
Portfolio of Investments 19
Notes to Portfolio of Investments 42
Financial Statements 47
Notes to Financial Statements 50
EXPENSE EXAMPLE 67
ADVISORY AGREEMENTS 69
DIRECTORS' AND OFFICERS' INFORMATION 78
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2005, USAA. All rights reserved.
2
M E S S A G E
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from the PRESIDENT
"
IN THE CURRENT INVESTMENT
ENVIRONMENT . . . INVESTORS MAY
[PHOTO OF CHRISTOPHER W. CLAUS] FIND THAT QUALITY, DIVERSIFICATION,
SAFETY, LIQUIDITY, AND PATIENCE
ARE THE SMARTEST STRATEGIES.
"
June 2005
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As I write to you, inflation - a key driver of both the stock
and bond markets - appears to be under control. The U.S.
economy is in good health, and I expect the gross domestic
product (GDP) to grow between 3% and 3.5% in 2005. Meanwhile,
the Federal Reserve Board (the Fed) shows signs of nearing the
end of its interest-rate tightening schedule; it is likely to
leave the federal funds rate near 3.5% or 3.75%. Oil prices
have moved higher, rising above $50 a barrel and continuing to
constrain economic growth.
Although U.S. equity valuations are trading at historically
high levels for a rising interest-rate environment,
international valuations appear a little more reasonable.
Remarkably, long-term interest rates have remained low, which
has helped to support the stock market. Why? The bond market
seems to believe that the economy will slow. Absent inflation
and a rising dollar, longer-term interest rates actually
declined in 2005, increasing the value of longer-term bonds.
In my opinion, longer-term rates will continue to have a
significant impact on the direction of the stock and bond
markets over the next few quarters.
The growth in the U.S. budget deficit is of some concern.
Sooner or later, the government must cut spending and/or raise
taxes to pay its bills - both would be challenging for the
U.S. economy over the long term.
3
. . . C O N T I N U E D
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Consumers have their own budget deficits. Some pundits scoff
at the significance; others predict a day of reckoning. I
believe Americans have to curb their spending and start saving
more to support their eventual retirements. And while greater
savings may be a plus, a slowdown in consumer spending would
hurt economic growth.
Against this backdrop, investors may find that quality,
diversification, safety, liquidity, and patience are the
smartest strategies. For short-term investors, money markets
provide yields near 3%, with relative safety and liquidity.
Investors with longer-term horizons could see annual returns
of 4% to 5% a year in bonds, particularly if they reinvest the
interest. Stocks are likely to generate only modest gains
going forward; we see the equity markets providing
mid-single-digit returns over the next several years.
In the current investment environment, it would be prudent to
take what the market offers us and resist the urge to reach
for higher returns at dramatically greater risk. Sometimes
risk is simply risk and is not always rewarded with higher
returns. We will continue to look for value in our
investments, examine the risks, and not stray from our
investment discipline.
From everyone at USAA, thank you for your business and the
opportunity to serve your investment needs.
Sincerely,
/s/ CHRISTOPHER W. CLAUS
Christopher W. Claus
President and Vice Chairman of the Board
AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR
INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY
INVESTING IN THE FUND.
Past performance is no guarantee of future results. o As
interest rates rise, existing bond prices fall.
4
M A N A G E R S '
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COMMENTARY on the Fund
MARK W. JOHNSON, CFA MATTHEW E. MEGARGEL, CFA
USAA Investment Management Company Wellington Management Company, LLP
Precious Metals and Minerals Securities U.S. Stocks
MARGARET "DIDI" WEINBLATT, Ph.D., CFA JAMES P. HOFFMANN
USAA Investment Management Company Wellington Management Company, LLP
Bonds and Money Market Instruments Real Estate Securities
ARNOLD J. ESPE, CFA DAVID R. MANNHEIM
USAA Investment Management Company MFS Investment Management
Bonds and Money Market Instruments International Stocks
STUART H. WESTER, CFA MARCUS L. SMITH
USAA Investment Management Company MFS Investment Management
U.S. Stocks International Stocks
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HOW DID THE FUND PERFORM?
The USAA Cornerstone Strategy Fund had a total return of 9.42%
for the year ended May 31, 2005. This compares to a 11.31%
return for the Lipper Global Flexible Portfolio Funds Average,
10.75% for the Lipper Global Flexible Funds Index, and 8.23%
for the S&P 500 Index.
HOW WERE THE FUND'S ASSETS ALLOCATED AMONG THE VARIOUS ASSET CLASSES?
We began the period with roughly 56% of net assets in U.S.
stocks, 25% in international stocks, 19% in bonds and money
market instruments, and no allocation to real estate or
precious metals and minerals securities. In the first half of
the reporting year, we shifted 5% of net assets from U.S.
stocks to international stocks given the more attractive
valuation characteristics of overseas stocks relative to their
U.S. counterparts. As a result of this shift and the
performance of individual managers within their respective
markets, we ended the period with 52% in U.S.
REFER TO PAGE 14 FOR BENCHMARK DEFINITIONS.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
5
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equities, 29% in international equities, 19% in bonds and
money market instruments, and no allocation to real estate or
precious metals and minerals securities.
DESCRIBE THE MARKET ENVIRONMENT FOR U.S. STOCKS, AS WELL AS YOUR OVERALL
STRATEGY.
While it was a positive reporting year for U.S. stocks, the
great majority of returns were achieved in the fourth quarter
of 2004. For the 12-month period, nine of the 10 economic
sectors within the Russell 3000 Index generated positive
returns, led by energy, which benefited from higher oil
prices. Technology stocks lagged due to disappointing earnings
forecasts from a number of key companies in the sector. The
U.S. stock portion of the Fund was favorably positioned to
outperform the Russell 3000 Index due to superior stock
selection and overweight allocations to both the energy and
industrials sectors.
HOW DID THE FUND'S U.S. STOCKS PORTION PERFORM?
Climbing oil prices helped make Exxon Mobil Corp. the greatest
single contributor to performance. Other strong performers in
the energy sector included Chesapeake Energy Corp. and
ConocoPhillips. Given our view that high oil prices will
persist, we have added to smaller names and oilfield services
stocks with greater earnings leverage. Holdings in consumer
staples and consumer discretionary sectors contributed
positively to our return, led by Altria Group, Inc. and
Michaels Stores, Inc., while General Electric Co. and
Precision Castparts Corp. were contributors to our strong
performance in the industrials sector.
THE RUSSELL 3000 INDEX MEASURES THE PERFORMANCE OF THE 3,000
LARGEST U.S. COMPANIES BASED ON TOTAL MARKET CAPITALIZATION,
WHICH REPRESENTS APPROXIMATELY 98% OF THE INVESTABLE U.S.
EQUITY MARKET. WELLINGTON MANAGEMENT AND USAA UTILIZE THE
RUSSELL 3000 AS A FINANCIAL MARKET PERFORMANCE BENCHMARK IN
MANAGING THE U.S. STOCK PORTION OF THE FUND.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-41.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
In the health care sector, negative sentiment surrounding the
pharmaceutical industry weighed on shares of Pfizer, Inc., the
largest detractor from our return, and Eli Lilly and Co.
Shares of Biogen IDEC fell when Tysabri, the promising new
multiple sclerosis treatment, developed in collaboration with
Elan, was pulled from the market following the death of a
patient. We sold the stock prior to the end of the reporting
period. Other areas that hurt the return relative to the
Russell 3000 Index included weaker stock selection in
materials and financials as well as our underweight exposure
to utilities.
WHAT ARE YOUR STRATEGIES MOVING FORWARD IN THE U.S. STOCK MARKET?
As the economic cycle matures, we will continue to look for
attractively valued stocks with emphasis on superior earnings
quality. We remain underweight in financials due to concerns
about net-interest margins and regulatory scrutiny. We
continue to be underweight in utilities given lofty valuations
and rising short-term interest rates. We remain overweight in
energy with a generally favorable view of oil and gas markets
longer term, but are cautious about a near-term trading top in
the sector as inventory levels and production rise. We are
underweight in telecommunications services due to stiff
competitive trends and pricing margins, and slightly
overweight in information technology, with sizable positions
in Microsoft Corp., Dell, Inc., and Cisco Systems, Inc., where
fundamentals remain solid.
CAN YOU DESCRIBE THE MARKET ENVIRONMENT OVERSEAS?
After a strong start to the reporting year, most overseas
markets have struggled in 2005 while adjusting to the fact
that earnings growth is decelerating after reaching a cyclical
peak in 2004.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-41.
7
. . . C O N T I N U E D
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HOW DID THE INTERNATIONAL STOCKS PORTION OF THE FUND PERFORM DURING THE PERIOD?
Even though the technology sector struggled overall, our stock
selection there was the most significant positive contributor
to the performance of the international stocks portion. Our
holding in Samsung Electronics Co. Ltd. (Korea) did very well
given the company's world leadership in semiconductors, LCD TV
components, and flash memory, which is used in MP3 players.
Canon, Inc. (Japan) also performed well on a relative basis.
Retailing was another area where our stock selection was good,
led by Hennes & Mauritz AB "B" (Sweden) and Esprit Holdings
Ltd. (Hong Kong). H&M continued to expand profit margins based
on good inventory control, and Esprit Holdings Ltd. had strong
growth in same-store sales while expanding the number of
stores, especially in Germany.
Two other sectors that had a positive impact were
transportation, led by Canadian National Railway Co. (Canada),
and energy, where we overcame an underweight position in this
top-performing sector through excellent stock selection. We
owned EnCana Corp. (Canada), a company that has some
particularly productive oilfields in western Canada that are
exceeding expectations.
Leisure, however, was a particularly poor sector. In the first
half of the reporting year, our holdings in British Sky
Broadcasting Group plc (U.K.) and News Corp., Inc. "B"
(Australia) were large detractors, and both were sold. The
stock of Nintendo Co. Ltd. (Japan), the world's largest
manufacturer of handheld game machines, traded lower after
management reported that software providers had delayed the
release of games to be used in its DS system, a small,
handheld device that was introduced last fall. Our original
thesis, that Nintendo Co. Ltd. is well-positioned to
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
8
. . . C O N T I N U E D
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COMMENTARY on the Fund
build earnings through a new game cycle, remains intact.
Another holding that we were disappointed by and sold was NOK
Corp. (Japan), which among other things suffered from a
lagging auto seals business.
WHAT'S YOUR OUTLOOK FOR INTERNATIONAL STOCK MARKETS?
Looking out the next five years, we believe earnings growth
will be in the 8% to 10% range. However, there is a lot of
volatility within industry sectors, an environment that favors
our fundamental approach to investing on a company-by-company
basis.
WHAT WAS THE BOND MARKET ENVIRONMENT DURING THE PERIOD?
The dominating theme was the decline in long-term interest
rates despite the fact that the Federal Reserve Board (the
Fed) tripled the short-term federal funds rate, from 1% to 3%,
through 0.25% hikes at eight consecutive meetings of the
Federal Open Market Committee.
WHAT DROVE PERFORMANCE OF THE BOND PORTION OF THE FUND?
In this environment, the bond portion of the Fund benefited
from its allocation among bond market sectors, but was hurt by
its defensive posture on long-term interest rates.
Specifically, we were underweight in long-duration bonds,
those with maturities from 10 years to 30 years, and these had
the best total return because long-term interest rates fell.
Overall, the positive total return from coupon income and
price appreciation from our longer-term bonds more than offset
price declines on shorter-term bonds. Additionally, the fact
that we had a good part of our
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-41.
9
. . . C O N T I N U E D
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HISTORICAL YIELD CURVE*
[CHART OF HISTORICAL YIELD CURVE]
MATURITY 5/28/04 5/31/05 CHANGE
- -------- ------- ------- --------
3 MONTH 1.060% 2.940% 1.8798%
6 MONTH 1.378 3.108 1.7299
2 YEAR 2.532 3.574 0.0413
3 YEAR 3.063 3.626 0.5622
5 YEAR 3.791 3.735 -0.0557
10 YEAR 4.647 3.981 -0.6658
30 YEAR 5.345 4.320 -1.0241
[END CHART]
*YIELD OF TREASURY BILLS, NOTES, AND BONDS. SOURCE: BLOOMBERG
L.P.
shorter-term exposure in floating-rate notes helped, because
they did not suffer the price erosion of fixed-rate notes as
rates rose.
HOW WAS THE BOND PORTION ALLOCATED BY SECTOR?
We were overweight in corporate bonds, and this proved
beneficial as yield spreads relative to Treasuries narrowed.
Within the corporate sector, we found the most value in
utilities, insurance, real estate investment trusts (REITs),
and aircraft-backed paper.
Our overweight exposure to mortgage-backed securities also
helped, as did our underweight position in traditional U.S.
Treasuries.
10
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COMMENTARY on the Fund
Our holdings in U.S. Treasury inflation-protected securities,
which have been such strong performers over the past few
years, proved detrimental during this reporting year as
inflation expectations fell.
WHAT'S YOUR OUTLOOK FOR THE U.S. BOND MARKET?
As of June 2005, the yield on the 10-year U.S. Treasury bond
is again below 4%. Our view remains that yields this low do
not adequately reflect inflation risk. Given that we expect a
pickup in inflation, we continue to be positioned for an
increase in long-term yields. We should note that we're not
overly bearish on long-term interest rates. We just believe
that a 10-year Treasury yield under 4% doesn't offer much
value, while one closer to 5% does. We remain overweight in
corporate bonds given our view that they will outperform over
the long term, and continue to find value in mortgage-backed
and asset-backed securities on a case-by-case basis.
DO YOU ANTICIPATE ANY CHANGES IN THE FUND'S ASSET ALLOCATION?
In early June 2005, just after the new reporting year began,
we reduced our allocation to U.S. stocks and international
stocks by 5% of Fund net assets each. While we remain positive
on stocks, this move reflects a less favorable view on their
risk/reward ratio. These assets were shifted to money market
instruments, and we expect to move them to longer-term bonds
when the overall bond market appears to be more in balance.
On behalf of all the managers working on the USAA Cornerstone
Strategy Fund, thank you for your continued support.
11
F U N D
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RECOGNITION
USAA CORNERSTONE STRATEGY FUND
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USAA CORNERSTONE STRATEGY FUND
OVERALL MORNINGSTAR RATINGS(TM)
out of 1,205 large blend funds for the period ending May 31, 2005:
OVERALL RATING
* * * *
3-YEAR 5-YEAR 10-YEAR
* * * * * * * * * * * * *
out of 1,205 funds out of 906 funds out of 323 funds
The Overall Morningstar Rating for a fund is derived from a weighted
average of the performance figures associated with its 3-, 5-, and
10-year (if applicable) Morningstar Ratings metrics. Ratings are
based on risk-adjusted returns.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH FUND WITH AT LEAST
A THREE-YEAR HISTORY, MORNINGSTAR CALCULATES A MORNINGSTAR RATING(TM) BASED ON A
MORNINGSTAR RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A FUND'S
MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES CHARGES, LOADS, AND
REDEMPTION FEES), PLACING MORE EMPHASIS ON DOWNWARD VARIATIONS AND REWARDING
CONSISTENT PERFORMANCE. THE TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS
RECEIVE 5 STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS,
THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10% RECEIVE 1 STAR. (EACH SHARE
CLASS IS COUNTED AS A FRACTION OF ONE FUND WITHIN THIS SCALE AND RATED
SEPARATELY, WHICH MAY CAUSE SLIGHT VARIATIONS IN THE DISTRIBUTION PERCENTAGES.)
