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 GNMA TRUST - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2005
[LOGO OF USAA]
USAA(R)
USAA GNMA Trust(R)
[GRAPHIC OF USAA GNMA Trust(R)]
A n n u a l R e p o r t
- --------------------------------------------------------------------------------
MAY 31, 2005
Table of CONTENTS
- --------------------------------------------------------------------------------
MESSAGE FROM THE PRESIDENT 2
MANAGER'S COMMENTARY 4
FUND RECOGNITION 8
INVESTMENT OVERVIEW 9
FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm 15
Portfolio of Investments 16
Notes to Portfolio of Investments 19
Financial Statements 20
Notes to Financial Statements 23
EXPENSE EXAMPLE 34
ADVISORY AGREEMENTS 36
DIRECTORS' AND OFFICERS' INFORMATION 42
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2005, USAA. All rights reserved.
2
M E S S A G E
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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
==================--------------------------------------------------------------
COMMENTARY on the Fund
MARGARET "DIDI" WEINBLATT, Ph.D., CFA
[PHOTO OF MARGARET "DIDI" WEINBLATT] USAA Investment Management Company
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HOW DID THE FUND PERFORM?
The USAA GNMA Trust had a total return of 5.32% for the year
ended May 31, 2005. This compares to a 5.19% return for the
Lipper GNMA Funds Average, 5.46% for the Lipper GNMA Funds
Index, and 6.47% for the Lehman Brothers GNMA 30-Year Index.
WHAT WAS THE 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. As the period opened,
longer-term bond yields had already risen in anticipation of
the Fed's action, reaching the highest levels we had seen since
2002. The graph on the next page tracks the yield on U.S.
Treasury bonds of varying maturities as well as the target
federal funds rate over the past two years. In this
environment, longer-term bonds posted good absolute returns.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 13 FOR BENCHMARK DEFINITIONS.
5
. . . C O N T I N U E D
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TREASURY YIELDS AND FED FUNDS RATE
[CHART OF TREASURY YIELDS AND FED FUNDS RATE]
30-YEAR YIELD 10-YEAR YIELD 2-YEAR YIELD FEDERAL FUNDS RATE
------------- ------------- ------------ ------------------
5/30/2003 4.377% 3.372% 1.326% 5/30/2003 1.25%
6/2/2003 4.422 3.41 1.31 6/2/2003 1.25
6/3/2003 4.37 3.331 1.198 6/3/2003 1.25
6/4/2003 4.354 3.295 1.214 6/4/2003 1.25
6/5/2003 4.406 3.344 1.238 6/5/2003 1.25
6/6/2003 4.397 3.353 1.246 6/6/2003 1.25
6/9/2003 4.342 3.278 1.182 6/9/2003 1.25
6/10/2003 4.254 3.192 1.117 6/10/2003 1.25
6/11/2003 4.263 3.212 1.149 6/11/2003 1.25
6/12/2003 4.213 3.165 1.101 6/12/2003 1.25
6/13/2003 4.174 3.114 1.084 6/13/2003 1.25
6/16/2003 4.232 3.173 1.157 6/16/2003 1.25
6/17/2003 4.3 3.262 1.221 6/17/2003 1.25
6/18/2003 4.398 3.363 1.238 6/18/2003 1.25
6/19/2003 4.407 3.339 1.156 6/19/2003 1.25
6/20/2003 4.433 3.367 1.164 6/20/2003 1.25
6/23/2003 4.396 3.313 1.139 6/23/2003 1.25
6/24/2003 4.335 3.251 1.098 6/24/2003 1.25
6/25/2003 4.463 3.405 1.287 6/25/2003 1
6/26/2003 4.565 3.543 1.407 6/26/2003 1
6/27/2003 4.583 3.543 1.351 6/27/2003 1
6/30/2003 4.558 3.515 1.304 6/30/2003 1
7/1/2003 4.587 3.549 1.304 7/1/2003 1
7/2/2003 4.58 3.538 1.28 7/2/2003 1
7/3/2003 4.691 3.663 1.313 7/3/2003 1
7/4/2003 4.685 3.649 1.306 7/7/2003 1
7/7/2003 4.746 3.733 1.354 7/8/2003 1
7/8/2003 4.714 3.716 1.37 7/9/2003 1
7/9/2003 4.698 3.682 1.338 7/10/2003 1
7/10/2003 4.698 3.657 1.306 7/11/2003 1
7/11/2003 4.683 3.628 1.275 7/14/2003 1
7/14/2003 4.77 3.726 1.34 7/15/2003 1
7/15/2003 4.966 3.983 1.454 7/16/2003 1
7/16/2003 4.895 3.92 1.43 7/17/2003 1
7/17/2003 4.893 3.922 1.439 7/18/2003 1
7/18/2003 4.934 4.001 1.489 7/21/2003 1
7/21/2003 5.088 4.212 1.622 7/22/2003 1
7/22/2003 5.041 4.124 1.523 7/23/2003 1
7/23/2003 5.042 4.11 1.499 7/24/2003 1
7/24/2003 5.093 4.167 1.536 7/25/2003 1
7/25/2003 5.117 4.177 1.504 7/28/2003 1
7/28/2003 5.215 4.282 1.616 7/29/2003 1
7/29/2003 5.338 4.44 1.703 7/30/2003 1
7/30/2003 5.249 4.309 1.632 7/31/2003 1
7/31/2003 5.358 4.408 1.744 8/1/2003 1
8/1/2003 5.315 4.385 1.777 8/4/2003 1
8/4/2003 5.253 4.285 1.681 8/5/2003 1
8/5/2003 5.362 4.392 1.818 8/6/2003 1
8/6/2003 5.238 4.269 1.754 8/7/2003 1
8/7/2003 5.215 4.219 1.706 8/8/2003 1
8/8/2003 5.232 4.271 1.698 8/11/2003 1
8/11/2003 5.27 4.355 1.764 8/12/2003 1
8/12/2003 5.351 4.428 1.723 8/13/2003 1
8/13/2003 5.45 4.562 1.822 8/14/2003 1
8/14/2003 5.382 4.491 1.765 8/15/2003 1
8/15/2003 5.398 4.53 1.799 8/18/2003 1
8/18/2003 5.345 4.459 1.824 8/19/2003 1
8/19/2003 5.243 4.363 1.734 8/20/2003 1
8/20/2003 5.286 4.438 1.8 8/21/2003 1