12
I N V E S T M E N T
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OVERVIEW
USAA CORNERSTONE STRATEGY FUND
OBJECTIVE
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Achieve a positive, inflation-adjusted rate of return and a
reasonably stable value of Fund shares, thereby preserving
purchasing power of shareholders' capital.
TYPES OF INVESTMENTS
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Using preset target ranges, the Fund's strategy is to invest
its assets mostly in stocks (divided into the categories of
U.S., international, real estate, and precious metals and
minerals) and, to a much lesser extent, in bonds and money
market instruments.
- --------------------------------------------------------------------------------
5/31/05 5/31/04
- --------------------------------------------------------------------------------
Net Assets $1,543.4 Million $1,350.0 Million
Net Asset Value Per Share $26.53 $25.80
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AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/05
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
9.42% 4.02% 7.48%
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.
13
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CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
S&P 500 Lipper Global Flexible Lipper Global Flexible USAA Cornerstone
Index Portfolio Funds Average Funds Index Strategy Fund
--------- ----------------------- ---------------------- ----------------
5/31/1995 $10,000.00 $10,000.00 $10,000.00 $10,000.00
6/30/1995 10,231.87 10,130.79 10,096.24 10,110.47
7/31/1995 10,571.03 10,462.24 10,366.40 10,349.77
8/31/1995 10,597.41 10,455.42 10,358.84 10,408.45
9/30/1995 11,044.39 10,655.68 10,540.32 10,629.61
10/31/1995 11,004.93 10,597.92 10,452.33 10,435.53
11/30/1995 11,487.48 10,846.89 10,678.49 10,715.79
12/31/1995 11,708.76 11,090.84 10,919.78 11,112.69
1/31/1996 12,106.81 11,279.90 11,186.50 11,436.41
2/29/1996 12,219.44 11,329.37 11,183.75 11,496.53
3/31/1996 12,337.09 11,447.40 11,272.07 11,602.89
4/30/1996 12,518.81 11,674.81 11,516.79 11,667.63
5/31/1996 12,841.12 11,805.98 11,589.87 11,778.62
6/30/1996 12,890.07 11,822.86 11,637.88 11,847.99
7/31/1996 12,320.91 11,521.37 11,353.99 11,557.59
8/31/1996 12,581.19 11,754.34 11,521.50 11,816.66
9/30/1996 13,288.66 12,139.95 11,844.84 12,147.70
10/31/1996 13,655.02 12,249.40 11,990.85 12,325.22
11/30/1996 14,686.27 12,721.86 12,501.28 12,861.22
12/31/1996 14,395.34 12,725.70 12,519.01 13,098.83
1/31/1997 15,294.21 12,946.48 12,750.78 13,295.88
2/28/1997 15,414.29 13,045.05 12,824.39 13,359.92
3/31/1997 14,782.12 12,841.05 12,614.77 13,153.02
4/30/1997 15,663.81 12,938.26 12,738.13 13,231.84
5/31/1997 16,621.46 13,538.95 13,273.71 13,773.73
6/30/1997 17,360.38 13,966.42 13,645.58 14,271.27
7/31/1997 18,741.38 14,568.50 14,206.76 14,939.78
8/31/1997 17,692.24 14,129.28 13,799.09 14,494.36
9/30/1997 18,660.63 14,832.00 14,387.06 15,323.77
10/31/1997 18,038.12 14,286.94 13,876.92 14,929.54
11/30/1997 18,872.46 14,381.56 13,920.10 14,990.98
12/31/1997 19,196.33 14,496.04 14,039.51 15,147.77
1/31/1998 19,408.45 14,599.52 14,073.78 15,142.38
2/28/1998 20,807.46 15,241.22 14,708.32 15,671.41
3/31/1998 21,872.12 15,730.44 15,201.87 16,168.06
4/30/1998 22,096.10 15,846.63 15,335.96 16,227.44
5/31/1998 21,716.82 15,680.33 15,204.62 16,135.67
6/30/1998 22,598.30 15,736.43 15,192.71 16,043.90
7/31/1998 22,359.47 15,595.61 15,044.16 15,675.34
8/31/1998 19,129.05 13,845.03 13,379.56 14,050.08
9/30/1998 20,355.53 14,124.35 13,593.73 14,324.69
10/31/1998 22,008.71 14,780.32 14,303.54 14,812.27
11/30/1998 23,342.07 15,415.12 14,943.99 15,238.20
12/31/1998 24,686.28 15,878.37 15,301.81 15,452.12
1/31/1999 25,718.19 16,076.24 15,483.50 15,434.51
2/28/1999 24,919.01 15,641.18 15,106.94 15,017.84
3/31/1999 25,915.72 16,136.49 15,598.85 15,158.69
4/30/1999 26,919.30 16,823.71 16,436.85 16,132.88
5/31/1999 26,284.33 16,545.53 16,175.01 16,015.51
6/30/1999 27,739.06 17,126.81 16,774.60 16,285.46
7/31/1999 26,876.69 17,159.10 16,763.05 16,114.32
8/31/1999 26,743.63 17,111.90 16,704.10 15,940.78
9/30/1999 26,011.39 17,103.70 16,612.81 15,723.86
10/31/1999 27,656.70 17,508.45 16,949.63 15,922.19
11/30/1999 28,218.88 18,096.25 17,544.72 16,064.74
12/31/1999 29,878.59 19,337.31 18,724.47 16,708.74
1/31/2000 28,377.60 18,903.90 18,341.87 16,232.82
2/29/2000 27,840.98 19,609.32 19,362.33 16,091.33
3/31/2000 30,562.88 19,899.83 19,268.28 17,081.76
4/30/2000 29,643.69 19,268.86 18,623.36 16,933.84
5/31/2000 29,035.99 18,936.59 18,330.86 16,895.25
6/30/2000 29,751.10 19,645.78 18,987.94 17,242.55
7/31/2000 29,286.39 19,253.00 18,753.47 17,104.17
8/31/2000 31,104.47 19,908.77 19,393.07 17,463.42
9/30/2000 29,462.78 19,398.26 18,820.93 16,997.73
10/31/2000 29,337.60 19,026.41 18,456.18 16,844.71
11/30/2000 27,026.52 18,363.54 17,743.07 16,538.69
12/31/2000 27,159.11 18,993.92 18,461.33 17,167.59
1/31/2001 28,122.11 19,425.47 18,699.98 17,470.19
2/28/2001 25,559.54 18,558.75 17,756.97 16,817.91
3/31/2001 23,941.23 17,780.34 16,881.05 16,253.06
4/30/2001 25,800.23 18,544.58 17,741.82 17,053.27
5/31/2001 25,973.31 18,508.33 17,606.10 16,992.75
6/30/2001 25,341.38 18,334.98 17,348.79 16,730.50
7/31/2001 25,091.82 18,125.29 17,103.18 16,770.84
8/31/2001 23,522.61 17,786.00 16,680.80 16,380.82
9/30/2001 21,623.25 16,428.39 15,581.03 15,244.39
10/31/2001 22,035.82 16,873.89 15,949.21 15,392.32
11/30/2001 23,725.70 17,598.73 16,525.43 16,132.02
12/31/2001 23,933.67 17,858.21 16,545.79 16,357.44
1/31/2002 23,584.59 17,611.49 16,438.76 16,091.58
2/28/2002 23,129.65 17,543.34 16,303.90 16,182.53
3/31/2002 23,999.64 18,182.16 16,756.79 16,728.24
4/30/2002 22,545.24 18,025.29 16,531.02 16,504.36
5/31/2002 22,379.73 18,042.49 16,725.46 16,490.37
6/30/2002 20,786.17 17,414.92 16,095.59 15,902.67
7/31/2002 19,166.28 16,219.61 15,142.80 15,000.15
8/31/2002 19,291.75 16,342.97 15,218.14 15,119.09
9/30/2002 17,197.22 15,253.12 14,282.04 14,258.54
10/31/2002 18,709.19 15,820.61 14,883.32 14,783.26
11/30/2002 19,809.32 16,610.26 15,480.60 15,398.94
12/31/2002 18,646.16 16,176.45 15,086.86 15,007.06
1/31/2003 18,158.64 15,960.41 14,847.70 14,587.79
2/28/2003 17,885.78 15,784.80 14,692.36 14,385.38
3/31/2003 18,058.95 15,776.89 14,676.78 14,378.15
4/30/2003 19,545.77 16,805.18 15,530.25 15,288.98
5/31/2003 20,574.60 17,815.88 16,361.28 16,062.47
6/30/2003 20,837.43 18,013.36 16,559.12 16,293.79
7/31/2003 21,204.99 18,145.72 16,688.44 16,416.68
8/31/2003 21,617.72 18,526.77 17,040.74 16,763.67
9/30/2003 21,388.83 18,809.03 17,301.29 16,770.90
10/31/2003 22,598.17 19,550.93 17,963.22 17,544.38
11/30/2003 22,796.77 19,816.52 18,251.37 17,819.08
12/31/2003 23,991.50 20,671.91 18,862.76 18,565.45
1/31/2004 24,431.77 21,044.71 19,289.21 18,798.71
2/29/2004 24,771.25 21,383.77 19,560.41 19,134.01
3/31/2004 24,397.58 21,483.25 19,648.35 18,973.65
4/30/2004 24,015.09 20,905.07 19,081.71 18,645.63
5/31/2004 24,343.99 20,986.26 19,169.92 18,806.00
6/30/2004 24,817.22 21,307.98 19,437.04 19,177.74
7/31/2004 23,995.94 20,768.12 18,941.60 18,616.48
8/31/2004 24,092.10 20,842.95 19,015.97 18,623.77
9/30/2004 24,353.08 21,279.09 19,472.72 18,951.78
10/31/2004 24,725.14 21,694.84 19,829.86 19,228.77
11/30/2004 25,725.23 22,748.20 20,747.97 20,023.28
12/31/2004 26,600.35 23,391.06 21,338.60 20,701.99
1/31/2005 25,951.98 23,031.45 20,959.80 20,352.95
2/28/2005 26,497.82 23,534.42 21,451.69 20,833.85
3/31/2005 26,029.08 23,159.26 21,052.47 20,477.05
4/30/2005 25,535.66 22,920.38 20,832.04 20,166.80
5/31/2005 26,347.46 23,322.52 21,231.25 20,577.88
[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.
14
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
The graph on page 13 illustrates the comparison of a $10,000
hypothetical investment in the USAA Cornerstone Strategy Fund
to the following benchmarks:
o The S&P 500 Index is an unmanaged index representing the
weighted average performance of a group of 500 widely held,
publicly traded stocks. It is not possible to invest
directly in the S&P 500 Index.
o The Lipper Global Flexible Portfolio Funds Average is an
average performance level of all global flexible portfolio
funds, reported by Lipper Inc., an independent organization
that monitors the performance of mutual funds.
o The Lipper Global Flexible Funds Index tracks the total
return performance of the 10 largest funds within the
Lipper Global Flexible Portfolio Funds category.
15
. . . C O N T I N U E D
========================--------------------------------------------------------
- ---------------------------------------------------------------------------
TOP 3 HOLDINGS*
IN EACH CATEGORY
(% of Net Assets)
- ---------------------------------------------------------------------------
INTERNATIONAL STOCKS
Reckitt Benckiser plc 1.2%
Roche Holdings AG 0.9%
Total S.A. 0.8%
BONDS
Freddie Mac, Pool C01491 0.9%
Government National Mortgage Assn. I, Pool 781496 0.6%
Fannie Mae, Pool 706349 0.5%
U.S. EQUITIES
Microsoft Corp. 1.4%
Bank of America Corp. 1.3%
Citigroup, Inc. 1.3%
- ---------------------------------------------------------------------------
*EXCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 19-41.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS
CURRENCY FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL
INSTABILITY.
16
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
ASSET ALLOCATION
5/31/05
[PIE CHART OF ASSET ALLOCATION]
U.S. Equities 51.8%
International Equities 29.2%
Bonds 17.0%
Short-Term Investments Purchased with Cash
Collateral from Securities Loaned 7.0%
Money Market Instruments 2.1%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
- --------------------------------------------------------
TOP 10 INDUSTRIES*
(% of Net Assets)
- --------------------------------------------------------
Pharmaceuticals 5.4%
Diversified Banks 3.7%
Integrated Oil & Gas 3.3%
Health Care Equipment 3.1%
Oil & Gas Exploration & Production 2.9%
Electric Utilities 2.6%
Regional Banks 2.6%
Aerospace & Defense 2.5%
Household Products 2.3%
Semiconductors 2.3%
- --------------------------------------------------------
*EXCLUDES U.S. GOVERNMENT
17
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA CORNERSTONE 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 $14,481,000.
62.87% of ordinary income distributions qualifies for
dividends-received deductions eligible to corporations.
The Fund has designated a portion of the amount paid to
redeeming shareholders, in the amount of $3,412,000, as a
long-term capital gain distribution for tax purposes.
18
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 CORNERSTONE STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Cornerstone 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 Cornerstone 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
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
U.S. EQUITIES (51.8%)
U.S. STOCKS (51.0%)
ADVERTISING (0.4%)
138,500 Lamar Advertising Co. "A"* $ 5,792
----------
AEROSPACE & DEFENSE (2.5%)
137,000 Boeing Co. 8,754
96,600 Engineered Support Systems, Inc. 3,767
50,500 General Dynamics Corp. 5,453
91,700 Precision Castparts Corp. 7,128
48,800 Rockwell Collins, Inc. 2,410
103,800 United Technologies Corp. 11,076
----------
38,588
----------
ALUMINUM (0.4%)
243,500 Alcoa, Inc. 6,599
----------
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
25,100 Columbia Sportswear Co.* 1,132
18,900 Liz Claiborne, Inc. 710
----------
1,842
----------
APPAREL RETAIL (0.8%)
96,700 Chico's FAS, Inc.* 3,308
117,300 Christopher & Banks Corp. 2,146
136,800 Gap, Inc. 2,873
155,900 Pacific Sunwear of California, Inc.* 3,274
----------
11,601
----------
ASSET MANAGEMENT & CUSTODY BANKS (0.8%)
162,000 Northern Trust Corp. 7,439
104,000 State Street Corp. 4,992
----------
12,431
----------
AUTOMOTIVE RETAIL (0.2%)
51,000 O'Reilly Automotive, Inc.* 2,833
----------
BIOTECHNOLOGY (0.4%)
105,700 Genzyme Corp.(h)* 6,595
----------
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE TV (0.5%)
142,800 Citadel Broadcasting Corp.* $ 1,695
166,200 Comcast Corp. "A"* 5,259
----------
6,954
----------
CASINOS & GAMING (0.2%)
52,700 Harrah's Entertainment, Inc. 3,784
----------
COMMUNICATIONS EQUIPMENT (1.7%)
532,900 Cisco Systems, Inc.* 10,328
502,300 Corning, Inc.* 7,876
160,700 Motorola, Inc. 2,791
324,600 Polycom, Inc.* 5,554
----------
26,549
----------
COMPUTER HARDWARE (0.6%)
222,100 Dell, Inc.* 8,860
----------
COMPUTER STORAGE & PERIPHERALS (0.2%)
29,900 QLogic Corp.* 957
98,700 SanDisk Corp.* 2,575
----------
3,532
----------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.5%)
46,000 Caterpillar, Inc. 4,329
39,200 Oshkosh Truck Corp. 3,126
----------
7,455
----------
CONSTRUCTION MATERIALS (0.1%)
28,800 Vulcan Materials Co. 1,726
----------
CONSUMER ELECTRONICS (0.2%)
61,300 Garmin Ltd.(h) 2,719
----------
CONSUMER FINANCE (0.2%)
37,000 Capital One Financial Corp. 2,790
----------
DATA PROCESSING & OUTSOURCED SERVICES (1.0%)
43,000 Affiliated Computer Services, Inc. "A"* 2,224
41,100 DST Systems, Inc.* 1,987
21
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
127,800 First Data Corp. $ 4,835
145,200 Fiserv, Inc.* 6,244
----------
15,290
----------
DIVERSIFIED BANKS (1.4%)
448,300 Bank of America Corp. 20,765
----------
DIVERSIFIED CHEMICALS (0.6%)
186,200 Du Pont (E.I.) De Nemours & Co. 8,660
----------
DRUG RETAIL (0.2%)
741,200 Rite Aid Corp.(h)* 2,935
----------
EDUCATIONAL SERVICES (0.5%)
111,700 Career Education Corp.(h)* 3,873
78,900 ITT Educational Services, Inc.* 3,581
----------
7,454
----------
ELECTRIC UTILITIES (0.7%)
271,900 PG&E Corp. 9,726
10,000 Southern California Edison Co. (Preferred)* 1,017
----------
10,743
----------
ELECTRONIC EQUIPMENT MANUFACTURERS (0.3%)
275,100 Symbol Technologies, Inc. 3,166
92,000 Tektronix, Inc. 2,086
----------
5,252
----------
ELECTRONIC MANUFACTURING SERVICES (0.2%)
82,600 Benchmark Electronics, Inc.* 2,616
----------
ENVIRONMENTAL & FACILITIES SERVICES (0.2%)
89,500 Waste Connections, Inc.* 3,319
----------
GENERAL MERCHANDISE STORES (0.2%)
139,300 Dollar Tree Stores, Inc.* 3,455
----------
HEALTH CARE EQUIPMENT (2.6%)
193,900 Baxter International, Inc. 7,155
67,600 Biomet, Inc. 2,548
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
75,300 Diagnostic Products Corp. $ 3,279
183,900 Fisher Scientific International, Inc.* 11,486
18,400 Kinetic Concepts, Inc.* 1,182
226,700 Medtronic, Inc. 12,185
47,100 Waters Corp.* 1,830
----------
39,665
----------
HEALTH CARE FACILITIES (0.7%)
138,200 HCA, Inc. 7,463
74,200 Triad Hospitals, Inc.* 3,763
----------
11,226
----------
HEALTH CARE SERVICES (0.2%)
100,600 Dendrite International, Inc.* 1,559
54,400 Omnicare, Inc. 2,085
----------
3,644
----------
HEALTH CARE SUPPLIES (0.4%)
50,200 Cooper Companies, Inc. 3,316
59,900 Edwards Lifesciences Corp.* 2,738
----------
6,054
----------
HOME ENTERTAINMENT SOFTWARE (0.4%)
107,000 Electronic Arts, Inc.* 5,622
----------
HOME IMPROVEMENT RETAIL (0.6%)
170,700 Lowe's Companies, Inc. 9,766
----------
HOMEBUILDING (0.5%)
237,133 D.R. Horton, Inc. 8,198
----------
HOUSEHOLD PRODUCTS (1.1%)
302,700 Procter & Gamble Co. 16,694
----------
HOUSEWARES & SPECIALTIES (0.2%)
104,200 Yankee Candle Co., Inc. 3,287
----------
HYPERMARKETS & SUPER CENTERS (0.2%)
67,100 Wal-Mart Stores, Inc. 3,169
----------
23
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES (1.7%)
539,100 General Electric Co. $ 19,666
213,000 Tyco International Ltd. 6,162
----------
25,828
----------
INDUSTRIAL GASES (0.6%)
161,700 Air Products & Chemicals, Inc. 9,739
----------
INDUSTRIAL MACHINERY (0.7%)
108,000 Ingersoll-Rand Co. Ltd. "A" 8,360
41,700 Parker Hannifin Corp. 2,516
----------
10,876
----------
INSURANCE BROKERS (0.2%)
118,200 Arthur J. Gallagher & Co. 3,265
----------
INTEGRATED OIL & GAS (2.1%)
125,800 ConocoPhillips 13,566
346,500 Exxon Mobil Corp. 19,474
----------
33,040
----------
INTERNET SOFTWARE & SERVICES (0.6%)
251,200 Yahoo!, Inc.* 9,345
----------
INVESTMENT BANKING & BROKERAGE (1.1%)
394,300 E*TRADE Financial Corp.* 4,870
208,300 Merrill Lynch & Co., Inc. 11,302
----------
16,172
----------
LIFE & HEALTH INSURANCE (0.2%)
196,100 UnumProvident Corp. 3,600
----------
MANAGED HEALTH CARE (1.4%)
79,400 Coventry Health Care, Inc.* 5,528
320,900 Health Net, Inc.* 10,984
40,300 WellPoint, Inc.* 5,360
----------
21,872
----------
MOVIES & ENTERTAINMENT (1.7%)
1,102,500 Time Warner, Inc.* 19,184
197,500 Viacom, Inc. "B" 6,772
----------
25,956
----------
24
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
MULTI-LINE INSURANCE (0.4%)
123,200 American International Group, Inc. $ 6,844
----------
OIL & GAS DRILLING (0.5%)
228,700 GlobalSantaFe Corp. 8,379
----------
OIL & GAS EQUIPMENT & SERVICES (0.6%)
138,000 Schlumberger Ltd. 9,435
----------
OIL & GAS EXPLORATION & PRODUCTION (1.6%)
329,000 Chesapeake Energy Corp. 6,734
179,100 Noble Energy, Inc.(h) 13,320
141,233 XTO Energy, Inc. 4,395
----------
24,449
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.5%)
432,943 Citigroup, Inc. 20,396
54,200 Principal Financial Group, Inc. 2,162
----------
22,558
----------
PACKAGED FOODS & MEAT (0.6%)
96,000 General Mills, Inc. 4,752
86,900 Kellogg Co. 3,953
----------
8,705
----------
PHARMACEUTICALS (3.0%)
297,100 Abbott Laboratories 14,332
93,700 Eli Lilly and Co. 5,463
318,700 Pfizer, Inc. 8,892
429,900 Schering-Plough Corp. 8,383
223,600 Wyeth 9,697
----------
46,767
----------
PROPERTY & CASUALTY INSURANCE (0.8%)
59,900 Ambac Financial Group, Inc. 4,322
222,723 St. Paul Travelers Companies, Inc. 8,436
----------
12,758
----------
REAL ESTATE INVESTMENT TRUSTS (0.5%)
106,900 Simon Property Group, Inc. 7,346
----------
25
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
REGIONAL BANKS (0.4%)
80,900 Zions Bancorp $ 5,731
----------
RESTAURANTS (0.4%)
101,100 CBRL Group, Inc.(h) 4,117
36,300 Yum! Brands, Inc. 1,862
----------
5,979
----------
SEMICONDUCTOR EQUIPMENT (0.4%)
90,200 Lam Research Corp.* 2,767
95,900 Varian Semiconductor Equipment Associates, Inc.* 3,892
----------
6,659
----------
SEMICONDUCTORS (1.6%)
318,600 Intel Corp. 8,580
54,200 International Rectifier Corp.* 2,590
98,500 Maxim Integrated Products, Inc. 3,881
73,300 Microchip Technology, Inc. 2,172
283,700 Texas Instruments, Inc. 7,841
----------
25,064
----------
SOFT DRINKS (0.8%)
207,600 PepsiCo, Inc. 11,688
----------
SPECIALTY STORES (0.9%)
246,600 Michaels Stores, Inc. 10,384
106,500 Petco Animal Supplies, Inc.* 3,205
----------
13,589
----------
SYSTEMS SOFTWARE (1.5%)
902,700 Microsoft Corp. 23,290
----------
TECHNOLOGY DISTRIBUTORS (0.2%)
54,200 CDW Corp. 3,153
----------
THRIFTS & MORTGAGE FINANCE (1.1%)
52,800 Freddie Mac(k,+) 3,434
102,200 Golden West Financial Corp. 6,400
72,500 IndyMac Bancorp, Inc. 2,983
216,000 Sovereign Bancorp, Inc. 4,821
----------
17,638
----------
26
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
TOBACCO (0.8%)
189,500 Altria Group, Inc. $ 12,723
----------
TRADING COMPANIES & DISTRIBUTORS (0.2%)
62,400 Fastenal Co.(h) 3,627
----------
TRUCKING (0.2%)
61,400 Yellow Roadway Corp.(h)* 3,241
----------
WIRELESS TELECOMMUNICATION SERVICES (0.7%)
331,400 Nextel Communications, Inc. "A"* 10,002
----------
Total U.S. stocks (cost: $672,669) 787,782
----------
EXCHANGE-TRADED FUNDS (0.8%)
78,100 iShares Russell 2000 Growth Index Fund(h) 4,912
57,900 MidCap SPDR Trust Series 1(h) 7,096
----------
Total exchange-traded funds (cost: $10,979) 12,008
----------
Total U.S. equities (cost: $683,648) 799,790
----------
INTERNATIONAL EQUITIES (29.2%)
INTERNATIONAL STOCKS (29.2%)
AUSTRALIA (0.3%)
474,583 QBE Insurance Group Ltd. (Property & Casualty Insurance) 5,258
----------
AUSTRIA (0.5%)
164,070 Erste Bank der oesterreichischen Sparkassen AG (Regional Banks) 8,070
----------
BRAZIL (0.2%)
129,700 Companhia Vale Do Rio Doce ADR (Steel) 3,765
----------
CANADA (0.9%)
124,210 Canadian National Railway Co. (Railroads) 7,611
162,300 EnCana Corp. (Oil & Gas Exploration & Production) 5,625
----------
13,236
----------
27
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
FRANCE (5.2%)
399,560 AXA S.A. (Multi-Line Insurance) $ 9,740
23,837 Air Liquide S.A. (Industrial Gases)(h) 4,145
46,323 Air Liquide S.A. - Bonus Shares (Industrial Gases)
(acquired 7/03/2002-11/11/2004; cost $6,236)(n,r) 8,054
149,720 Business Objects S.A. (Application Software)(h)* 4,291
259,631 Credit Agricole S.A. (Regional Banks)(h) 6,732
83,100 Groupe DANONE (Packaged Foods & Meat)(h) 7,644
81,900 LVMH Moet Hennessy Louis Vuitton S.A.
(Apparel & Accessories & Luxury Goods) 5,845
65,330 Sanofi-Aventis S.A. (Pharmaceuticals)(h) 5,893
148,104 Schneider Electric S.A. (Electrical Components & Equipment)(h) 10,898
70,409 Societe Television Francaise 1 (Broadcasting & Cable TV) 1,907
53,680 Total S.A. (Integrated Oil & Gas)(h) 11,857
105,660 Veolia Environnement S.A. (Multi-Utilities)(h) 3,985
----------
80,991
----------
GERMANY (0.4%)
10,280 Premiere AG (Broadcasting & Cable TV)* 358
89,770 Schering AG (Pharmaceuticals)(h) 5,642
----------
6,000
----------
HONG KONG (1.0%)
12,021,500 CNOOC Ltd. (Oil & Gas Exploration & Production) 6,606
601,500 Esprit Holdings Ltd. (Apparel Retail) 4,310
5,203,000 Hutchison Telecommunications International Ltd. (Wireless
Telecommunication Services)* 4,915
----------
15,831
----------
HUNGARY (0.4%)
91,000 OTP Bank Ltd. GDR (Regional Banks) 5,597
----------
INDONESIA (0.1%)
4,992,500 PT Bank Central Asia Tbk (Diversified Banks) 1,823
----------
IRELAND (0.3%)
314,450 Depfa Bank plc (Specialized Finance) 5,046
----------
ISRAEL (0.3%)
219,100 Check Point Software Technologies Ltd. (Systems Software)* 4,976
----------
28
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
ITALY (0.5%)
64,929 FastWeb S.p.A. (Communications Equipment)* $ 2,836
226,500 RAS S.p.A. (Multi-Line Insurance) 4,367
----------
7,203
----------
JAPAN (4.7%)
737,000 Asahi Glass Co. (Building Products) 7,986
325,000 Bridgestone Corp. (Tires & Rubber) 6,423
187,000 Canon, Inc. (Electronic Equipment Manufacturers) 10,165
194,600 Chugai Pharmaceutical Co. Ltd. (Pharmaceuticals) 2,881
221,000 Kaneka Corp. (Diversified Chemicals) 2,307
34,900 Murata Manufacturing Co. Ltd. (Electrical Components & Equipment) 1,781
54,600 Nintendo Co. Ltd. (Leisure Products) 5,805
123,600 Nitto Denko Corp. (Specialty Chemicals) 6,958
583,000 Sekisui Chemical Co. Ltd. (Homebuilding) 4,056
1,017,000 Shinsei Bank Ltd. (Diversified Banks) 5,163
1,794,000 Tokyo Gas Co. Ltd. (Gas Utilities) 7,041
974,000 Toray Industries, Inc. (Textiles) 4,335
214,500 Toyota Motor Corp. (Automobile Manufacturers) 7,629
----------
72,530
----------
KOREA (0.7%)
22,640 Samsung Electronics Co. Ltd. (Semiconductors) 10,989
----------
MEXICO (0.6%)
97,220 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV)(h) 5,833
914,400 Wal-Mart de Mexico S.A. (General Merchandise Stores) 3,466
----------
9,299
----------
NETHERLANDS (0.4%)
40,000 Aegon N.V. (Life & Health Insurance)*(o) 1,002
350,540 Reed Elsevier N.V. (Publishing) 4,844
----------
5,846
----------
POLAND (0.2%)
311,380 Powszechna Kasa Oszczednosci Bank Polski S.A. (Regional Banks)* 2,434
----------
SINGAPORE (0.7%)
399,000 DBS Group Holdings Ltd. (Diversified Banks) 3,327
4,631,080 Singapore Telecommunications Ltd. (Integrated
Telecommunication Services) 7,224
----------
10,551
----------
29
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
SPAIN (1.5%)
509,900 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) $ 7,994
181,250 Iberdrola S.A. (Electric Utilities) 4,628