8/21/2003 5.276 4.477 1.908 8/22/2003 1
8/22/2003 5.259 4.475 1.918 8/25/2003 1
8/25/2003 5.303 4.527 1.968 8/26/2003 1
8/26/2003 5.272 4.475 1.894 8/27/2003 1
8/27/2003 5.314 4.537 1.97 8/28/2003 1
8/28/2003 5.208 4.416 1.932 8/29/2003 1
8/29/2003 5.224 4.466 1.972 9/2/2003 1
9/1/2003 5.223 4.46 1.964 9/3/2003 1
9/2/2003 5.334 4.601 2.036 9/4/2003 1
9/3/2003 5.351 4.595 2.004 9/5/2003 1
9/4/2003 5.306 4.505 1.891 9/8/2003 1
9/5/2003 5.189 4.349 1.722 9/9/2003 1
9/8/2003 5.264 4.428 1.761 9/10/2003 1
9/9/2003 5.227 4.357 1.689 9/11/2003 1
9/10/2003 5.154 4.273 1.632 9/12/2003 1
9/11/2003 5.205 4.316 1.696 9/15/2003 1
9/12/2003 5.16 4.254 1.621 9/16/2003 1
9/15/2003 5.183 4.269 1.589 9/17/2003 1
9/16/2003 5.195 4.277 1.588 9/18/2003 1
9/17/2003 5.088 4.18 1.612 9/19/2003 1
9/18/2003 5.075 4.164 1.636 9/22/2003 1
9/19/2003 5.069 4.162 1.667 9/23/2003 1
9/22/2003 5.126 4.218 1.634 9/24/2003 1
9/23/2003 5.093 4.207 1.633 9/25/2003 1
9/24/2003 5.03 4.135 1.608 9/26/2003 1
9/25/2003 4.987 4.083 1.645 9/29/2003 1
9/26/2003 4.935 4.002 1.557 9/30/2003 1
9/29/2003 5.006 4.077 1.605 10/1/2003 1
9/30/2003 4.883 3.939 1.462 10/2/2003 1
10/1/2003 4.891 3.934 1.446 10/3/2003 1
10/2/2003 4.934 3.995 1.469 10/6/2003 1
10/3/2003 5.097 4.201 1.637 10/7/2003 1
10/6/2003 5.07 4.171 1.605 10/8/2003 1
10/7/2003 5.158 4.259 1.645 10/9/2003 1
10/8/2003 5.161 4.238 1.621 10/10/2003 1
10/9/2003 5.215 4.293 1.645 10/13/2003 1
10/10/2003 5.181 4.271 1.645 10/14/2003 1
10/13/2003 5.179 4.253 1.629 10/15/2003 1
10/14/2003 5.252 4.346 1.686 10/16/2003 1
10/15/2003 5.289 4.399 1.768 10/17/2003 1
10/16/2003 5.306 4.461 1.932 10/20/2003 1
10/17/2003 5.25 4.39 1.859 10/21/2003 1
10/20/2003 5.236 4.384 1.851 10/22/2003 1
10/21/2003 5.206 4.344 1.843 10/23/2003 1
10/22/2003 5.136 4.253 1.761 10/24/2003 1
10/23/2003 5.196 4.318 1.802 10/27/2003 1
10/24/2003 5.12 4.232 1.728 10/28/2003 1
10/27/2003 5.141 4.261 1.778 10/29/2003 1
10/28/2003 5.091 4.179 1.67 10/30/2003 1
10/29/2003 5.177 4.297 1.754 10/31/2003 1
10/30/2003 5.199 4.344 1.861 11/3/2003 1
10/31/2003 5.132 4.295 1.822 11/4/2003 1
11/3/2003 5.162 4.342 1.878 11/5/2003 1
11/4/2003 5.129 4.297 1.846 11/6/2003 1
11/5/2003 5.184 4.354 1.927 11/7/2003 1
11/6/2003 5.244 4.41 1.977 11/10/2003 1
11/7/2003 5.254 4.44 2.011 11/11/2003 1
11/10/2003 5.265 4.448 2.028 11/12/2003 1
11/11/2003 5.265 4.448 2.028 11/13/2003 1
11/12/2003 5.209 4.4 2.021 11/14/2003 1
11/13/2003 5.105 4.271 1.882 11/17/2003 1
11/14/2003 5.052 4.219 1.809 11/18/2003 1
11/17/2003 5.048 4.196 1.784 11/19/2003 1
11/18/2003 4.999 4.144 1.768 11/20/2003 1
11/19/2003 5.082 4.238 1.867 11/21/2003 1
11/20/2003 5.01 4.154 1.785 11/24/2003 1
11/21/2003 5.016 4.161 1.819 11/25/2003 1
11/24/2003 5.066 4.23 1.894 11/26/2003 1
11/25/2003 5.03 4.186 1.836 11/28/2003 1
11/26/2003 5.07 4.248 1.928 12/1/2003 1
11/27/2003 5.07 4.248 1.967 12/2/2003 1
11/28/2003 5.132 4.334 2.048 12/3/2003 1
12/1/2003 5.152 4.387 2.096 12/4/2003 1
12/2/2003 5.151 4.381 2.056 12/5/2003 1
12/3/2003 5.186 4.404 2.072 12/8/2003 1
12/4/2003 5.161 4.367 2.04 12/9/2003 1
12/5/2003 5.063 4.232 1.871 12/10/2003 1
12/8/2003 5.11 4.269 1.903 12/11/2003 1
12/9/2003 5.165 4.353 1.968 12/12/2003 1
12/10/2003 5.15 4.318 1.911 12/15/2003 1
12/11/2003 5.103 4.232 1.79 12/16/2003 1
12/12/2003 5.091 4.24 1.806 12/17/2003 1
12/15/2003 5.097 4.258 1.83 12/18/2003 1
12/16/2003 5.066 4.215 1.797 12/19/2003 1
12/17/2003 5.022 4.184 1.805 12/22/2003 1
12/18/2003 4.947 4.128 1.789 12/23/2003 1
12/19/2003 4.965 4.135 1.788 12/24/2003 1
12/22/2003 4.981 4.17 1.813 12/26/2003 1
12/23/2003 5.052 4.261 1.854 12/29/2003 1
12/24/2003 4.987 4.185 1.839 12/30/2003 1
12/25/2003 4.987 4.185 1.839 12/31/2003 1
12/26/2003 4.97 4.152 1.815 1/2/2004 1
12/29/2003 5.048 4.244 1.855 1/5/2004 1
12/30/2003 5.076 4.259 1.831 1/6/2004 1
12/31/2003 5.074 4.248 1.823 1/7/2004 1
1/1/2004 5.074 4.247 1.823 1/8/2004 1
1/2/2004 5.171 4.381 1.903 1/9/2004 1
1/5/2004 5.178 4.379 1.919 1/12/2004 1
1/6/2004 5.102 4.273 1.822 1/13/2004 1
1/7/2004 5.077 4.244 1.822 1/14/2004 1
1/8/2004 5.086 4.257 1.83 1/15/2004 1
1/9/2004 4.96 4.082 1.66 1/16/2004 1
1/12/2004 4.973 4.088 1.652 1/20/2004 1
1/13/2004 4.92 4.013 1.587 1/21/2004 1
1/14/2004 4.895 3.996 1.627 1/22/2004 1
1/15/2004 4.856 3.971 1.643 1/23/2004 1
1/16/2004 4.893 4.032 1.674 1/26/2004 1
1/19/2004 4.893 4.032 1.674 1/27/2004 1
1/20/2004 4.925 4.057 1.657 1/28/2004 1
1/21/2004 4.905 4.02 1.641 1/29/2004 1
1/22/2004 4.844 3.955 1.599 1/30/2004 1
1/23/2004 4.944 4.074 1.664 2/2/2004 1
1/26/2004 4.984 4.132 1.697 2/3/2004 1
1/27/2004 4.938 4.076 1.647 2/4/2004 1
1/28/2004 5.004 4.19 1.821 2/5/2004 1
1/29/2004 5.001 4.175 1.787 2/6/2004 1
1/30/2004 4.962 4.134 1.823 2/9/2004 1
2/2/2004 4.984 4.147 1.807 2/10/2004 1
2/3/2004 4.95 4.099 1.751 2/11/2004 1
2/4/2004 4.956 4.114 1.758 2/12/2004 1
2/5/2004 4.982 4.169 1.831 2/13/2004 1
2/6/2004 4.918 4.079 1.75 2/17/2004 1
2/9/2004 4.901 4.054 1.741 2/18/2004 1
2/10/2004 4.951 4.114 1.806 2/19/2004 1
2/11/2004 4.901 4.033 1.709 2/20/2004 1
2/12/2004 4.933 4.046 1.708 2/23/2004 1
2/13/2004 4.917 4.042 1.675 2/24/2004 1
2/16/2004 4.917 4.042 1.675 2/25/2004 1
2/17/2004 4.912 4.04 1.666 2/26/2004 1
2/18/2004 4.911 4.05 1.682 2/27/2004 1
2/19/2004 4.895 4.033 1.649 3/1/2004 1
2/20/2004 4.954 4.098 1.706 3/2/2004 1
2/23/2004 4.902 4.038 1.656 3/3/2004 1
2/24/2004 4.897 4.025 1.64 3/4/2004 1
2/25/2004 4.887 4.009 1.606 3/5/2004 1
2/26/2004 4.906 4.036 1.677 3/8/2004 1
2/27/2004 4.838 3.973 1.645 3/9/2004 1
3/1/2004 4.839 3.975 1.653 3/10/2004 1
3/2/2004 4.902 4.044 1.725 3/11/2004 1
3/3/2004 4.904 4.052 1.725 3/12/2004 1
3/4/2004 4.878 4.017 1.701 3/15/2004 1
3/5/2004 4.764 3.851 1.565 3/16/2004 1
3/8/2004 4.709 3.77 1.5 3/17/2004 1
3/9/2004 4.67 3.723 1.484 3/18/2004 1
3/10/2004 4.67 3.73 1.508 3/19/2004 1
3/11/2004 4.665 3.7 1.459 3/22/2004 1
3/12/2004 4.718 3.779 1.523 3/23/2004 1
3/15/2004 4.706 3.764 1.531 3/24/2004 1
3/16/2004 4.643 3.681 1.474 3/25/2004 1
3/17/2004 4.665 3.713 1.498 3/26/2004 1
3/18/2004 4.701 3.756 1.523 3/29/2004 1
3/19/2004 4.705 3.773 1.514 3/30/2004 1
3/22/2004 4.665 3.715 1.481 3/31/2004 1
3/23/2004 4.653 3.692 1.473 4/1/2004 1
3/24/2004 4.659 3.709 1.464 4/2/2004 1
3/25/2004 4.693 3.739 1.504 4/5/2004 1
3/26/2004 4.762 3.831 1.584 4/6/2004 1
3/29/2004 4.811 3.89 1.616 4/7/2004 1
3/30/2004 4.814 3.896 1.624 4/8/2004 1
3/31/2004 4.773 3.837 1.576 4/9/2004 1
4/1/2004 4.802 3.88 1.624 4/12/2004 1
4/2/2004 4.979 4.145 1.85 4/13/2004 1
4/5/2004 5.042 4.208 1.883 4/14/2004 1
4/6/2004 4.998 4.149 1.835 4/15/2004 1
4/7/2004 5.005 4.159 1.843 4/16/2004 1
4/8/2004 5.029 4.193 1.861 4/19/2004 1
4/9/2004 5.029 4.193 1.861 4/20/2004 1
4/12/2004 5.061 4.23 1.887 4/21/2004 1
4/13/2004 5.156 4.354 1.994 4/22/2004 1
4/14/2004 5.16 4.366 2.077 4/23/2004 1
4/15/2004 5.21 4.402 2.061 4/26/2004 1
4/16/2004 5.17 4.34 1.989 4/27/2004 1
4/19/2004 5.21 4.387 2.039 4/28/2004 1
4/20/2004 5.262 4.459 2.156 4/29/2004 1
4/21/2004 5.227 4.425 2.165 4/30/2004 1
4/22/2004 5.195 4.383 2.116 5/3/2004 1
4/23/2004 5.24 4.46 2.236 5/4/2004 1
4/26/2004 5.228 4.436 2.229 5/5/2004 1
4/27/2004 5.2 4.385 2.146 5/6/2004 1
4/28/2004 5.287 4.499 2.248 5/7/2004 1
4/29/2004 5.315 4.538 2.351 5/10/2004 1
4/30/2004 5.286 4.507 2.319 5/11/2004 1
5/3/2004 5.279 4.501 2.311 5/12/2004 1
5/4/2004 5.345 4.567 2.327 5/13/2004 1
5/5/2004 5.358 4.581 2.327 5/14/2004 1
5/6/2004 5.368 4.6 2.376 5/17/2004 1
5/7/2004 5.467 4.773 2.622 5/18/2004 1
5/10/2004 5.492 4.794 2.59 5/19/2004 1
5/11/2004 5.454 4.748 2.574 5/20/2004 1
5/12/2004 5.523 4.807 2.59 5/21/2004 1
5/13/2004 5.562 4.854 2.657 5/24/2004 1
5/14/2004 5.486 4.77 2.534 5/25/2004 1
5/17/2004 5.423 4.691 2.468 5/26/2004 1
5/18/2004 5.455 4.736 2.518 5/27/2004 1
5/19/2004 5.477 4.774 2.56 5/28/2004 1
5/20/2004 5.42 4.702 2.502 6/1/2004 1
5/21/2004 5.459 4.758 2.545 6/2/2004 1
5/24/2004 5.433 4.734 2.529 6/3/2004 1
5/25/2004 5.411 4.722 2.538 6/4/2004 1
5/26/2004 5.366 4.657 2.446 6/7/2004 1
5/27/2004 5.316 4.602 2.464 6/8/2004 1
5/28/2004 5.346 4.649 2.536 6/9/2004 1
5/31/2004 5.346 4.649 2.536 6/10/2004 1
6/1/2004 5.397 4.702 2.593 6/11/2004 1
6/2/2004 5.428 4.74 2.642 6/14/2004 1
6/3/2004 5.416 4.712 2.618 6/15/2004 1
6/4/2004 5.458 4.774 2.691 6/16/2004 1
6/7/2004 5.454 4.762 2.659 6/17/2004 1
6/8/2004 5.449 4.764 2.692 6/18/2004 1
6/9/2004 5.481 4.807 2.766 6/21/2004 1
6/10/2004 5.47 4.795 2.799 6/22/2004 1
6/11/2004 5.475 4.801 2.809 6/23/2004 1
6/14/2004 5.531 4.872 2.934 6/24/2004 1
6/15/2004 5.364 4.678 2.752 6/25/2004 1
6/16/2004 5.401 4.724 2.793 6/28/2004 1
6/17/2004 5.351 4.68 2.76 6/29/2004 1
6/18/2004 5.378 4.712 2.787 6/30/2004 1.25
6/21/2004 5.369 4.686 2.753 7/1/2004 1.25
6/22/2004 5.406 4.719 2.762 7/2/2004 1.25
6/23/2004 5.383 4.698 2.729 7/6/2004 1.25
6/24/2004 5.338 4.646 2.754 7/7/2004 1.25
6/25/2004 5.336 4.648 2.738 7/8/2004 1.25
6/28/2004 5.409 4.737 2.859 7/9/2004 1.25
6/29/2004 5.366 4.688 2.819 7/12/2004 1.25
6/30/2004 5.289 4.583 2.681 7/13/2004 1.25
7/1/2004 5.288 4.565 2.641 7/14/2004 1.25
7/2/2004 5.206 4.461 2.526 7/15/2004 1.25
7/5/2004 5.206 4.457 2.526 7/16/2004 1.25
7/6/2004 5.219 4.476 2.542 7/19/2004 1.25
7/7/2004 5.225 4.476 2.542 7/20/2004 1.25
7/8/2004 5.224 4.472 2.517 7/21/2004 1.25
7/9/2004 5.208 4.458 2.516 7/22/2004 1.25
7/12/2004 5.199 4.447 2.524 7/23/2004 1.25
7/13/2004 5.211 4.472 2.557 7/26/2004 1.25
7/14/2004 5.218 4.482 2.589 7/27/2004 1.25