603,378 Telefonica S.A. (Integrated Telecommunication Services) 10,105
----------
22,727
----------
SWEDEN (1.8%)
373,640 Atlas Copco AB "A" (Industrial Machinery)(h) 5,699
123,880 Atlas Copco AB "A" Redemption Shares (Industrial Machinery)* 333
192,460 Hennes & Mauritz AB "B" (Apparel Retail) 6,802
1,330,460 LM Ericsson Telephone Co. "B" ADR (Communications Equipment) 4,184
258,560 Sandvik AB (Industrial Machinery) 10,199
----------
27,217
----------
SWITZERLAND (2.4%)
21,751 Nestle S.A. (Packaged Foods & Meat) 5,723
114,810 Roche Holdings AG (Pharmaceuticals) 14,475
8,070 Straumann AG (Health Care Supplies) 1,626
11,902 Syngenta AG (Specialty Chemicals)* 1,233
36,280 Synthes, Inc. (Health Care Equipment) 3,984
129,790 UBS AG (Diversified Capital Markets) 10,006
----------
37,047
----------
TAIWAN (0.1%)
1,342,637 Compal Electronics, Inc. (Computer Hardware) 1,288
----------
THAILAND (0.2%)
927,700 Bangkok Bank Public Co. Ltd. (Diversified Banks) 2,649
----------
UNITED KINGDOM (5.8%)
836,040 Amvescap plc (Investment Banking & Brokerage) 4,899
182,290 AstraZeneca plc (Pharmaceuticals) 7,735
286,600 BG Group plc (Oil & Gas Exploration & Production) 2,170
122,200 BOC Group plc (Diversified Chemicals) 2,234
472,790 Diageo plc (Distillers & Vintners) 6,791
1,663,400 Hilton Group plc (Casinos & Gaming) 8,592
1,127,291 Kingfisher plc (Home Improvement Retail) 5,264
190,520 Next plc (Apparel Retail) 4,985
592,240 Reckitt Benckiser plc (Household Products) 18,080
88,974 Royal Bank Scotland Group plc (Diversified Banks) 2,613
381,600 Smith & Nephew plc (Health Care Equipment) 3,769
30
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
4,482,060 Vodafone Group plc (Wireless Telecommunication Services) $ 11,300
879,140 William Hill plc (Casinos & Gaming) 7,899
493,150 Yell Group plc (Publishing) 3,663
----------
89,994
----------
Total international stocks (cost: $361,832) 450,367
----------
RIGHTS (0.0%)(s)
SWEDEN
254,360 Sandvik AB (Industrial Machinery)* (cost: $0) 149
----------
Total international equities (cost: $361,832) 450,516
----------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
- ---------- ------ --------
BONDS (17.0%)
CORPORATE OBLIGATIONS (9.0%)
APPAREL & ACCESSORIES & LUXURY GOODS (0.1%)
$ 1,000 Kellwood Co., Debentures 7.63% 10/15/2017 1,073
1,000 Kellwood Co., Senior Notes 7.88 7/15/2009 1,096
----------
2,169
----------
BROADCASTING & CABLE TV (0.2%)
2,000 Cox Communications, Inc., Notes 4.63 6/01/2013 1,931
1,000 Liberty Media Corp., Senior Notes 5.70 5/15/2013 930
----------
2,861
----------
CASINOS & GAMING (0.1%)
1,000 Harrahs Operating Co., Inc., Senior Notes(b) 5.63 6/01/2015 1,008
----------
CONSUMER FINANCE (0.8%)
2,000 American Honda Finance Corp., MTN(b) 3.35(c) 5/11/2007 2,002
1,000 Ford Motor Credit Co., Senior Notes 4.95 1/15/2008 948
1,000 Ford Motor Credit Co., Notes 7.00 10/01/2013 933
2,000 General Motors Acceptance Corp., MTN 4.40(c) 10/20/2005 1,997
1,000 General Motors Acceptance Corp., Notes 6.75 12/01/2014 850
1,000 General Motors Acceptance Corp., Notes 8.00 11/01/2031 839
2,000 Household Finance Corp., Notes 6.38 10/15/2011 2,206
2,000 SLM Corp., MTN, CPI Floating Rate Note 4.38(c) 6/01/2009 1,992
----------
11,767
----------
31
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
DATA PROCESSING & OUTSOURCED SERVICES (0.1%)
$ 2,000 Fiserv, Inc., Notes 4.00% 4/15/2008 $ 1,974
----------
DIVERSIFIED BANKS (0.4%)
2,600 Bank of America Corp., Subordinated Notes 9.38 9/15/2009 3,104
1,000 Emigrant Bancorp, Inc., Senior Notes(b) 6.25 6/15/2014 1,065
1,000 JPMorgan Chase & Co., Notes 4.50 1/15/2012 998
1,636 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 1,594
----------
6,761
----------
DIVERSIFIED CHEMICALS (0.2%)
3,000 Union Carbide Corp., Debentures 6.79 6/01/2025(q) 3,000
----------
ELECTRIC UTILITIES (1.6%)
1,000 FirstEnergy Corp., Notes, Series B 6.45 11/15/2011 1,089
1,000 FPL Energy National Wind, LLC, Secured Notes(b) 5.61 3/10/2024 1,024
1,000 Monongahela Power Co., Notes, Series A 7.36 1/15/2010 1,066
2,123 Oglethorpe Power Corp., Secured Series
Facility Bonds 6.97 6/30/2011 2,255
2,000 Pinnacle West Energy Corp., Senior Notes(b) 3.63 4/01/2007 2,001
2,000 Power Contract Financing, Senior Notes(b) 6.26 2/01/2010 2,080
2,000 PPL Capital Funding, Inc., Guaranteed Notes,
Series A 4.33 3/01/2009 1,982
2,000 Public Service Electric & Gas Co.,
First Mortgage Bond, Series A 3.18(c) 6/23/2006 2,000
2,000 Sempra Energy ESOP, Series 1999 (NBGA)(b) 4.21 11/01/2014(e) 1,994
2,000 Tampa Electric Co., Notes 6.38 8/15/2012 2,198
3,000 Tristate General & Transport Association,
Bonds(b) 6.04 1/31/2018 3,257
3,000 TXU Energy Co., LLC, Senior Notes 7.00 3/15/2013 3,315
1,000 West Penn Power Co., Notes 6.63 4/15/2012 1,071
----------
25,332
----------
FOOD RETAIL (0.1%)
2,000 Safeway, Inc., Notes 5.80 8/15/2012 2,087
----------
GAS UTILITIES (0.4%)
1,000 Enbridge Energy Partners, LP, Senior Notes 5.35 12/15/2014 1,016
1,000 Energy Transfer Partners, Senior Notes(b) 5.95 2/01/2015 1,003
1,000 Kinder Morgan Energy Partners, LP,
Senior Notes 5.13 11/15/2014 1,007
32
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
$ 2,000 Noram Energy Corp., Debentures 6.50% 2/01/2008 $ 2,101
1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 1,048
----------
6,175
----------
HEALTH CARE EQUIPMENT (0.1%)
1,000 Baxter International, Inc., Notes 7.13 2/01/2007 1,039
----------
HEALTH CARE FACILITIES (0.1%)
2,000 HCA, Inc., Notes 5.25 11/06/2008 2,010
----------
HOUSEHOLD APPLIANCES (0.1%)
1,000 Whirlpool Corp., Debentures 7.75 7/15/2016 1,156
----------
HOUSEWARES & SPECIALTIES (0.1%)
2,000 Newell Rubbermaid, Inc., MTN, Series A 6.35 7/15/2028(q) 2,106
----------
INTEGRATED OIL & GAS (0.2%)
1,000 Amerada Hess Corp., Notes 6.65 8/15/2011 1,090
974 Merey Sweeny, LP, Senior Notes(b) 8.85 12/18/2019 1,188
----------
2,278
----------
MANAGED HEALTH CARE (0.2%)
1,000 Coventry Health Care, Inc., Senior Notes 6.13 1/15/2015 1,000
2,135 Highmark, Inc., Senior Notes(b) 6.80 8/15/2013 2,364
----------
3,364
----------
MULTI-LINE INSURANCE (0.1%)
1,000 ASIF Global Financing XIX, Senior Notes(b) 4.90 1/17/2013 1,010
----------
MULTI-SECTOR HOLDINGS (0.1%)
1,000 Leucadia National Corp., Senior Notes 7.00 8/15/2013 995
----------
MULTI-UTILITIES (0.1%)
2,000 Duke Capital Corp., LLC, Senior Notes 5.50 3/01/2014 2,054
----------
OIL & GAS EQUIPMENT & SERVICES (0.3%)
2,000 Cooper Cameron Corp., Senior Notes 2.65 4/15/2007 1,941
2,000 Halliburton Co., Senior Notes 4.65(c) 10/17/2005 2,010
1,000 Seacor Holdings, Inc., Senior Notes 7.20 9/15/2009 1,059
----------
5,010
----------
33
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
OIL & GAS EXPLORATION & PRODUCTION (0.2%)
$ 1,250 Pioneer Natural Resource Co., Senior Notes 5.88% 7/15/2016 $ 1,249
1,000 Southwestern Energy Co., MTN 7.63 5/01/2027(q) 1,103
----------
2,352
----------
OIL & GAS REFINING & MARKETING (0.2%)
2,000 Magellan Midstream Partners, LP, Notes 6.45 6/01/2014 2,202
500 Ultramar Diamond Shamrock Corp., Senior Notes 6.75 10/15/2037 549
----------
2,751
----------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.1%)
1,000 Citigroup, Inc., Global Notes 4.25 7/29/2009 1,002
----------
PACKAGED FOODS & MEAT (0.1%)
2,000 Kraft Foods, Inc., Notes 4.63 11/01/2006 2,016
----------
PAPER PACKAGING (0.1%)
1,000 Temple-Inland, Inc., Notes 5.00 5/17/2007 1,011
----------
PROPERTY & CASUALTY INSURANCE (0.8%)
2,000 21st Century Insurance Group, Senior Notes 5.90 12/15/2013 2,090
1,000 ACE INA Holdings, Inc., Senior Notes 5.88 6/15/2014 1,048
1,000 AXIS Capital Holdings Ltd., Senior Notes 5.75 12/01/2014 1,029
2,000 Berkshire Hathaway Finance Corp.,
Senior Notes(b) 4.85 1/15/2015 2,012
1,000 Fidelity National Financial, Inc., Notes 5.25 3/15/2013 913
1,000 Fund American Companies, Inc., Notes 5.88 5/15/2013 1,039
1,000 Markel Corp., Notes 7.20 8/15/2007 1,057
1,000 Ohio Casualty Corp., Notes 7.30 6/15/2014 1,091
1,000 RLI Corp., Senior Notes 5.95 1/15/2014 1,022
1,000 W.R. Berkley Corp., Senior Notes 5.60 5/15/2015 1,016
----------
12,317
----------
RAILROADS (0.1%)
2,000 Union Pacific Railroad Corp., Pass-Through
Certificates, Series 2004-2(b) 5.21 9/30/2014 2,058
----------
REAL ESTATE INVESTMENT TRUSTS (1.2%)
1,000 Arden Realty, LP, Notes 5.25 3/01/2015 1,005
1,000 BRE Properties, Inc., Senior Notes 4.88 5/15/2010 1,004
34
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
$ 2,000 Duke Realty, LP, Notes 5.40% 8/15/2014 $ 2,068
2,000 EOP Operating, LP, Guaranteed Notes 4.75 3/15/2014 1,956
2,000 ERP Operating, LP, Notes 5.25 9/15/2014 2,037
1,000 Gables Realty, LP, Senior Notes 5.00 3/15/2010 995
1,500 Gables Realty, LP, Senior Notes 5.75 7/15/2007 1,540
1,000 Hospitality Properties Trust, Senior Notes 5.13 2/15/2015 980
2,000 Liberty Property, LP, Senior Notes 5.65 8/15/2014 2,094
2,000 Mack-Cali Realty, LP, Notes 5.05 4/15/2010 2,025
1,000 Post Apartment Homes, LP, Senior Notes 5.45 6/01/2012 1,006
2,000 United Dominion Realty Trust, Senior Notes 5.25 1/15/2015 2,010
----------
18,720
----------
REGIONAL BANKS (0.1%)
1,000 Hudson United Bank, Subordinated Notes 7.00 5/15/2012 1,121
----------
REINSURANCE (0.2%)
2,000 Montpelier Re Holdings Ltd., Senior Notes 6.13 8/15/2013 2,111
1,000 Platinum Underwriters Finance, Inc., Notes(b) 7.50 6/01/2017 1,011
----------
3,122
----------
THRIFTS & MORTGAGE FINANCE (0.5%)
1,000 Countrywide Home Loan, Guaranteed Notes,
Series MTNL 4.00 3/22/2011 965
1,000 Countrywide Home Loan, Notes, Series MTN(h) 4.13 9/15/2009 986
2,000 Independence Community Bank Corp., Notes(m) 3.50 6/20/2013 1,929
2,000 Washington Mutual Bank, Subordinated Notes 5.65 8/15/2014 2,109
2,000 World Savings Bank Federal Savings Bank,
Notes 4.13 12/15/2009 1,991
----------
7,980
----------
Total corporate obligations (cost: $137,774) 138,606
----------
EURODOLLAR AND YANKEE OBLIGATIONS (1.6%)(f)
DIVERSIFIED BANKS (0.4%)
1,500 Chuo Mitsui Trust & Banking Co.,
Subordinated Notes (Japan)(b,h,m) 5.51 12/29/2049 1,437
1,000 Mizuho Finance, Notes (Japan)(b) 5.79 4/15/2014 1,050
1,000 Nordea Bank AB, Subordinated Notes
(Sweden)(b) 5.42 12/29/2049 1,034
35
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
$ 1,000 Skandinaviska Enskilda Banken,
Subordinated Bonds (Sweden)(b,m) 5.47% 3/29/2049 $ 1,040
2,000 UFJ Finance Aruba AEC, Notes (Aruba) 8.75 11/13/2049 2,198
----------
6,759
----------
DIVERSIFIED METALS & MINING (0.1%)
1,000 Glencore Funding, LLC, Notes (Switzerland)(b) 6.00 4/15/2014 960
----------
FOREIGN GOVERNMENT (0.1%)
2,000 Republic of Poland, Global Unsubordinated
Notes (Poland) 5.25 1/15/2014 2,103
----------
INTEGRATED OIL & GAS (0.2%)
2,000 BP Capital plc, Company Guaranty Notes
(United Kingdom) 2.75 12/29/2006 1,969
1,000 Pemex Finance Ltd., Senior Notes (Mexico) 8.88 11/15/2010 1,130
----------
3,099
----------
INTEGRATED TELECOMMUNICATION SERVICES (0.1%)
1,000 Telecom Italia Capital, Guaranteed Senior
Notes, Series A (Luxembourg) 4.00 11/15/2008 983
----------
OIL & GAS DRILLING (0.1%)
994 Delek & Avner-Yam Tethys Ltd.,
Secured Notes (Israel)(b) 5.33 8/01/2013 991
----------
OIL & GAS EXPLORATION & PRODUCTION (0.2%)
2,000 Canadian Oil Sands Ltd., Notes (Canada)(b) 5.80 8/15/2013 2,095
1,000 Nexen, Inc., Notes (Canada) 5.05 11/20/2013 1,012
----------
3,107
----------
PAPER PRODUCTS (0.1%)
1,000 Domtar, Inc., Notes (Canada) 5.38 12/01/2013 910
----------
PROPERTY & CASUALTY INSURANCE (0.1%)
1,145 Mantis Reef Ltd. II, Notes (Australia)(b) 4.80 11/03/2009 1,147
----------
36
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (0.1%)
$ 2,000 Westfield Capital Corp., Senior Notes
(Australia)(b) 5.13% 11/15/2014 $ 2,032
----------
REINSURANCE (0.1%)
2,000 Stingray Pass-Through Trust, Pass-Through
Certificates (Bermuda)(b) 5.90 1/12/2015 2,017
----------
Total Eurodollar and Yankee obligations
(cost: $23,992) 24,108
----------
ASSET-BACKED SECURITIES (0.7%)
AIRLINES (0.4%)
980 Aircraft Finance Trust, Notes, Series 1999-1A,
Class A2 3.59(c) 5/15/2024 924
1,697 Airport Airplanes, Pass-Through Certificates,
Series 1R, Class A8 3.47(c) 3/15/2019 1,587
1,225 America West Airlines, Inc., Pass-Through
Certificates, Series 1996-1, Class A, EETC 6.85 7/02/2009 1,220
1,679 Northwest Airlines Corp., Pass-Through
Certificates, Series 1999-2A, EETC 7.58 3/01/2019 1,677
----------
5,408
----------
ASSET-BACKED FINANCING (0.3%)
2,000 ARG Funding Corp., Subordinated Bonds,
Series 2003-1A, Class C2 6.64 3/20/2007 2,002
2,000 Chase Credit Card Owner Trust,
Series 2002-5, Class A 3.19(c) 10/15/2009 2,005
1,000 Citibank Credit Card Issuance Trust,
Series 2005-C1, Class C1 5.50 3/24/2017 1,038
----------
5,045
----------
Total asset-backed securities (cost: $10,463) 10,453
----------
COMMERCIAL MORTGAGE SECURITIES (0.3%)
COMMERCIAL MORTGAGE-BACKED SECURITIES (0.3%)
2,000 Merrill Lynch Mortgage Investors, Inc.,
Series 1998-C1, Class A2 6.48 11/15/2026 2,098
2,000 Wachovia Bank Commercial Mortgage Trust,