7/15/2004 5.213 4.482 2.605 7/28/2004 1.25
7/16/2004 5.116 4.351 2.497 7/29/2004 1.25
7/19/2004 5.111 4.353 2.522 7/30/2004 1.25
7/20/2004 5.174 4.446 2.621 8/2/2004 1.25
7/21/2004 5.199 4.468 2.662 8/3/2004 1.25
7/22/2004 5.187 4.446 2.654 8/4/2004 1.25
7/23/2004 5.167 4.432 2.653 8/5/2004 1.25
7/26/2004 5.211 4.487 2.712 8/6/2004 1.25
7/27/2004 5.318 4.615 2.796 8/9/2004 1.25
7/28/2004 5.313 4.585 2.737 8/10/2004 1.5
7/29/2004 5.295 4.577 2.754 8/11/2004 1.5
7/30/2004 5.198 4.477 2.681 8/12/2004 1.5
8/2/2004 5.189 4.451 2.649 8/13/2004 1.5
8/3/2004 5.168 4.426 2.64 8/16/2004 1.5
8/4/2004 5.166 4.42 2.648 8/17/2004 1.5
8/5/2004 5.154 4.402 2.648 8/18/2004 1.5
8/6/2004 5.037 4.222 2.387 8/19/2004 1.5
8/9/2004 5.059 4.258 2.444 8/20/2004 1.5
8/10/2004 5.068 4.291 2.533 8/23/2004 1.5
8/11/2004 5.056 4.273 2.5 8/24/2004 1.5
8/12/2004 5.049 4.256 2.5 8/25/2004 1.5
8/13/2004 5.018 4.229 2.458 8/26/2004 1.5
8/16/2004 5.051 4.264 2.482 8/27/2004 1.5
8/17/2004 5.004 4.192 2.399 8/30/2004 1.5
8/18/2004 5.038 4.238 2.432 8/31/2004 1.5
8/19/2004 5.027 4.215 2.382 9/1/2004 1.5
8/20/2004 5.025 4.234 2.438 9/2/2004 1.5
8/23/2004 5.075 4.285 2.471 9/3/2004 1.5
8/24/2004 5.064 4.273 2.454 9/7/2004 1.5
8/25/2004 5.049 4.263 2.47 9/8/2004 1.5
8/26/2004 5.009 4.211 2.476 9/9/2004 1.5
8/27/2004 5.021 4.228 2.484 9/10/2004 1.5
8/30/2004 4.981 4.178 2.46 9/13/2004 1.5
8/31/2004 4.928 4.119 2.395 9/14/2004 1.5
9/1/2004 4.926 4.115 2.387 9/15/2004 1.5
9/2/2004 5.002 4.215 2.46 9/16/2004 1.5
9/3/2004 5.059 4.296 2.582 9/17/2004 1.5
9/6/2004 5.061 4.293 2.591 9/20/2004 1.5
9/7/2004 5.01 4.24 2.55 9/21/2004 1.75
9/8/2004 4.954 4.161 2.469 9/22/2004 1.75
9/9/2004 4.989 4.197 2.485 9/23/2004 1.75
9/10/2004 4.985 4.188 2.485 9/24/2004 1.75
9/13/2004 4.942 4.137 2.469 9/27/2004 1.75
9/14/2004 4.934 4.126 2.436 9/28/2004 1.75
9/15/2004 4.96 4.166 2.478 9/29/2004 1.75
9/16/2004 4.874 4.074 2.412 9/30/2004 1.75
9/17/2004 4.91 4.108 2.478 10/1/2004 1.75
9/20/2004 4.867 4.058 2.428 10/4/2004 1.75
9/21/2004 4.839 4.037 2.462 10/5/2004 1.75
9/22/2004 4.774 3.98 2.462 10/6/2004 1.75
9/23/2004 4.791 4.018 2.52 10/7/2004 1.75
9/24/2004 4.799 4.029 2.571 10/8/2004 1.75
9/27/2004 4.769 3.991 2.538 10/12/2004 1.75
9/28/2004 4.799 4.004 2.521 10/13/2004 1.75
9/29/2004 4.867 4.089 2.597 10/14/2004 1.75
9/30/2004 4.893 4.121 2.609 10/15/2004 1.75
10/1/2004 4.945 4.189 2.626 10/18/2004 1.75
10/4/2004 4.928 4.166 2.642 10/19/2004 1.75
10/5/2004 4.932 4.174 2.634 10/20/2004 1.75
10/6/2004 4.969 4.222 2.691 10/21/2004 1.75
10/7/2004 4.996 4.244 2.692 10/22/2004 1.75
10/8/2004 4.908 4.131 2.586 10/25/2004 1.75
10/11/2004 4.9 4.132 2.586 10/26/2004 1.75
10/12/2004 4.879 4.1 2.553 10/27/2004 1.75
10/13/2004 4.869 4.057 2.496 10/28/2004 1.75
10/14/2004 4.823 4.026 2.471 10/29/2004 1.75
10/15/2004 4.846 4.055 2.52 11/1/2004 1.75
10/18/2004 4.839 4.043 2.512 11/2/2004 1.75
10/19/2004 4.816 4.034 2.545 11/3/2004 1.75
10/20/2004 4.773 3.982 2.504 11/4/2004 1.75
10/21/2004 4.77 3.997 2.545 11/5/2004 1.75
10/22/2004 4.762 3.976 2.52 11/8/2004 1.75
10/25/2004 4.754 3.972 2.512 11/9/2004 1.75
10/26/2004 4.774 4.001 2.529 11/10/2004 2
10/27/2004 4.845 4.084 2.587 11/11/2004 2
10/28/2004 4.818 4.051 2.577 11/12/2004 2
10/29/2004 4.79 4.025 2.552 11/15/2004 2
11/1/2004 4.837 4.072 2.585 11/16/2004 2
11/2/2004 4.814 4.048 2.569 11/17/2004 2
11/3/2004 4.827 4.076 2.585 11/18/2004 2
11/4/2004 4.816 4.074 2.626 11/19/2004 2
11/5/2004 4.898 4.175 2.765 11/22/2004 2
11/8/2004 4.932 4.218 2.807 11/23/2004 2
11/9/2004 4.945 4.228 2.815 11/24/2004 2
11/10/2004 4.959 4.241 2.841 11/26/2004 2
11/11/2004 4.968 4.254 2.851 11/29/2004 2
11/12/2004 4.898 4.181 2.818 11/30/2004 2
11/15/2004 4.897 4.188 2.868 12/1/2004 2
11/16/2004 4.902 4.207 2.885 12/2/2004 2
11/17/2004 4.841 4.131 2.81 12/3/2004 2
11/18/2004 4.807 4.115 2.844 12/6/2004 2
11/19/2004 4.885 4.205 2.921 12/7/2004 2
11/22/2004 4.843 4.18 2.947 12/8/2004 2
11/23/2004 4.837 4.184 2.956 12/9/2004 2
11/24/2004 4.844 4.2 3.025 12/10/2004 2
11/25/2004 4.84 4.196 3.017 12/13/2004 2
11/26/2004 4.886 4.248 3.033 12/14/2004 2.25
11/29/2004 4.965 4.32 3.058 12/15/2004 2.25
11/30/2004 5.003 4.351 3.001 12/16/2004 2.25
12/1/2004 5.012 4.367 3.009 12/17/2004 2.25
12/2/2004 5.062 4.408 3.042 12/20/2004 2.25
12/3/2004 4.928 4.252 2.92 12/21/2004 2.25
12/6/2004 4.893 4.223 2.912 12/22/2004 2.25
12/7/2004 4.888 4.223 2.936 12/23/2004 2.25
12/8/2004 4.784 4.12 2.895 12/24/2004 2.25
12/9/2004 4.834 4.168 2.928 12/27/2004 2.25
12/10/2004 4.819 4.151 2.936 12/28/2004 2.25
12/13/2004 4.805 4.149 2.961 12/29/2004 2.25
12/14/2004 4.77 4.124 2.961 12/30/2004 2.25
12/15/2004 4.712 4.076 2.937 12/31/2004 2.25
12/16/2004 4.826 4.186 2.986 1/3/2005 2.25
12/17/2004 4.827 4.201 3.004 1/4/2005 2.25
12/20/2004 4.812 4.185 3.029 1/5/2005 2.25
12/21/2004 4.796 4.164 3.029 1/6/2005 2.25
12/22/2004 4.828 4.195 3.004 1/7/2005 2.25
12/23/2004 4.843 4.226 3.013 1/10/2005 2.25
12/24/2004 4.845 4.216 2.996 1/11/2005 2.25
12/27/2004 4.92 4.298 3.056 1/12/2005 2.25
12/28/2004 4.916 4.293 3.073 1/13/2005 2.25
12/29/2004 4.944 4.324 3.107 1/14/2005 2.25
12/30/2004 4.873 4.255 3.085 1/18/2005 2.25
12/31/2004 4.827 4.22 3.069 1/19/2005 2.25
1/3/2005 4.813 4.212 3.094 1/20/2005 2.25
1/4/2005 4.887 4.291 3.2 1/21/2005 2.25
1/5/2005 4.848 4.283 3.209 1/24/2005 2.25
1/6/2005 4.846 4.263 3.16 1/25/2005 2.25
1/7/2005 4.836 4.271 3.193 1/26/2005 2.25
1/10/2005 4.818 4.271 3.218 1/27/2005 2.25
1/11/2005 4.781 4.238 3.21 1/28/2005 2.25
1/12/2005 4.768 4.236 3.211 1/31/2005 2.25
1/13/2005 4.691 4.165 3.178 2/1/2005 2.25
1/14/2005 4.729 4.226 3.229 2/2/2005 2.5
1/17/2005 4.727 4.21 3.229 2/3/2005 2.5
1/18/2005 4.68 4.187 3.229 2/4/2005 2.5
1/19/2005 4.656 4.173 3.221 2/7/2005 2.5
1/20/2005 4.657 4.163 3.187 2/8/2005 2.5
1/21/2005 4.644 4.142 3.146 2/9/2005 2.5
1/24/2005 4.601 4.122 3.188 2/10/2005 2.5
1/25/2005 4.682 4.194 3.214 2/11/2005 2.5
1/26/2005 4.668 4.198 3.257 2/14/2005 2.5
1/27/2005 4.685 4.22 3.284 2/15/2005 2.5
1/28/2005 4.609 4.142 3.259 2/16/2005 2.5
1/31/2005 4.586 4.13 3.276 2/17/2005 2.5
2/1/2005 4.595 4.14 3.284 2/18/2005 2.5
2/2/2005 4.58 4.142 3.317 2/21/2005 2.5
2/3/2005 4.582 4.165 3.342 2/22/2005 2.5
2/4/2005 4.483 4.077 3.285 2/23/2005 2.5
2/7/2005 4.423 4.052 3.302 2/24/2005 2.5
2/8/2005 4.374 4.017 3.31 2/25/2005 2.5
2/9/2005 4.37 3.992 3.236 2/28/2005 2.5
2/10/2005 4.474 4.091 3.294 3/1/2005 2.5
2/11/2005 4.481 4.086 3.328 3/2/2005 2.5
2/14/2005 4.45 4.071 3.353 3/3/2005 2.5
2/15/2005 4.486 4.098 3.345 3/4/2005 2.5
2/16/2005 4.519 4.154 3.404 3/7/2005 2.5
2/17/2005 4.575 4.181 3.362 3/8/2005 2.5
2/18/2005 4.65 4.267 3.439 3/9/2005 2.5
2/21/2005 4.646 4.264 3.431 3/10/2005 2.5
2/22/2005 4.686 4.287 3.432 3/11/2005 2.5
2/23/2005 4.653 4.264 3.44 3/14/2005 2.5
2/24/2005 4.67 4.285 3.483 3/15/2005 2.5
2/25/2005 4.64 4.266 3.526 3/16/2005 2.5
2/28/2005 4.72 4.379 3.6 3/17/2005 2.5
3/1/2005 4.715 4.367 3.575 3/18/2005 2.5
3/2/2005 4.735 4.379 3.559 3/21/2005 2.5
3/3/2005 4.739 4.379 3.568 3/22/2005 2.75
3/4/2005 4.65 4.31 3.56 3/23/2005 2.75
3/7/2005 4.625 4.31 3.593 3/24/2005 2.75
3/8/2005 4.708 4.393 3.618 3/25/2005 2.75
3/9/2005 4.832 4.522 3.66 3/28/2005 2.75
3/10/2005 4.764 4.465 3.669 3/29/2005 2.75
3/11/2005 4.81 4.544 3.72 3/30/2005 2.75
3/14/2005 4.78 4.51 3.729 3/31/2005 2.75
3/15/2005 4.826 4.547 3.738 4/1/2005 2.75
3/16/2005 4.795 4.508 3.713 4/4/2005 2.75
3/17/2005 4.767 4.466 3.671 4/5/2005 2.75
3/18/2005 4.811 4.509 3.698 4/6/2005 2.75
3/21/2005 4.836 4.525 3.715 4/7/2005 2.75
3/22/2005 4.906 4.643 3.826 4/8/2005 2.75
3/23/2005 4.851 4.586 3.818 4/11/2005 2.75
3/24/2005 4.845 4.599 3.854 4/12/2005 2.75
3/25/2005 4.845 4.595 3.855 4/13/2005 2.75
3/28/2005 4.89 4.642 3.873 4/14/2005 2.75
3/29/2005 4.842 4.575 3.838 4/15/2005 2.75
3/30/2005 4.799 4.548 3.83 4/18/2005 2.75
3/31/2005 4.756 4.483 3.779 4/19/2005 2.75
4/1/2005 4.722 4.449 3.729 4/20/2005 2.75
4/4/2005 4.736 4.458 3.721 4/21/2005 2.75
4/5/2005 4.753 4.47 3.721 4/22/2005 2.75
4/6/2005 4.735 4.424 3.68 4/25/2005 2.75
4/7/2005 4.795 4.482 3.721 4/26/2005 2.75
4/8/2005 4.769 4.47 3.745 4/27/2005 2.75
4/11/2005 4.725 4.43 3.72 4/28/2005 2.75
4/12/2005 4.659 4.354 3.687 4/29/2005 2.75
4/13/2005 4.682 4.362 3.654 5/2/2005 2.75
4/14/2005 4.681 4.31 3.554 5/3/2005 3
4/15/2005 4.609 4.243 3.494 5/4/2005 3
4/18/2005 4.61 4.272 3.552 5/5/2005 3
4/19/2005 4.543 4.213 3.51 5/6/2005 3
4/20/2005 4.549 4.187 3.485 5/9/2005 3
4/21/2005 4.637 4.296 3.627 5/10/2005 3
4/22/2005 4.58 4.247 3.61 5/11/2005 3
4/25/2005 4.554 4.249 3.635 5/12/2005 3
4/26/2005 4.572 4.267 3.651 5/13/2005 3
4/27/2005 4.549 4.225 3.617 5/16/2005 3
4/28/2005 4.486 4.146 3.564 5/17/2005 3
4/29/2005 4.514 4.2 3.654 5/18/2005 3
5/2/2005 4.514 4.188 3.629 5/19/2005 3
5/3/2005 4.483 4.166 3.637 5/20/2005 3
5/4/2005 4.591 4.188 3.612 5/23/2005 3
5/5/2005 4.578 4.156 3.547 5/24/2005 3
5/6/2005 4.629 4.26 3.72 5/25/2005 3
5/9/2005 4.625 4.284 3.753 5/26/2005 3
5/10/2005 4.569 4.202 3.67 5/27/2005 3
5/11/2005 4.546 4.204 3.678 5/30/2005 3
5/12/2005 4.516 4.172 3.645 5/31/2005 3
5/13/2005 4.481 4.119 3.587
5/16/2005 4.496 4.129 3.595
5/17/2005 4.474 4.115 3.595
5/18/2005 4.44 4.09 3.587
5/19/2005 4.444 4.113 3.637
5/20/2005 4.439 4.123 3.662
5/23/2005 4.381 4.056 3.62
5/24/2005 4.359 4.029 3.594
5/25/2005 4.433 4.088 3.603
5/26/2005 4.429 4.081 3.627
5/27/2005 4.43 4.073 3.643
5/30/2005 4.43 4.071 3.643
5/31/2005 4.321 3.983 3.578
Source: Bloomberg L.P.