Series 2005-C18, Class APB 4.81 4/15/2042 2,034
----------
4,132
----------
37
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED
SECURITIES (0.0%)(d,s)
$25,018 Bear Stearns Commercial Mortgage Securities, Inc.,
Series 2004-ESA, Class X1
(acquired 6/17/2004; cost $1,000)(b,n) 1.14% 5/14/2016 $ 783
----------
Total commercial mortgage securities (cost: $4,913) 4,915
----------
U.S. GOVERNMENT AGENCY ISSUES (5.0%)(k)
ASSET-BACKED FINANCING (0.2%)
2,747 U.S. Small Business Administration,
Participation Certificates, Series 2003-20 F 4.07 6/01/2023 2,685
----------
DEBENTURES (0.4%)
Fannie Mae,(+)
5,000 CPI Floating Rate Notes 5.25(c) 2/17/2009 4,995
1,100 Benchmark Note 7.13 6/15/2010 1,253
----------
6,248
----------
MORTGAGE-BACKED PASS-THROUGH SECURITIES (3.3%)
Fannie Mae,(+)
7,017 Pool 706349(p) 5.00 5/01/2033 7,026
770 Pool 610989 6.50 10/01/2016 804
1,552 Pool 253180 6.50 2/01/2030 1,618
610 Pool 535164 7.00 2/01/2030 645
225 Pool 547483 7.00 8/01/2030 238
Freddie Mac,(+)
5,178 Pool C79394(p) 5.50 4/01/2033 5,263
13,833 Pool C01491 6.00 2/01/2033 14,233
Government National Mortgage Assn. I,
2,102 Pool 780860 6.00 9/15/2028 2,179
1,590 Pool 603869 6.00 1/15/2033 1,644
332 Pool 340945 6.50 5/15/2023 349
512 Pool 352106 6.50 8/15/2023 539
193 Pool 366762 6.50 4/15/2024 203
847 Pool 577423 6.50 1/15/2032 888
8,318 Pool 781496 6.50 9/15/2032 8,726
1,337 Pool 575469 7.00 12/15/2031 1,418
1,397 Pool 583624 7.00 6/15/2032 1,482
35 Pool 206743 7.50 3/15/2017 38
116 Pool 207904 7.50 3/15/2017 124
17 Pool 207950 7.50 3/15/2017 18
27 Pool 166093 8.00 6/15/2016 29
38
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. I,
$ 11 Pool 166108 8.00% 6/15/2016 $ 12
21 Pool 177786 8.00 9/15/2016 23
41 Pool 186000 8.00 11/15/2016 44
31 Pool 193968 8.00 12/15/2016 33
37 Pool 203822 8.00 3/15/2017 40
3 Pool 034140 8.50 9/15/2009 3
8 Pool 138007 8.50 6/15/2016 9
7 Pool 164021 8.50 6/15/2016 8
31 Pool 159980 8.50 7/15/2016 34
5 Pool 176311 8.50 9/15/2016 5
2 Pool 177247 8.50 9/15/2016 2
13 Pool 174005 8.50 12/15/2016 15
26 Pool 197279 8.50 12/15/2016 28
31 Pool 190671 8.50 1/15/2017 34
5 Pool 197400 8.50 1/15/2017 5
31 Pool 201986 8.50 1/15/2017 34
18 Pool 185270 8.50 2/15/2017 19
3 Pool 157116 9.00 6/15/2016 4
1 Pool 162801 9.00 7/15/2016 1
3 Pool 166282 9.00 7/15/2016 4
2 Pool 164502 9.00 8/15/2016 2
6 Pool 172663 9.00 9/15/2016 7
3 Pool 170810 9.00 10/15/2016 3
19 Pool 031433 9.50 6/15/2009 20
1 Pool 032271 9.50 6/15/2009 2
23 Pool 034679 9.50 6/15/2009 24
8 Pool 038310 9.50 6/15/2009 9
6 Pool 035052 9.50 9/15/2009 6
24 Pool 167971 9.50 7/15/2016 27
19 Pool 172771 9.50 9/15/2016 21
3 Pool 185417 9.50 11/15/2016 3
19 Pool 186335 9.50 11/15/2016 21
11 Pool 187909 9.50 11/15/2016 12
- Pool 184544 9.50 12/15/2016 -
58 Pool 189802 9.50 4/15/2017 64
26 Pool 214646 9.50 5/15/2017 29
9 Pool 225137 9.50 8/15/2017 10
23 Pool 037733 10.00 11/15/2009 25
4 Pool 037889 10.00 11/15/2009 4
18 Pool 037888 10.00 11/15/2009 19
17 Pool 036897 10.00 12/15/2009 18
4 Pool 059731 11.50 3/15/2013 5
39
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. II,
$ 1,363 Pool 781494 6.50% 8/20/2031 $ 1,424
728 Pool 002934 7.50 6/20/2030 778
163 Pool 003070 7.50 4/20/2031 174
626 Pool 002958 8.00 8/20/2030 674
----------
51,202
----------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.7%)
5,123 Freddie Mac, Series 2389 VH(+) 6.00 12/01/2031 5,233
Government National Mortgage Assn. I,
5,000 Series 2003-50 PC 5.50 3/16/2032 5,125
1,000 Series 2001-49 VB 7.00 11/16/2016 1,024
----------
11,382
----------
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (0.4%)
1,867 Perforadora Centrale S.A. de C.V. "A",
Guaranteed Bond, Series A, Title XI 5.24 12/15/2018 1,951
4,048 Rowan Companies, Inc., Guaranteed Bond,
Title XI 2.80 10/20/2013 3,807
----------
5,758
----------
Total U.S. government agency issues (cost: $76,114) 77,275
----------
U.S. TREASURY SECURITIES (0.2%)
INFLATION-INDEXED NOTES(a)
3,329 3.50%, 1/15/2011 (cost: $3,322) 3,721
----------
MUNICIPAL BONDS (0.2%)
COMMUNITY SERVICE (0.1%)
1,385 Jicarilla Apache Nation, NM, RB 2.95 12/01/2006 1,369
----------
HOSPITAL (0.1%)
2,000 Rhode Island State Health & Education RB,
Series C (LOC - Citizens Bank of Rhode Island) 3.60 9/15/2033(e) 1,973
----------
Total municipal bonds (cost: $3,385) 3,342
----------
Total bonds (cost: $259,963) 262,420
----------
40
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- -------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (2.1%)
COMMERCIAL PAPER (0.4%)
-----------------------
PAPER PACKAGING
$ 6,257 Sonoco Products Co., Notes(g) 3.09% 6/01/2005 $ 6,257
----------
DISCOUNT NOTE (0.4%)
--------------------
6,821 Fannie Mae(k,+) 2.98(l) 6/01/2005 6,821
----------
NUMBER
OF SHARES
- ----------
MONEY MARKET FUNDS (1.3%)
-------------------------
19,487,582 SSgA Prime Money Market Fund 2.90(i) - 19,488
----------
Total money market instruments (cost: $32,566) 32,566
----------
PRINCIPAL
AMOUNT
(000)
- ----------
SHORT-TERM INVESTMENTS PURCHASED WITH
CASH COLLATERAL FROM SECURITIES LOANED (7.0%)
CORPORATE OBLIGATIONS (0.7%)
----------------------------
REGIONAL BANKS
$10,000 Wells Fargo & Co. 3.26(c) 12/16/2005 10,011
----------
REPURCHASE AGREEMENTS (6.2%)(j)
-------------------------------
49,000 CS First Boston LLC, 3.05%, acquired on 5/31/2005 and due
6/01/2005 at $49,000 (collateralized by $49,835 of Freddie
Mac Notes(k,+), 4.13%, due 2/24/2011; market value $49,984) 49,000
44,000 Deutsche Bank Securities, Inc., 3.04%, acquired on 5/31/2005
and due 6/01/2005 at $44,000 (collateralized by $45,080 of
Federal Home Loan Bank Bonds(k,+), 2.50% - 4.63%,
due 7/09/2007 - 6/12/2020; combined market value $44,881) 44,000
3,235 Lehman Brothers, Inc., 3.04%, acquired on 5/31/2005 and due
6/01/2005 at $3,235 (collateralized by $10,980 of Fannie
Mae STRIPS(k,+), 4.86% - 4.87%(l), due 5/15/2029 - 1/15/2030;
combined market value $3,300) 3,235
----------
96,235
----------
41
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- -------------------------------------------------------------------------------------------------------
MONEY MARKET FUNDS (0.1%)
-------------------------
1,766,569 AIM Short-Term Investment Co. Liquid
Assets Portfolio, 2.97%(i) $ 1,767
47,960 Merrill Lynch Premier Institutional Fund, 2.87%(i) 48
----------
1,815
----------
Total short-term investments purchased with cash collateral from
securities loaned (cost: $108,060) 108,061
----------
TOTAL INVESTMENTS (COST: $1,446,069) $1,653,353
==========
42
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA CORNERSTONE 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%.
ADR - American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
GDR - Global depositary receipts are receipts issued by a U.S. or
foreign bank evidencing ownership of foreign shares. Dividends are
paid in U.S. dollars.
ISHARES - exchange-traded funds, managed by Barclays Global Fund
Advisors, that represent a portfolio of stocks designed to closely
track a specific market index. iShares funds are traded on various
stock exchanges.
SPDR - Standard & Poor's depositary receipt, or "spider," is an
exchange-traded fund based on either the S&P 500 Index or the S&P
MidCap 400 Index, and is traded on the American Stock Exchange (AMEX).
PORTFOLIO DESCRIPTION ABBREVIATIONS
CPI Consumer Price Index
EETC Enhanced Equipment Trust Certificate
ESOP Employee Stock Ownership Plan
MTN Medium-Term Note
RB Revenue Bond
CREDIT ENHANCEMENTS - add the financial strength of the
provider of the enhancement to support the issuer's ability to repay
the
43
N O T E S
==========----------------------------------------------------------------------
to Portfolio of Investments
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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 Sempra Energy.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) U.S. Treasury inflation-indexed notes - designed to provide a real
rate of return after being adjusted over time to reflect the
impact of inflation. Their principal value periodically adjusts to
the rate of inflation. They trade at the prevailing real, or
after-inflation, interest rates. The U.S. Treasury guarantees
repayment of these securities of at least their face value in the
event of sustained deflation or a drop in prices. Inflation
adjustments to the face value of these securities are included in
interest income.
(b) Restricted security that is not registered under the Securities
Act of 1933. A resale of this security in the United States may
occur in an exempt transaction to a qualified institutional buyer
as defined by Rule 144A, and as such has been deemed liquid by
USAA Investment Management Company (the Manager) under liquidity
guidelines approved by the Board of Trustees, unless otherwise
noted as illiquid.
(c) Variable-rate or floating-rate security - interest rate is
adjusted periodically. The interest rate disclosed represents the
current rate at May 31, 2005.
(d) Interest-only commercial mortgage-backed securities (IO CMBSs) -
represent the right to receive only the interest payments on an
underlying pool of commercial mortgage loans. The interest rate
44
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
disclosed is the purchase yield, which reflects an anticipated
yield based upon interest rates at the time of purchase and the
estimated timing and amount of future cash flows. The principal
amount represents the notional amount of the underlying pool on
which current interest is calculated. IO CMBSs are backed by loans
that have various forms of prepayment protection, which include
lock-out provisions, yield maintenance provisions, and prepayment
penalties. This serves to moderate their prepayment risk. IO CMBSs
are subject to recessionary default-related prepayments that may
have a negative impact on yield.
(e) Security has a mandatory put, which shortens its effective
maturity date.
(f) Eurodollar and Yankee obligations are dollar-denominated
instruments that are issued outside the U.S. capital markets by
foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions
(Eurodollar obligations) as well as dollar-denominated instruments
that are issued by foreign issuers in the U.S. capital markets
(Yankee obligations).
(g) Commercial paper issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Unless this commercial paper is
subsequently registered, a resale of this commercial paper in the
United States must be effected in a transaction exempt from
registration under the Securities Act of 1933. Section 4(2)
commercial paper is normally resold to other investors through or
with the assistance of the issuer or an investment dealer who
makes a market in this security, and as such has been deemed
liquid by the Manager under liquidity guidelines approved by the
Board of Trustees, unless otherwise noted as illiquid.
(h) The security or a portion thereof was out on loan as of May 31,
2005.
45
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
(i) Rate represents the money market fund annualized seven-day yield at
May 31, 2005.
(j) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is marked-
to-market daily to ensure its market value is equal to or in
excess of the repurchase agreement price plus accrued interest.
(k) U.S. government agency issues - mortgage-backed securities
issued by Government National Mortgage Association (GNMA) and
certain other U.S. government agencies are supported by the full
faith and credit of the U.S. government. Securities issued by
government-sponsored enterprises (GSEs) indicated with "+" are
supported only by the credit of the issuing agency,
instrumentality, or corporation, and are neither issued nor
guaranteed by the U.S. government.
(l) Zero-coupon security. Rate represents the effective yield at date
of purchase.
(m) Callable security expected to be called prior to maturity due to a
scheduled change from a fixed to a floating interest rate, which
is likely to be uneconomical to the issuer.
(n) Security deemed illiquid by the Manager, under liquidity guidelines
approved by the Board of Trustees, and valued using methods
determined by a pricing service, under valuation procedures
approved by the Board of Trustees. The aggregate market value of
these securities at May 31, 2005, was $8,837,000, which
represented 0.6% of the Fund's net assets.
(o) At May 31, 2005, the aggregate market value of securities purchased
on a when-issued basis was $1,002,000.
(p) At May 31, 2005, portions of these securities were segregated to
cover when-issued purchases.
46
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
(q) Put bond - provides the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature may
shorten the effective maturity of the security.
(r) Security was fair valued at May 31, 2005, by the Manager in
accordance with valuation procedures approved by the Board of
Trustees.
(s) 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.