HOW DID MORTGAGE-BACKED SECURITIES PERFORM?
The period of rising short-term rates and falling long-term
rates proved to be a good environment for mortgage-backed
securities. Mortgage-backed secur ities have interest-rate
sensitivity closer to that of short-or intermediate-term
bonds, because even though mortgages may have 15-or 30-year
maturities, the bonds are paid off when a mortgage is
refinanced or a house is sold. Although homeowners were still
refinancing their mortgages during the period, the volume
declined somewhat, since many mortgages had already been
refinanced.
Mortgage-backed securities also performed well in relation to
corporate bonds. Corporate bonds were top performers in the
bond market in 2003 and 2004 as companies repaired their
balance sheets, but this turned around in March 2005 when
General Motors announced its biggest quarterly loss in
13 years,
6
. . . C O N T I N U E D
========================--------------------------------------------------------
COMMENTARY on the Fund
reminding investors that corporate bonds carry event risk. This
re-assessment of relative risk made mortgage-backed securities
a refuge, and for the first time in several years mortgage-
backed securities began outperforming corporate bonds of
similar interest-rate sensitivity. GNMAs in particular
benefited from the fact that, like U.S. Treasury bonds, they
are backed by the full faith and credit of the U.S.
government. Because your Fund must have at least 80% of
assets in GNMAs, it was not subject to the volatility that hit
the corporate bond market.
HOW DID YOU MANAGE THE FUND IN THIS ENVIRONMENT?
Given the low long-term interest-rate environment in the face
of Fed rate hikes, we felt it was prudent to keep the Fund's
interest-rate sensitivity relatively low. We also focused on
slightly higher coupon bonds that, while subject to prepayment
risk, tend to suffer less of a price decline if interest rates
rise. Our cautious stance hindered performance as rates stayed
low and even went down. However, we did take the opportunity to
deploy cash when rates spiked, such as at the end of the first
quarter of 2005.
COUPON RATE COMPOSITION OF MORTGAGE POOLS
[CHART OF COUPON RATE COMPOSITION OF MORTGAGE POOLS]
COUPON RATE % CATEGORY PERCENTAGE
- ------------- -------------------
5.00% 8.9%
5.50% 33.5%
5.88% 1.9%
6.00% 32.4%
6.16% 2.8%
6.50% 14.2%
6.75% 0.1%
7.00% 3.9%
7.50% 1.0%
8.00% 1.1%
8.50% 0.1%
9.00% 0.1%
AVERAGE COUPON RATE
5.90% (MAY 2005)
[END CHART]
7
. . . C O N T I N U E D
========================--------------------------------------------------------
SHOULD INVESTORS IN THE FUND BE CONCERNED ABOUT A POSSIBLE HOUSING "BUBBLE"?
No. While no one can say whether recent home price increases
are sustainable, your Fund is not invested in any of the new
types of mortgages (for example, interest-only mortgages) that
would be most at risk if housing prices were to fall.
WHAT'S YOUR MARKET OUTLOOK?
With economic growth moderating and global competition keeping
inflation in check despite higher energy and other commodity
prices, we believe the Fed may be nearing the end of its
tightening regime, especially as the federal funds rate nears
the 3.5% that existed before 9/11, when the Fed opened the
monetary flow to support the economy.
It pays to remember that bond investing is about earning
income. As the chart on page 10 shows, the bulk of your Fund's
total return has come from income as opposed to changes in the
Fund's price.
Thank you for the opportunity and privilege of serving you.
8
F U N D
========------------------------------------------------------------------------
RECOGNITION
USAA GNMA TRUST
[LOGO OF LIPPER LEADER PRESERVATION] [LOGO OF LIPPER LEADER EXPENSE]
LIPPER LEADER PRESERVATION LIPPER LEADER EXPENSE
The Fund is listed as a Lipper Leader for Preservation and Expense of 3,945
fixed-income funds and 150 funds, respectively, within the Lipper GNMA Funds
category for the overall period ended May 31, 2005.
LIPPER RATINGS FOR PRESERVATION REFLECT FUNDS' HISTORICAL LOSS AVOIDANCE
RELATIVE TO OTHER FUNDS WITHIN THE SAME ASSET CLASS AS OF MAY 31, 2005.
PRESERVATION RATINGS ARE RELATIVE, RATHER THAN ABSOLUTE, MEASURES, AND FUNDS
NAMED LIPPER LEADERS FOR PRESERVATION MAY STILL EXPERIENCE LOSSES PERIODICALLY;
THOSE LOSSES MAY BE LARGER FOR EQUITY AND MIXED EQUITY FUNDS THAN FOR
FIXED-INCOME FUNDS. THE FUND RECEIVED A LIPPER LEADER RATING FOR PRESERVATION
AMONG 3,945 AND 3,341 FIXED-INCOME FUNDS FOR THE THREE-AND FIVE-YEAR PERIODS,
RESPECTIVELY, AND A SCORE OF 2 AMONG 2,044 FIXED-INCOME FUNDS IN LIPPER'S GNMA
FUNDS CATEGORY FOR THE 10-YEAR PERIOD. LIPPER RATINGS FOR EXPENSE REFLECT FUNDS'
EXPENSE MINIMIZATION RELATIVE TO PEERS WITH SIMILAR LOAD STRUCTURES AS OF MAY
31, 2005. THE FUND RECEIVED A LIPPER LEADER RATING FOR EXPENSE AMONG 150, 119,
AND 86 FUNDS FOR THE THREE-, FIVE-, AND 10-YEAR PERIODS, RESPECTIVELY. RATINGS
ARE SUBJECT TO CHANGE EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED AVERAGE OF
PERCENTILE RANKS FOR THE PRESERVATION AND EXPENSE METRICS OVER THREE-, FIVE-,
AND 10-YEAR PERIODS (IF APPLICABLE). THE HIGHEST 20% OF FUNDS IN EACH PEER GROUP
ARE NAMED LIPPER LEADERS, THE NEXT 20% RECEIVE A SCORE OF 2, THE MIDDLE 20% ARE
SCORED 3, THE NEXT 20% ARE SCORED 4, AND THE LOWEST 20% ARE SCORED 5. LIPPER
RATINGS ARE NOT INTENDED TO PREDICT FUTURE RESULTS, AND LIPPER DOES NOT
GUARANTEE THE ACCURACY OF THIS INFORMATION. MORE INFORMATION IS AVAILABLE AT
WWW.LIPPERLEADERS.COM. LIPPER LEADER COPYRIGHT 2005, REUTERS, ALL RIGHTS
RESERVED.
9
I N V E S T M E N T
====================------------------------------------------------------------
OVERVIEW
USAA GNMA TRUST
OBJECTIVE
- --------------------------------------------------------------------------------
High level of current income consistent with preservation of
principal.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Normally invests at least 80% of the Fund's assets in GNMA
securities backed by the full faith and credit of the U.S.
government.
- --------------------------------------------------------------------------------
5/31/05 5/31/04
- --------------------------------------------------------------------------------
Net Assets $594.2 Million $610.5 Million
Net Asset Value Per Share $9.76 $9.72
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AND 30-DAY SEC YIELD* AS OF 5/31/05
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 30-DAY SEC YIELD
5.32% 6.50% 5.90% 4.55%
*CALCULATED AS PRESCRIBED BY THE SECURITIES AND EXCHANGE COMMISSION.