47
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
ASSETS
Investments in securities, at market value (including securities
on loan of $102,817) (identified cost of $1,446,069) $1,653,353
Cash 7
Cash denominated in foreign currencies (identified cost of $533) 529
Receivables:
Capital shares sold 1,216
Dividends and interest 5,581
Securities sold 6,844
Other 161
----------
Total assets 1,667,691
----------
LIABILITIES
Payables:
Upon return of securities loaned 108,065
Securities purchased (when-issued of $1,000) 13,985
Capital shares redeemed 1,162
Unrealized depreciation on foreign currency contracts held, at value 1
Accrued management fees 974
Accrued transfer agent's fees 10
Other accrued expenses and payables 114
----------
Total liabilities 124,311
----------
Net assets applicable to capital shares outstanding $1,543,380
==========
NET ASSETS CONSIST OF:
Paid-in capital $1,301,728
Overdistributed net investment income (157)
Accumulated net realized gain on investments 34,567
Net unrealized appreciation of investments 207,284
Net unrealized depreciation on foreign currency translations (42)
----------
Net assets applicable to capital shares outstanding $1,543,380
==========
Capital shares outstanding, unlimited number of shares
authorized, no par value 58,178
==========
Net asset value, redemption price, and offering price per share $ 26.53
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
48
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA CORNERSTONE STRATEGY FUND
YEAR ENDED MAY 31, 2005
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $938) $ 20,730
Interest 12,129
Securities lending 408
--------
Total income 33,267
--------
EXPENSES
Management fees 10,730
Administration and servicing fees 2,154
Transfer agent's fees 2,880
Custody and accounting fees 574
Postage 343
Shareholder reporting fees 74
Trustees' fees 8
Registration fees 80
Professional fees 75
Other 17
--------
Total expenses 16,935
Expenses paid indirectly (224)
--------
Net expenses 16,711
--------
NET INVESTMENT INCOME 16,556
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 70,129
Foreign currency transactions (248)
Change in net unrealized appreciation/depreciation of:
Investments 41,840
Foreign currency translations (70)
--------
Net realized and unrealized gain 111,651
--------
Increase in net assets resulting from operations $128,207
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
49
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA CORNERSTONE STRATEGY FUND
YEARS ENDED MAY 31,
2005 2004
----------------------------
FROM OPERATIONS
Net investment income $ 16,556 $ 10,212
Net realized gain on investments 70,129 94,063
Net realized loss on foreign currency transactions (248) (253)
Change in net unrealized appreciation/depreciation of:
Investments 41,840 89,628
Foreign currency translations (70) (26)
----------------------------
Increase in net assets resulting from operations 128,207 193,624
----------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (24,372) (10,866)
Net realized gains (66,035) -
----------------------------
Distributions to shareholders (90,407) (10,866)
----------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 213,808 146,191
Shares issued for dividends reinvested 88,378 10,569
Cost of shares redeemed (146,650) (122,018)
----------------------------
Increase in net assets from capital
share transactions 155,536 34,742
----------------------------
Net increase in net assets 193,336 217,500
NET ASSETS
Beginning of period 1,350,044 1,132,544
----------------------------
End of period $1,543,380 $1,350,044
============================
Accumulated undistributed (overdistributed)
net investment income:
End of period $ (157) $ 7,333
============================
CHANGE IN SHARES OUTSTANDING
Shares sold 8,114 5,904
Shares issued for dividends reinvested 3,311 416
Shares redeemed (5,575) (4,956)
----------------------------
Increase in shares outstanding 5,850 1,364
============================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
50
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA CORNERSTONE 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 Cornerstone Strategy Fund
(the Fund), which is classified as diversified under the 1940 Act. The
Fund's investment objective is to achieve a positive, inflation-
adjusted rate of return and a reasonably stable value of Fund shares,
thereby preserving the purchasing power of shareholders' capital.
A. SECURITY VALUATION - The value of each security is determined
(as of the close of trading on the New York Stock Exchange
(NYSE) on each business day the exchange is open) as set forth
below:
1. Equity securities, except as otherwise noted, traded
primarily on a domestic securities exchange or the Nasdaq
over-the-counter markets are valued at the last sales price
or official closing price on the exchange or primary market
on which they trade. Equity securities traded primarily on
foreign securities exchanges or markets are valued at the
last quoted sales price, or the most recently determined
official closing price calculated according to local market
convention, available at the time the Fund is valued. If no
last sale or official closing price is reported or available,
the average of the bid and asked prices is generally used.
2. Equity securities trading in various foreign markets may take
place on days when the NYSE is closed. Further, when the NYSE
is open, the foreign markets may be closed. Therefore, the
calculation of the Fund's net asset value (NAV) may not take
place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
between the time of
51
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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 subadvisers, if applicable, will monitor for
events that would materially affect the value of the Fund's
foreign securities and, if necessary, the Manager will value
the foreign securities in good faith, considering such
available information that the Manager deems relevant, under
valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign market
closing prices of foreign equity securities to reflect what
the Fund believes to be the fair value of the securities as
of the close of the NYSE. Fair valuation of affected foreign
equity securities may occur frequently based on an assessment
that events that occur on a fairly regular basis (such as
U.S. market movements) are significant.
3. Investments in open-end investment companies, other than
exchange-traded funds, are valued at their NAV at the end of
each business day.
4. Debt securities purchased with original maturities of 60 days
or less are stated at amortized cost, which approximates
market value. Repurchase agreements are valued at cost.
5. Other debt securities are valued each business day by a
pricing service (the Service) approved by the Trust's Board
of Trustees. The Service uses the mean between quoted bid
and asked prices or the last sales price to price securities
when, in the Service's judgment, these prices are readily
available and are representative of the securities' market
values. For many securities, such prices are not readily
available. The Service
52
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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
subadvisers, if applicable, under valuation procedures
approved by the Trust's Board of Trustees. Valuing these
securities at fair value is intended to cause the Fund's NAV
to be more reliable than it otherwise would be.
Fair value methods used by the Manager include, but are not
limited to, obtaining market quotations from secondary
pricing services, broker-dealers, or widely used quotation
systems. General factors considered in determining the fair
value of securities include fundamental analytical data, the
nature and duration of any restrictions on disposition of the
securities, and an evaluation of the forces that influenced
the market in which the securities are purchased and sold.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially
all of its income to its shareholders. Therefore, no federal
income tax provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted
for on the date the securities are purchased or sold (trade
date). Gains or losses from sales of investment securities are
computed on the identified cost basis. Dividend income, less
foreign taxes,
53
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be
invested in the securities of foreign issuers and may be traded
in foreign currency. Since the Fund's accounting records are
maintained in U.S. dollars, foreign currency amounts are
translated into U.S. dollars on the following basis:
1. Purchases and sales of securities, income, and expenses at
the exchange rate obtained from an independent pricing
service on the respective dates of such transactions.
54
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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
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
55
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
volatility of the Fund's NAV to the extent that the Fund makes
such purchases while remaining substantially fully invested. As
of May 31, 2005, the outstanding when-issued commitments,
including interest purchased, for the Fund were $1,000,000.
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 $213,000 and $11,000,
respectively, resulting in a total reduction in Fund expenses of
$224,000.
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.
56
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE 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 were allocated among the funds based on their respective
average net assets for the period.
57
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
For the year ended May 31, 2005, the Fund paid CAPCO facility fees of
$8,000, which represents 4.8% of total fees paid to CAPCO by the USAA
funds. The Fund had no borrowings under any of these agreements during
the year ended May 31, 2005.
(3) DISTRIBUTIONS
- --------------------------------------------------------------------------------
The character of any distributions made during the year from net
investment income or net realized gains is determined in accordance
with federal tax regulations and may differ from those determined in
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between book-
basis and tax-basis accounting resulted in reclassifications made to
the statement of assets and liabilities to increase paid-in capital by
$3,412,000, increase accumulated undistributed net investment income by
$326,000, and decrease accumulated net realized gain on investments by
$3,738,000. This includes differences in accounting for security
paydowns, foreign currency gains and losses, and the utilization of
earnings and profits distributed to shareholders on redemption of
shares as part of the dividends-paid deduction for federal income tax
purposes. This reclassification has no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2005, and 2004, was as follows:
2005 2004
-------------------------------
Ordinary income* $38,916,000 $10,866,000
Long-term realized capital gains 51,491,000 884,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
58
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE 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 long-term capital gains $ 44,417,000
Accumulated capital and other losses (157,000)
Unrealized appreciation of investments 197,434,000
Unrealized depreciation on foreign currency translations (42,000)
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 and realized gains from security
transactions not offset by capital losses are made annually in the
succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes. At May 31, 2005, the Fund had a current post-October
currency loss of $157,000, for federal income tax purposes, which will
be recognized on the first day of the following fiscal year.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2005, were
$991,070,000 and $912,121,000, respectively.
As of May 31, 2005, the cost of securities, including short-term
securities, for federal income tax purposes, was $1,455,919,000.
Gross unrealized appreciation and depreciation of investments as of May
31, 2005, for federal income tax purposes, were $212,222,000 and
$14,788,000, respectively, resulting in net unrealized appreciation of
$197,434,000.
59
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
(5) FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
A forward currency contract (currency contract) is a commitment
to purchase or sell a foreign currency at a specified date, at a
negotiated price. The Fund may enter into currency contracts in
connection with the purchase or sale of a security denominated
in a foreign currency. These contracts allow the Fund to "lock
in" the U.S. dollar price of the security. The Fund may also
enter into currency contracts to hedge against foreign currency
exchange risks on the non-U.S. dollar denominated securities
held in the Fund's portfolio. Currency contracts are valued on a
daily basis using foreign currency exchange rates obtained from
an independent pricing service. Risks of entering into currency
contracts include the potential inability of the counterparty to
meet the terms of the contract and the Fund's giving up the
opportunity for potential profit.
At May 31, 2005, the terms of open foreign currency contracts
were as follows (in thousands):
FOREIGN CURRENCY CONTRACTS TO BUY
- ------------------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE RECEIVE 5/31/2005 FOR U.S. DOLLAR (DEPRECIATION)
- ------------------------------------------------------------------------------------------
6/01/2005 22 $ 40 $ 40 $ -
Pound Sterling
6/02/2005 239 435 437 (2)
Pound Sterling
6/01/2005 37 11 12 (1)
Polish Zloty
6/03/2005 32 9 9 -
Polish Zloty
6/02/2005 866,627 91 91 -
Indonesian Rupiah
6/03/2005 1,205,281 127 127 -
Indonesian Rupiah
- ------------------------------------------------------------------------------------------
$713 $716 $(3)
- ------------------------------------------------------------------------------------------
60
N O T E S
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
FOREIGN CURRENCY CONTRACTS TO SELL
- -----------------------------------------------------------------------------------------
U.S. DOLLAR UNREALIZED
EXCHANGE CONTRACTS TO VALUE AS OF IN EXCHANGE APPRECIATION
DATE DELIVER 5/31/2005 FOR U.S. DOLLAR (DEPRECIATION)
- -----------------------------------------------------------------------------------------
6/01/2005 11 $ 14 $ 14 $-
Euro
6/03/2005 137 168 168 -
Euro
6/01/2005 5,126 47 47 -
Japanese Yen
6/02/2005 11,850 109 110 1
Japanese Yen
6/03/2005 11,523 106 107 1
Japanese Yen
- -----------------------------------------------------------------------------------------
$444 $446 $2
- -----------------------------------------------------------------------------------------
(6) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party securities-lending agent,
Metropolitan West Securities LLC (MetWest), may lend its securities to
qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the securities loaned, initially in an amount at
least equal to 102% of the fair value of domestic securities loaned and
105% of the fair value of international securities loaned. Cash
collateral is invested in high-quality short-term investments. The Fund
and MetWest retain 80% and 20%, respectively, of the income earned from
the investment of cash received as collateral. MetWest receives no
other fees from the Fund for its services as securities-lending agent.
Risks to the Fund in securities-lending transactions are that the
borrower may not provide additional collateral when required or return
the securities when due, and that the value of the short-term
investments will be less than the amount of cash collateral required to
61
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
be returned to the borrower. For the year ended May 31, 2005, the Fund
received securities-lending income of $408,000, which is net of the 20%
income retained by MetWest. As of May 31, 2005, the Fund loaned
securities having a fair market value of approximately $102,817,000 and
received cash collateral of $108,065,000 for the loans. Of this amount,
$108,060,000 was invested in short-term investments, as noted in the
Fund's portfolio of investments, and $5,000 remained in cash.
(7) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager provides investment management
services to the Fund pursuant to an Investment Advisory
Agreement. Under this agreement, the Manager is responsible for
managing the business and affairs of the Fund and for directly
managing the day-to-day investment of a portion of the Fund's
assets, subject to the authority of and supervision by the
Trust's Board of Trustees. The Manager is also authorized to
select (with approval of the Trust's Board of Trustees) one or
more subadvisers to manage the day-to-day investment of a
portion of the Fund's assets. The Manager monitors each
subadviser's performance through quantitative and qualitative
analysis, and periodically recommends to the Trust's Board of
Trustees as to whether each subadviser's agreement should be
renewed, terminated, or modified. The Manager also is
responsible for allocating assets to the subadvisers. The
allocation for each subadviser can range from 0% to 100% of the
Fund's assets, and the Manager can change the allocations
without shareholder approval.
The investment management fee for the Fund is composed of a base
fee and a performance adjustment that increases or decreases the
base fee depending upon the performance of the Fund relative to
the performance of the Lipper Global Flexible
62
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
Funds Index, which tracks the total return performance of the 30
largest funds in the Lipper Global Flexible Portfolio Funds
category. The Fund's base fee is accrued daily and paid monthly
at an annualized rate of 0.75% of the Fund's average net assets.
The performance adjustment is calculated monthly by comparing
the Fund's performance to that of the Lipper index over the
performance period. The performance period for the Fund consists
of the current month plus the previous 35 months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance
period, which is then multiplied by a fraction, the numerator of
which is the number of days in the month and the denominator of
which is 365 (366 in leap years). The resulting amount is then
added to (in the case of overperformance) or subtracted from (in
the case of underperformance) the base fee, as referenced in the
following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
whenever the Fund outperforms the Lipper Global Flexible Funds
Index over that period, even if the Fund had overall negative
returns during the performance period.
For the year ended May 31, 2005, the Fund incurred total
management fees, paid or payable to the Manager, of
63
N O T E S
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to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
$10,730,000, which is net of a performance adjustment of
$(41,000) that decreased the base management fee of 0.75% by
0.01%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into
investment subadvisory agreements with Wellington Management
Company, LLP (Wellington Management) and MFS Investment
Management (MFSIM), under which Wellington Management directs
the investment and reinvestment of portions of the Fund's assets
invested in U.S. stocks and real estate securities (as allocated
from time to time by the Manager), and MFSIM directs the
investment and reinvestment of the portion of the Fund's assets
invested in international stocks (as allocated from time to time
by the Manager).