The performance data quoted represents past performance and is
no guarantee of future results. Current performance may be
higher or lower than the performance data quoted. The return
and principal value of an investment will fluctuate, so that an
investor's shares, when redeemed, may be worth more or less
than their original cost. For performance data current to the
most recent month-end, visit usaa.com.
TOTAL RETURN MEASURES THE PRICE CHANGE IN A SHARE ASSUMING THE
REINVESTMENT OF ALL NET INVESTMENT INCOME DIVIDEND AND REALIZED
CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED DO NOT
REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON
FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
10
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
AVERAGE ANNUAL COMPOUNDED RETURNS WITH REINVESTMENT OF DIVIDENDS -- PERIODS
ENDING MAY 31, 2005
- --------------------------------------------------------------------------------
TOTAL RETURN = DIVIDEND RETURN + PRICE CHANGE
- --------------------------------------------------------------------------------
10 YEARS 5.90% = 6.23% + (0.33%)
5 YEARS 6.50% = 5.68% + 0.82%
1 YEAR 5.32% = 4.91% + 0.41%
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.
ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS FOR THE 10-YEAR PERIOD
ENDING MAY 31, 2005
[CHART OF ANNUAL TOTAL RETURNS AND COMPOUNDED DIVIDEND RETURNS]
TOTAL RETURN DIVIDEND RETURN CHANGE IN SHARE PRICE
------------ --------------- ---------------------
5/31/1996 3.65% 6.92% -3.27%
5/31/1997 9.23% 7.28% 1.95%
5/31/1998 10.65% 6.93% 3.72%
5/31/1999 3.13% 6.23% -3.10%
5/31/2000 0.27% 6.57% -6.30%
5/31/2001 12.89% 7.34% 5.55%
5/31/2002 7.83% 5.91% 1.92%
5/31/2003 6.47% 5.68% 0.79%
5/31/2004 0.38% 4.71% -4.33%
5/31/2005 5.33% 4.92% 0.41%
[END CHART]
TOTAL RETURN EQUALS DIVIDEND RETURN PLUS SHARE PRICE CHANGE AND
ASSUMES REINVESTMENT OF ALL NET INVESTMENT INCOME AND REALIZED
CAPITAL GAIN DISTRIBUTIONS. DIVIDEND RETURN IS THE NET
INVESTMENT INCOME FROM DIVIDENDS RECEIVED OVER THE PERIOD,
ASSUMING REINVESTMENT OF ALL DIVIDENDS. SHARE PRICE CHANGE IS
THE CHANGE IN NET ASSET VALUE OVER THE PERIOD ADJUSTED FOR
REALIZED CAPITAL GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD
PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
11
. . . C O N T I N U E D
========================--------------------------------------------------------
12-MONTH DIVIDEND YIELD COMPARISON
[CHART OF 12-MONTH DIVIDEND YIELD COMPARISON]
USAA GNMA TRUST LIPPER GNMA FUNDS AVERAGE
--------------- -------------------------
5/31/1996 7.18% 6.66%
5/31/1997 6.90% 6.34%
5/31/1998 6.44% 6.10%
5/31/1999 6.38% 5.90%
5/31/2000 6.87% 6.16%
5/31/2001 6.64% 5.91%
5/31/2002 5.58% 5.09%
5/31/2003 5.54% 4.25%
5/31/2004 4.93% 4.03%
5/31/2005 4.80% 3.90%
[END CHART]
THE 12-MONTH DIVIDEND YIELD IS COMPUTED BY DIVIDING NET
INVESTMENT INCOME DIVIDENDS PAID DURING THE PREVIOUS 12 MONTHS
BY THE LATEST MONTH-END NET ASSET VALUE ADJUSTED FOR REALIZED
CAPITAL GAIN DISTRIBUTIONS. THE GRAPH REPRESENTS DATA FOR
PERIODS ENDING 5/31/96 TO 5/31/05.
12
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LEHMAN BROTHERS GNMA LIPPER GNMA FUNDS LIPPER GNMA FUNDS
30-YEAR INDEX INDEX USAA GNMA TRUST AVERAGE
-------------------- ----------------- --------------- -----------------
5/31/1995 $10,000.00 $10,000.00 $10,000.00 $10,000.00
6/30/1995 10,070.41 10,059.77 10,069.56 10,057.17
7/31/1995 10,090.99 10,060.56 10,049.31 10,052.30
8/31/1995 10,195.67 10,164.77 10,209.83 10,158.04
9/30/1995 10,297.27 10,263.09 10,308.78 10,261.51
10/31/1995 10,380.70 10,357.86 10,422.14 10,358.67
11/30/1995 10,501.26 10,483.70 10,574.28 10,489.50
12/31/1995 10,636.95 10,615.83 10,733.13 10,625.55
1/31/1996 10,710.12 10,678.36 10,795.89 10,686.67
2/29/1996 10,629.79 10,556.84 10,575.01 10,548.16
3/31/1996 10,603.13 10,513.54 10,473.56 10,501.98
4/30/1996 10,575.60 10,474.08 10,431.96 10,458.92
5/31/1996 10,539.22 10,432.33 10,364.56 10,415.08
6/30/1996 10,679.03 10,549.32 10,495.91 10,530.31
7/31/1996 10,719.62 10,587.38 10,519.32 10,566.23
8/31/1996 10,723.22 10,587.17 10,558.22 10,561.06
9/30/1996 10,903.91 10,754.92 10,718.80 10,730.90
10/31/1996 11,126.24 10,966.82 10,943.94 10,950.53
11/30/1996 11,290.51 11,131.47 11,114.82 11,120.04
12/31/1996 11,229.20 11,059.90 11,048.46 11,038.73
1/31/1997 11,316.44 11,131.04 11,133.63 11,108.40
2/28/1997 11,358.32 11,159.56 11,174.72 11,130.77
3/31/1997 11,244.55 11,053.06 11,059.51 11,011.38
4/30/1997 11,430.51 11,222.98 11,212.99 11,181.27
5/31/1997 11,549.58 11,323.46 11,321.53 11,284.50
6/30/1997 11,687.71 11,456.80 11,479.80 11,416.63
7/31/1997 11,898.86 11,672.70 11,693.47 11,652.60
8/31/1997 11,874.00 11,635.89 11,629.93 11,602.84
9/30/1997 12,032.56 11,789.22 11,793.27 11,758.10
10/31/1997 12,156.70 11,906.31 11,937.20 11,879.68
11/30/1997 12,195.86 11,932.13 11,959.54 11,906.78
12/31/1997 12,306.09 12,049.78 12,099.04 12,022.27
1/31/1998 12,426.14 12,168.00 12,268.25 12,146.43
2/28/1998 12,453.83 12,184.87 12,236.74 12,156.48
3/31/1998 12,506.34 12,228.20 12,317.11 12,197.93
4/30/1998 12,578.77 12,298.02 12,393.47 12,263.73
5/31/1998 12,665.25 12,385.69 12,527.48 12,359.25
6/30/1998 12,718.40 12,439.44 12,647.14 12,418.65
7/31/1998 12,790.58 12,497.65 12,677.41 12,467.13
8/31/1998 12,890.34 12,614.77 12,878.98 12,598.88
9/30/1998 13,043.42 12,770.61 13,168.32 12,775.76
10/31/1998 13,031.29 12,703.46 12,911.04 12,698.45
11/30/1998 13,105.48 12,776.32 13,056.47 12,769.85
12/31/1998 13,158.96 12,826.22 13,098.41 12,816.95
1/31/1999 13,252.28 12,904.02 13,199.13 12,891.33
2/28/1999 13,208.83 12,818.97 12,898.74 12,784.30
3/31/1999 13,288.74 12,899.71 13,034.99 12,860.93
4/30/1999 13,352.46 12,956.06 13,065.17 12,915.56
5/31/1999 13,284.23 12,862.83 12,920.09 12,817.09
6/30/1999 13,229.80 12,791.92 12,825.32 12,748.47
7/31/1999 13,142.68 12,708.05 12,580.23 12,664.89