The Manager (not the Fund) pays Wellington Management a
subadvisory fee in the annual amount of 0.40% of the first $50
million of the portion of the Fund's average net assets that
Wellington Management manages and invests in real estate
securities, plus 0.35% of the portion of the Fund's average net
assets over $50 million that Wellington Management manages and
invests in real estate securities, plus an amount not to exceed
0.20% of the portion of the Fund's average net assets that
Wellington Management manages and invests in securities other
than real estate securities. The Manager (not the Fund) pays
MFSIM a subadvisory fee in the annual amount of 0.335% of the
first $350 million of the aggregate average net assets of the
USAA World Growth Fund, the USAA International Fund, the USAA
Life Investment Trust World Growth Fund, and the portion of the
USAA Cornerstone Strategy Fund that MFSIM manages (MFSIM Funds),
plus 0.225% of the aggregate average net assets of the MFSIM
Funds over $350 million but not over $1 billion, plus 0.200% of
the aggregate average net assets of the MFSIM Funds over $1
billion. Prior to August 1, 2004, the Manager
64
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
(not the Fund) paid MFSIM a subadvisory fee in the annual amount
of 0.335% of the first $350 million of the aggregate average net
assets of the MFSIM Funds, plus 0.225% of the aggregate average
net assets of the MFSIM Funds over $350 million. For the year
ended May 31, 2005, the Manager incurred subadvisory fees, paid
or payable to Wellington Management of $1,349,000 and incurred
subadvisory fees, paid or payable to MFSIM of $3,212,000 for the
MFSIM Funds in total, of which $1,064,000 was based on the
portion of the average net assets of the USAA Cornerstone
Strategy Fund that MFSIM manages.
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 $2,154,000.
D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit
the annual expenses of the Fund to 1.19% of the Fund's average
annual net assets, before reductions of any expenses paid
indirectly, and will reimburse the Fund for all expenses in
excess of that amount. This agreement may be modified or
terminated at any time. The Fund had no reimbursable expenses as
of May 31, 2005.
E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket
expenses. The Fund also pays SAS fees that are related to the
administration and servicing of accounts that are traded on an
omnibus basis. For the year ended May 31, 2005, the Fund
incurred transfer agent's fees, paid or payable to SAS, of
$2,880,000.
65
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
F. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(8) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors, officers,
and/or employees of the Manager. None of the affiliated Trustees or
Fund officers received any compensation from the Fund.
66
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA CORNERSTONE 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 $ 25.80 $ 22.22 $ 23.57 $ 25.26 $ 26.27
-----------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .30(a) .22 .27 .39(d) .58
Net realized and unrealized gain (loss) 2.13(a) 3.57 (.93) (1.16)(d) (.40)
-----------------------------------------------------------------------
Total from investment operations 2.43(a) 3.79 (.66) (.77) .18
-----------------------------------------------------------------------
Less distributions:
From net investment income (.45) (.21) (.26) (.57) (.48)
From realized capital gains (1.25) - (.43) (.35) (.71)
-----------------------------------------------------------------------
Total distributions (1.70) (.21) (.69) (.92) (1.19)
-----------------------------------------------------------------------
Net asset value at end of period $ 26.53 $ 25.80 $ 22.22 $ 23.57 $ 25.26
=======================================================================
Total return (%)* 9.42 17.08 (2.59) (2.96) .58
Net assets at end of period (000) $1,543,380 $1,350,044 $1,132,544 $1,197,131 $1,016,101
Ratio of expenses to average
net assets (%)**(b) 1.18(c) 1.19(c) 1.19(c) 1.16(c) 1.07
Ratio of expenses to average net assets,
excluding reimbursements (%)**(b) - 1.20 1.27 1.17 -
Ratio of net investment income to
average net assets (%)** 1.15 .81 1.34 1.69(d) 2.26
Portfolio turnover (%) 64.88 90.94 131.07 30.52 54.67
* 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 $1,437,087,000.
(a) Calculated using average shares. For the year ended May 31, 2005, average shares were 54,709,000.
(b) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses
paid indirectly decreased the expense ratios as follows:
(.02%) (.02%) (.01%) (.00%)(+) (.00%)(+)
+ Represents less than 0.01% of average net assets.
(c) Effective April 26, 2002, the Manager voluntarily agreed to limit the annual expenses of the Fund to 1.19% of the
Fund's average net assets.
(d) In 2001, a change in amortization method was made as required by an accounting pronouncement.
Without that change, these amounts would have been:
Net investment income $ .39
Net realized and unrealized loss $ (1.16)
Ratio of net investment income to average net assets 1.70%
67
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA CORNERSTONE 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
68
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA CORNERSTONE 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 $1,027.70 $5.85
Hypothetical
(5% return before expenses) 1,000.00 1,019.16 5.82
*Expenses are equal to the Fund's annualized expense ratio of 1.16%, 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 2.77% for the six-month period of December
1, 2004, through May 31, 2005.
69
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA CORNERSTONE 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 Agreements 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 Agreements and the Manager and the Subadvisers, 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 Subadvisers' operations and personnel. Prior
to voting, the Independent Trustees reviewed the proposed continuance
of the Investment Advisory Agreement and the Subadvisory Agreements
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 Agreements with respect to the Fund.
The Independent Trustees also reviewed the proposed continuation of
the Investment Advisory Agreement and the Subadvisory Agreements 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
70
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
services provided by the Manager and by each Subadviser. At the
meeting at which the renewal of the Investment Advisory Agreement and
Subadvisory Agreement is considered, particular focus is given to
information concerning Fund performance, comparability of fees and
total expenses, and profitability. However, the Board noted that the
evaluation process with respect to the Manager and the Subadvisers is
an ongoing one. In this regard, the Board's and its committees'
consideration of the Investment Advisory Agreement and Subadvisory
Agreements 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
71
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and
regulatory requirements, and other services necessary for the
operation of the Fund and the Trust.
The Board considered the Manager's management style and the
performance of its duties under the Investment Advisory Agreement.
The Board considered the level and depth of knowledge of the Manager,
including the professional experience and qualifications of its senior
and investment personnel, as well as current staffing levels. The
Board discussed the Manager's effectiveness in monitoring the
performance of the Subadvisers and its timeliness in responding to
performance issues. The allocation of the Fund's brokerage, including
the Manager's process for monitoring "best execution" and the
utilization of "soft dollars," were also considered. The Manager's
role in coordinating the activities of the Fund's other service
providers was also considered. The Board considered the Manager's
financial condition and that it had the financial wherewithal to
continue to provide the same scope and high quality of services under
the Investment Advisory Agreement. In reviewing the Investment
Advisory Agreement, the Board focused on the experience, resources,
and strengths of the Manager and its affiliates in managing investment
companies, including the Fund.
The Board also reviewed the compliance and administrative services
provided to the Fund by the Manager, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager
and its affiliates provide compliance and administrative services to
the Fund. The Trustees, guided also by information obtained from their
experiences as directors/trustees of the Fund and other investment
companies managed by the Manager, also focused on the quality of the
Manager's compliance and administrative staff.
72
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
EXPENSES AND PERFORMANCE. In connection with its consideration of the
Investment Advisory Agreement, the Board evaluated the Fund's advisory
fees and total expense ratio as compared to other open-end investment
companies deemed to be comparable to the Fund as determined by the
independent third party in its report. The Fund's expenses were
compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon
certain factors, including fund type, comparability of investment
objective and classification, sales load type (in this case,
investment companies with no sales loads), asset size, and expense
components (the "expense group") and (ii) a larger group of investment
companies that includes all no-load retail open-end investment
companies in the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense universe").
Among other data, the Board noted that the Fund's management fee rate
-- which includes advisory and administrative services and the effects
of any performance fee adjustment as well as any fee waivers or
reimbursements -- was below the median of its expense group and below
the median of its expense universe. The data indicated that the Fund's
total expenses, after reimbursements, 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 the Manager's current voluntary
undertakings to maintain expense limitations for the Fund and that the
subadvisory fees under the Subadvisory Agreements 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,
73
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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 was lower than the average of its performance
universe and its Lipper index for the one- and three-year periods
ended December 31, 2004, and exceeded the average of its performance
universe and its Lipper index for the five-year period ended December
31, 2004. The Trustees considered the Manager's discussion of its plan
to address the Fund's performance, as well as the investment category
in which the Fund was placed for the third-party report.
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
74
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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 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 AGREEMENTS
- --------------------------------------------------------------------------------
In approving each 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 respective
75
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
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 each
Subadvisory Agreement. In approving each Subadvisory Agreement, the
Trustees did not identify any single factor as controlling, and each
Trustee attributed different weights to various factors. Throughout
their deliberations, the Independent Trustees were represented and
assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Trustees considered information provided to them
regarding the services provided by the Subadvisers, including
information presented periodically throughout the previous year. The
Board considered each 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 each Subadviser's
level of staffing. The Trustees noted that the materials provided to
them by each 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 each Subadviser's brokerage practices. The
Board also considered each Subadviser's regulatory and compliance
history. The Board noted that the Manager's monitoring processes of
each 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.
76
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of each Subadviser. In considering the cost of
services to be provided by each Subadviser and the profitability to
that Subadviser of its relationship with the Fund, the Trustees noted
the undertakings of the Manager to maintain expense limitations for
the Fund and also noted that the fees under the Subadvisory Agreement
were paid by the Manager. The Trustees also relied on the ability of
the Manager to negotiate each 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 each Subadviser,
each Subadviser's profitability with respect to the Fund, and the
potential economies of scale in each Subadviser's management 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 Agreements than the other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that each 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 each 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 each Subadviser. The Board noted the Manager's expertise and
resources in monitoring the performance, investment style, and risk-
adjusted performance of each Subadviser. The Board was mindful of the
Manager's focus on each Subadviser's performance and the explanations
of management regarding the factors that contributed to the recent
performance of the Fund. The Board also noted each Subadviser's
long-term performance record for similar accounts.
77
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA CORNERSTONE STRATEGY FUND
MAY 31, 2005
CONCLUSION. The Board reached the following conclusions regarding each
Subadvisory Agreement, among others: (i) each Subadviser is qualified
to manage the Fund's assets in accordance with its investment
objectives and policies; (ii) each 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 each Subadviser. Based
on the Board's conclusions, the Board of Trustees determined that
approval of each Subadvisory Agreement with respect to the Fund would
be in the interests of the Fund and its shareholders.
78
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.
79
. . . 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.
80
. . . 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.
81
. . . 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.
82
. . . 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.
83
. . . 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.
84
. . . 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.
85
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TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Laura T. Starks, Ph.D.
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1900
ACCOUNTING FIRM San Antonio, Texas 78205
TELEPHONE Call toll free - Central time
ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m.
Saturday, 8:30 a.m. to 5 p.m.
Sunday, 10:30 a.m. to 7 p.m.
FOR ADDITIONAL (800) 531-8181
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions
(800) 531-8448
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES (800) 531-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
(800) 531-8777
INTERNET ACCESS USAA.COM
THROUGH OUR ONGOING EFFORTS TO REDUCE EXPENSES, YOUR REPORT MAILINGS ARE
STREAMLINED. WE DEVELOP MAILING LISTS USING CRITERIA SUCH AS ADDRESS, MEMBER
NUMBER, AND SURNAME TO SEND ONE REPORT TO EACH HOUSEHOLD INSTEAD OF SENDING A
REPORT TO EVERY REGISTERED OWNER. THIS PRACTICE IS DESIGNED TO REDUCE DUPLICATE
COPIES AND SAVE PAPER AND POSTAGE COSTS TO THE FUND. IF YOU PREFER NOT TO
PARTICIPATE IN STREAMLINING AND WOULD LIKE TO CONTINUE RECEIVING ONE REPORT PER
REGISTERED ACCOUNT OWNER, PLEASE CALL US AND WE WILL BEGIN YOUR INDIVIDUAL
DELIVERY WITHIN 30 DAYS OF YOUR REQUEST.
COPIES OF THE MANAGER'S PROXY VOTING POLICIES AND PROCEDURES, APPROVED BY THE
TRUST'S BOARD OF TRUSTEES FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND, ARE
AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND
(III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE
AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND
COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800)
SEC-0330.
[LOGO OF RECYCLED PAPER]
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- --------------------------------------------------------------------------------
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23405-0705 (C)2005, USAA. All rights reserved.
ITEM 2. CODE OF ETHICS.
On June 25, 2003, the Board of Trustees of USAA Investment Trust approved a Code
of Ethics (Sarbanes Code) applicable solely to its senior financial officers,
including its principal executive officer (President), as defined under the
Sarbanes-Oxley Act of 2002 and implementing regulations of the Securities and
Exchange Commission. A copy of the Sarbanes Code is attached as an Exhibit to
this Form N-CSR.
No amendments have been made to the Sarbanes Code since it was adopted, and no
waivers (explicit or implicit) from a provision of the Sarbanes Code have been
granted.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Dr. Laura T. Starks, Ph.D. has been designated as an audit committee financial
expert for USAA Investment Trust. Dr. Starks has served as a professor of
Finance at the University of Texas at Austin since 1987, and has served as the
Chair Professor of Finance since 1996. Dr. Starks also has served as a
consultant to numerous clients, including accounting firms, on a range of
finance, accounting and auditing issues. Dr. Starks is an independent director
who serves as a member of the Audit Committee, Pricing and Investment Committee
and the Corporate Governance Committee of the Board of Trustees of USAA
Investment Trust.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES. The Registrant, USAA Investment Trust, consists of 10 funds in
all. Only 9 funds of the Registrant (excluding the Total Return Strategy Fund)
have a fiscal year-end of May 31 and are included within this report (the
Funds). The aggregate fees billed by the Registrant's independent auditor, Ernst
& Young LLP, for professional services rendered for the audit of the Funds'
annual financial statements and services provided in connection with statutory
and regulatory filings by the Registrant for the Funds for fiscal years ended
May 31, 2005 and 2004 were $150,400 and $154,195, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid by the Funds' transfer
agent USAA Transfer Agency Company (dba USAA Shareholder Account Services) for
professional services rendered by Ernst & Young, LLP for audit related services
related to the annual study of internal controls of the transfer agent for
fiscal years ended May 31, 2005 and 2004 were $15,500 and $15,000, respectively.
All services were preapproved by the Audit Committee.
(c) TAX FEES. The aggregate fees paid or accrued by the Registrant for
professional services rendered by Ernst & Young, LLP for tax services are
detailed in the table below:
- ----------------------------------------------------------------------------------------------
Review of Federal, Review of
State and City Passive Quarterly US/UK Tax
Income and tax Foreign Diversification Treaty and issues
returns and excise Investment Review under related to grantor
tax calculations Company Subchapter M trust TOTAL
- ----------------------------------------------------------------------------------------------
FYE 5-31-2005 $41,100 $14,050 $10,993 0 $ 66,143
FYE 5-31-2004 $39,700 $ 9,167 $ 5,400 $ 1,547 $ 55,814
- ----------------------------------------------------------------------------------------------
TOTAL $80,800 $23,217 $16,393 $ 1,547 $121,957
- ----------------------------------------------------------------------------------------------
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2005 or 2004.
(e)(1) AUDIT COMMITTEE PRE-APPROVAL POLICY. All audit and non-audit services to
be performed for the Registrant by Ernst & Young LLP must be pre-approved by the
Audit Committee. The Audit Committee Charter also permits the Chair of the Audit
Committee to pre-approve any permissible non-audit service that must be
commenced prior to a scheduled meeting of the Audit Committee. All non-audit
services were pre-approved by the Audit Committee or its Chair, consistent with
the Audit Committee's preapproval procedures.
(2) Not applicable.
(f) Not applicable.
(g) The aggregate non-audit fees billed by Ernst & Young LLP for services
rendered to the Registrant and the Registrant's investment adviser, IMCO, and
the Funds' transfer agent, SAS, for May 31, 2005 and 2004 were $109,143 and
$92,814, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2005 and 2004 that
were not required to be pre-approved by the Registrant's Audit Committee because
the services were not directly related to the operations of the Registrant's
funds. The Board of Directors/Trustees will consider Ernst & Young LLP's
independence and will consider whether the provision of these non-audit services
to IMCO is compatible with maintaining Ernst & Young LLP's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Filed as part of the report to shareholders.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Corporate Governance Committee selects and nominates candidates for
membership on the Board as independent directors. Currently, there is no
procedure for shareholders to recommend candidates to serve on the Board.
ITEM 10. CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer of USAA
Investment Trust (Trust) have concluded that the Trust's disclosure controls and
procedures are sufficient to ensure that information required to be disclosed by
the Trust in this Form N-CSR was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Trust's internal controls
or in other factors that could significantly affect the Trust's internal
controls subsequent to the date of their evaluation. Disclosure controls and
procedures were established for the new section of the shareholder reports
detailing the factors considered by the Funds' Board in approving the Funds'
advisory agreements.
ITEM 11. EXHIBITS.
(a)(1). Code of Ethics pursuant to Item 2 of Form N-CSR is filed hereto exactly
as set forth below:
CODE OF ETHICS
FOR PRINCIPAL EXECUTIVE OFFICER
AND SENIOR FINANCIAL OFFICERS
USAA MUTUAL FUND, INC.
USAA TAX-EXEMPT FUND, INC.
USAA INVESTMENT TRUST
USAA STATE TAX-FREE TRUST
USAA LIFE INVESTMENT TRUST
I. PURPOSE OF THE CODE OF ETHICS
USAA Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment
Trust, USAA State Tax-Free Trust and USAA Life Investment Trust (collectively,
the Funds, and each a Company) have adopted this code of ethics (the Code) to
comply with Section 406 of the Sarbanes-Oxley Act of 2002 (the Act) and
implementing regulations of the Securities and Exchange Commission (SEC). The
Code applies to each Company's Principal Executive Officer, Principal Financial
Officer and Principal Accounting Officer (each a Covered Officer), as detailed
in Appendix A.
The purpose of the Code is to promote:
o honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between the Covered Officers' personal
and professional relationships;
o full, fair, accurate, timely and understandable disclosure in reports
and documents that each Company files with, or submits to, the SEC and
in other public communications made by each Company;
o compliance with applicable laws and governmental rules and regulations;
o prompt internal reporting of violations of the Code to the Chief Legal
Officer of each Company, the President of each Company (if the
violation concerns the Treasurer) and the Chairman of the Board of
Directors/Trustees of each Company; and
o accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business
ethics and should be sensitive to actual and apparent conflicts of interest.
II. CONFLICTS OF INTEREST
A. DEFINITION OF A CONFLICT OF INTEREST.
A conflict of interest exists when a Covered Officer's private interest
influences, or reasonably appears to influence, the Covered Officer's judgment
or ability to act in the best interests of the Funds and their shareholders. For
example, a conflict of interest could arise if a Covered Officer, or an
immediate family member, receives personal benefits as a result of his or her
position with the Funds.
Certain conflicts of interest arise out of relationships between
Covered Officers and the Funds and are already subject to conflict of interest
provisions in the Investment Company Act of 1940 (the 1940 Act) and the
Investment Advisers Act of 1940 (the Advisers Act). For example, Covered
Officers may not individually engage in certain transactions with the Funds
because of their status as "affiliated persons" of the Funds. The USAA Funds'
and USAA Investment Management Company's (IMCO) compliance programs and
procedures are designed to prevent, or identify and correct, violations of these
provisions. This Code does not, and is not intended to, repeat or replace these
programs and procedures, and such conflicts fall outside of the parameters of
this Code.
Although typically not presenting an opportunity for improper personal
benefit, conflicts could arise from, or as a result of, the contractual
relationships between the Funds and IMCO of which the Covered Officers are also
officers or employees. As a result, this Code recognizes that the Covered
Officers will, in the normal course of their duties (whether formally for the
Funds or for IMCO, or for both), be involved in establishing policies and
implementing decisions that will have different effects on IMCO and the Funds.
The participation of Covered Officers in such activities is inherent in the
contractual relationship between the Funds and IMCO and is consistent with the
performance by the Covered Officers of their duties as officers of the Funds.
Thus, if performed in compliance with the provisions of the 1940 Act and the
Advisers Act, such activities will be deemed to have been handled ethically. In
addition, it is recognized by each Company's Board of Directors/Trustees (each a
Board, and collectively the Boards) that the Covered Officers also may be
officers or employees of one or more other investment companies covered by this
joint USAA Funds' Code.
B. GENERAL RULE. Covered Officers Should Avoid Actual and
Apparent Conflicts of Interest.
Conflicts of interest, other than the conflicts described in the two
preceding paragraphs, are covered by the Code. The following list provides
examples of conflicts of interest under the Code, but Covered Officers should
keep in mind that these examples are not exhaustive. The overarching principle
is that the personal interest of a Covered Officer should not be placed
improperly before the interest of the Funds and their shareholders.
Each Covered Officer must not engage in conduct that constitutes an
actual conflict of interest between the Covered Officer's personal interest and
the interests of the Funds and their shareholders. Examples of actual conflicts
of interest are listed below but are not exclusive. Each Covered Officer must
not:
o use his personal influence or personal relationships improperly to
influence investment decisions or financial reporting by the Funds
whereby the Covered Officer would benefit personally to the detriment
of the Funds and their shareholders;
o cause the Funds to take action, or fail to take action, for the
individual personal benefit of the Covered Officer rather than the
benefit of the Funds and their shareholders.
o accept gifts, gratuities, entertainment or any other benefit from any
person or entity that does business or is seeking to do business with
the Funds during contract negotiations.
o accept gifts, gratuities, entertainment or any other benefit with a
market value over $100 per person, per year, from or on behalf of any
person or entity that does, or seeks to do, business with or on behalf
of the Funds.
o EXCEPTION. Business-related entertainment such as meals, and
tickets to sporting or theatrical events, which are infrequent
and not lavish are excepted from this prohibition. Such
entertainment must be appropriate as to time and place,
reasonable and customary in nature, modest in cost and value,
incidental to the business, and not so frequent as to raise any
question of impropriety (Customary Business Entertainment).
Certain situations that could present the appearance of a conflict of
interest should be discussed with, and approved by, or reported to, an
appropriate person. Examples of these include:
o service as a director on the board or an officer of any public or
private company, other than a USAA company or a Company, must be
approved by the USAA Funds' and IMCO's Code of Ethics Committee and
reported to each affected Company.
o the receipt of any non-nominal (i.e., valued over $25) gifts from any
person or entity with which a Company has current or prospective
business dealings must be reported to the Chief Legal Officer. For
purposes of this Code, the individual holding the title of Secretary of
a Company shall be considered the Chief Legal Officer of a Company.
o the receipt of any business-related entertainment from any person or
entity with which the Funds have current or prospective business
dealings must be approved in advance by the Chief Legal Officer unless
such entertainment qualifies as Customary Business Entertainment.
o any ownership interest in, or any consulting or employment relationship
with, any of the Company's service providers, other than IMCO or any
other USAA company, must be approved by the Chairman of the Board of
the Directors/Trustees and reported to each affected Board.
o any material direct or indirect financial interest in commissions,
transaction charges or spreads paid by the Funds for effecting
portfolio transactions or for selling or redeeming shares other than an
interest arising from the Covered Officer's employment, such as
compensation or equity ownership should be approved by the Chairman of
the Board of Directors/Trustees and reported to each affected Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
o Each Covered Officer should familiarize himself with the disclosure
requirements applicable to the Funds, and the procedures and policies
implemented to promote full, fair, accurate, timely and understandable
disclosure by each Company.
o Each Covered Officer should not knowingly misrepresent, or cause others
to misrepresent, facts about the Funds to others, whether within or
outside the Funds, including to the Funds' Directors/Trustees and
auditors, and to government regulators and self-regulatory
organizations.
o Each Covered Officer should, to the extent appropriate within his area
of responsibility, consult with other officers and employees of the
Funds and IMCO with the goal of promoting full, fair, accurate, timely
and understandable disclosure in the reports and documents filed by a
Company with, or submitted to, the SEC, and in other public
communications made by the Funds.
o Each Covered Officer is responsible for promoting compliance with the
standards and restrictions imposed by applicable laws, rules and
regulations, and promoting compliance with the USAA Funds' and IMCO's
operating policies and procedures.
o A Covered Officer should not retaliate against any person who reports a
potential violation of this Code in good faith.
o A Covered Officer should notify the Chief Legal Officer promptly if he
knows of any violation of the Code. Failure to do so itself is a
violation of this Code.
IV. REPORTING AND ACCOUNTABILITY
A. INTERPRETATION OF THE CODE. The Chief Legal Officer of each
Company is responsible for applying this Code to specific
situations in which questions are presented under it and has the
authority to interpret the Code in any particular situation. The
Chief Legal Officer should consult, if appropriate, the USAA
Funds' outside counsel or counsel for the Independent
Directors/Trustees. However, any approvals or waivers sought by a
Covered Officer will be reported initially to the Chairman of the
Board of Directors/Trustees and will be considered by the Board
of Directors/Trustees.
B. REQUIRED REPORTS
o EACH COVERED OFFICER MUST:
o Upon adoption of the Code, affirm in writing to the Boards
that he has received, read and understands the Code.
o Annually thereafter affirm to the Chief Legal Officer that
he has complied with the requirements of the Code.
o THE CHIEF LEGAL OFFICER MUST:
o report to the Board about any matter or situation submitted
by a Covered Officer for interpretation under the Code, and
the advice given by the Chief Legal Officer;
o report annually to the Board and the Corporate Governance
Committee describing any issues that arose under the Code,
or informing the Board and Corporate Governance Committee
that no reportable issues occurred during the year.
C. INVESTIGATION PROCEDURES
The Funds will follow these procedures in investigating and enforcing
this Code:
o INITIAL COMPLAINT. All complaints or other inquiries concerning
potential violations of the Code must be reported to the Chief
Legal Officer. The Chief Legal Officer shall be responsible for
documenting any complaint. The Chief Legal Officer also will
report immediately to the President of the Company (if the
complaint involves the Treasurer), the Chairman of the Board (or
for the USAA Life Investment Trust (LIT) the Chairman/CEO of USAA
if the complaint involves the Chairman of the LIT Board) and the
Chairperson of the Audit Committee any material potential
violations that could have a material effect on the Funds'
financial condition or reputation. For all other complaints, the
Chief Legal Officer will report quarterly to the Board.
o INVESTIGATIONS. The Chief Legal Officer will take all appropriate
action to investigate any potential violation unless the Chairman
of the Board or the Chairperson of the Audit Committee direct
another person to undertake such investigation. The Chief Legal
Officer may utilize USAA's Office of Ethics to do a unified
investigation under this Code and USAA's Code of Conduct. The
Chairman of the Board, or the Board as a whole, may direct the
Company's outside counsel or the counsel to the Independent
Directors/Trustees (if any) to participate in any investigation
under this Code.
o STATUS REPORTS. The Chief Legal Officer will provide monthly
status reports to the Board about any alleged violation of the
Code that could have a material effect on the Funds' financial
condition or reputation, and quarterly updates regarding all
other alleged violations of the Code.
o VIOLATIONS OF THE CODE. If after investigation, the Chief Legal
Officer, or other investigating person, believes that a violation
of the Code has occurred, he will report immediately to the
Chairman of the Board (and for the USAA LIT the Chairman/CEO of
USAA if the violation involves the Chairman of the LIT Board) the
nature of the violation, and his recommendation regarding the
materiality of the violation. If, in the opinion of the
investigating person, the violation could materially affect the
Funds' financial condition or reputation, the Chief Legal Officer
also will notify the Chairperson of the Audit Committee of each
Company.
The Chief Legal Officer will inform, and make a recommendation
to, the Board, which will consider what further action is
appropriate. Appropriate action could include: (1) review of, and
modifications to, the Code or other applicable policies or
procedures; (2) notifications to appropriate personnel of IMCO or
USAA; (3) dismissal of the Covered Officer; and/or (4) other
disciplinary actions including reprimands or fines.
o The Boards of Directors/Trustees understand that Covered
Officers also are subject to USAA's Code of Business
Conduct. If a violation of this Code also violates USAA's
Code of Business Conduct, these procedures do not limit or
restrict USAA's ability to discipline such Covered Officer
under USAA's Code of Business Conduct. In that event, the
Chairman of the Board of Directors/Trustees will report to
the Boards the action taken by USAA with respect to a
Covered Officer.
V. OTHER POLICIES AND PROCEDURES
This Code shall be the sole code of ethics adopted by the Funds for
purposes of Section 406 of the Act and the implementing regulations adopted by
the SEC applicable to registered investment companies. If other policies and
procedures of a Company, IMCO, or other service providers govern or purport to
govern the behavior or activities of Covered Officers, they are superseded by
this Code to the extent that they overlap, conflict with, or are more lenient
than the provisions of this Code. The USAA Funds' and IMCO's Joint Code of
Ethics under Rule 17j-1 under the 1940 Act, and IMCO's more detailed compliance
policies and procedures (including its Insider Trading Policy) are separate
requirements applying to Covered Officers and other IMCO employees, and are not
part of this Code. Also, USAA's Code of Conduct imposes separate requirements on
Covered Officers and all employees of USAA, and also is not part of this Code.
VI. AMENDMENTS
Any amendment to this Code, other than amendments to Appendix A, must
be approved or ratified by majority vote of the Board of Directors/Trustees.
VII. CONFIDENTIALITY AND DOCUMENT RETENTION
The Chief Legal Officer shall retain material investigation documents
and reports required to be prepared under the Code for six years from the date
of the resolution of any such complaint. All reports and records prepared or
maintained pursuant to this Code will be considered confidential and shall be
maintained and protected accordingly. Except as otherwise required by law or
this Code, such matters shall not be disclosed to anyone other than the
appropriate Board of Directors/Trustees and counsel for the Independent
Directors/Trustees (if any), the appropriate Company and its counsel, IMCO, and
other personnel of USAA as determined by the affected Company's Chief Legal
Officer or the Chairman of the Board of Directors/Trustees.
Approved and adopted by IMCO's Code of Ethics Committee: June 12, 2003 Approved
and adopted by the Boards of Directors/Trustees of USAA Mutual Fund, Inc., USAA
Tax-Exempt Fund, Inc., USAA Investment Trust & USAA State Tax-Free Trust: June
25, 2003.
Approved and adopted by the Board of Trustees of USAA Life Investment Trust:
August 20, 2003.
APPENDIX A
COVERED OFFICERS
TITLE COMPANY
PRESIDENT USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
TREASURER USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA State Tax-Free Trust
USAA Life Investment Trust
(a)(2). Certification pursuant to Rule 30a-2(a) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(a)) is filed and attached hereto as Exhibit
99.CERT.
(a)(3). Not Applicable.
(b). Certification pursuant to Rule 30a-2(b) under the Investment Company Act
of 1940 (17 CFR 270.30a-2(b))is filed and attached hereto as Exhibit
99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Registrant: USAA INVESTMENT TRUST (EXCEPT TOTAL RETURN STRATEGY FUND)
By:* /s/ EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: July 26, 2005
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: August 2, 2005
------------------------------
By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: August 2, 2005
------------------------------
*Print the name and title of each signing officer under his or her signature.