8/31/1999 13,137.67 12,695.59 12,443.44 12,648.38
9/30/1999 13,350.29 12,902.73 12,682.60 12,848.75
10/31/1999 13,430.18 12,961.93 12,695.21 12,900.08
11/30/1999 13,435.80 12,963.52 12,703.12 12,904.35
12/31/1999 13,408.35 12,907.84 12,625.23 12,844.55
1/31/2000 13,287.46 12,795.25 12,562.90 12,731.36
2/29/2000 13,459.22 12,952.99 12,744.53 12,879.59
3/31/2000 13,674.93 13,156.14 12,900.64 13,079.86
4/30/2000 13,661.48 13,126.30 12,833.02 13,054.30
5/31/2000 13,713.27 13,179.54 12,954.78 13,100.43
6/30/2000 13,965.22 13,403.51 13,212.02 13,329.24
7/31/2000 14,037.94 13,458.76 13,276.06 13,380.99
8/31/2000 14,250.66 13,656.82 13,494.41 13,573.96
9/30/2000 14,383.16 13,774.25 13,583.37 13,690.10
10/31/2000 14,491.41 13,860.34 13,693.88 13,773.71
11/30/2000 14,694.83 14,071.82 13,930.42 13,979.60
12/31/2000 14,902.68 14,273.55 14,161.57 14,186.10
1/31/2001 15,146.39 14,490.66 14,375.15 14,395.48
2/28/2001 15,212.90 14,563.97 14,481.55 14,473.59
3/31/2001 15,303.82 14,636.23 14,585.34 14,551.98
4/30/2001 15,328.98 14,636.62 14,546.54 14,528.95
5/31/2001 15,457.69 14,736.10 14,624.84 14,617.11
6/30/2001 15,503.63 14,771.90 14,643.69 14,659.85
7/31/2001 15,769.27 15,046.18 14,931.53 14,933.60
8/31/2001 15,884.25 15,158.36 15,064.98 15,040.34
9/30/2001 16,098.63 15,359.86 15,279.19 15,250.88
10/31/2001 16,312.42 15,555.97 15,506.21 15,448.16
11/30/2001 16,175.21 15,407.58 15,309.75 15,281.60
12/31/2001 16,127.05 15,332.46 15,173.85 15,194.56
1/31/2002 16,290.09 15,488.41 15,330.01 15,341.35
2/28/2002 16,456.09 15,654.88 15,519.37 15,504.36
3/31/2002 16,300.04 15,491.62 15,296.06 15,319.69
4/30/2002 16,586.65 15,762.40 15,615.14 15,596.10
5/31/2002 16,695.16 15,865.68 15,770.15 15,697.38
6/30/2002 16,829.46 15,989.77 15,884.19 15,822.11
7/31/2002 17,024.54 16,172.19 16,060.14 16,000.25
8/31/2002 17,143.16 16,298.55 16,225.53 16,127.37
9/30/2002 17,285.02 16,429.84 16,357.11 16,270.61
10/31/2002 17,338.34 16,465.65 16,385.55 16,296.90
11/30/2002 17,354.72 16,468.74 16,384.53 16,291.89
12/31/2002 17,527.30 16,645.96 16,575.21 16,470.01
1/31/2003 17,571.63 16,686.11 16,615.58 16,504.23
2/28/2003 17,659.59 16,778.30 16,699.58 16,600.40
3/31/2003 17,672.05 16,771.07 16,697.73 16,590.06
4/30/2003 17,713.00 16,811.39 16,753.75 16,633.07
5/31/2003 17,713.62 16,830.74 16,791.09 16,678.44
6/30/2003 17,767.49 16,858.98 16,806.21 16,695.38
7/31/2003 17,474.04 16,520.74 16,456.64 16,321.36
8/31/2003 17,589.14 16,620.68 16,558.03 16,427.58
9/30/2003 17,843.05 16,894.93 16,824.35 16,710.95
10/31/2003 17,796.52 16,825.57 16,760.26 16,621.33
11/30/2003 17,858.18 16,879.18 16,789.08 16,665.07
12/31/2003 18,024.87 16,996.90 16,908.68 16,783.21
1/31/2004 18,114.99 17,086.25 16,993.51 16,867.65
2/29/2004 18,233.65 17,191.61 17,093.49 16,975.82
3/31/2004 18,308.36 17,247.33 17,162.57 17,037.93
4/30/2004 18,020.08 16,960.51 16,908.78 16,744.07
5/31/2004 17,983.51 16,917.67 16,854.67 16,696.94
6/30/2004 18,146.25 17,036.77 16,993.59 16,820.84
7/31/2004 18,293.07 17,179.41 17,114.80 16,950.98
8/31/2004 18,547.02 17,411.54 17,318.71 17,173.75
9/30/2004 18,586.14 17,397.54 17,349.95 17,176.80
10/31/2004 18,733.03 17,511.50 17,453.60 17,289.26
11/30/2004 18,690.40 17,462.91 17,415.87 17,236.23
12/31/2004 18,811.89 17,556.71 17,489.67 17,326.33
1/31/2005 18,921.00 17,658.63 17,573.06 17,423.65
2/28/2005 18,862.34 17,594.90 17,518.08 17,352.51
3/31/2005 18,826.51 17,559.02 17,481.02 17,309.67
4/30/2005 19,016.65 17,725.97 17,645.47 17,474.67
5/31/2005 19,153.57 17,840.91 17,752.19 17,581.37
[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.
13
. . . C O N T I N U E D
========================--------------------------------------------------------
The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA GNMA Trust to the following benchmarks:
o The Lehman Brothers GNMA 30-Year Index is an unmanaged index
of pass-through securities with an original maturity of 30
years.
o The Lipper GNMA Funds Index tracks the total return
performance of the 10 largest funds within the Lipper GNMA
Funds category.
o The Lipper GNMA Funds Average is an unmanaged index of peer
funds, reported by Lipper Inc., an independent organization
that monitors the performance of mutual funds.
14
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
ASSET ALLOCATION
5/31/05
[PIE CHART OF ASSET ALLOCATION]
30-Year Fixed-Rate Single-Family Mortgages* 84.7%
Collateralized Mortgage Obligations 8.1%
15-Year Fixed-Rate Single-Family Mortgages* 4.5%
Repurchase Agreements 2.4%
[END CHART]
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
*COMBINED IN THE PORTFOLIO OF INVESTMENTS UNDER MORTGAGE-BACKED
PASS-THROUGH SECURITIES, SINGLE-FAMILY.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON PAGES
16-18.
15
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA GNMA TRUST:
We have audited the accompanying statement of assets and liabilities of the USAA
GNMA Trust (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 GNMA Trust at May 31, 2005, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the three years in the
period then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 13, 2005
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(in thousands)
USAA GNMA TRUST
MAY 31, 2005
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY ISSUES (97.3%)(a)
MORTGAGE-BACKED PASS-THROUGH SECURITIES, SINGLE-FAMILY (89.2%)
Government National Mortgage Assn. I,
$ 7,918 Pool 604858 5.50% 12/15/2018 $ 8,199
41,729 Pool 604713 5.50 10/15/2033 42,681
18,344 Pool 616143 5.50 12/15/2033 18,762
8,741 Pool 615486 5.50 7/15/2034 8,939
8,203 Pool 781378 6.00 12/15/2016 8,540
3,870 Pool 780770 6.00 4/15/2028 4,013
1,920 Pool 482833 6.00 11/15/2028 1,990
3,627 Pool 492703 6.00 2/15/2029 3,757
2,681 Pool 781148 6.00 7/15/2029 2,779
5,076 Pool 584367 6.00 5/15/2032 5,250
14,306 Pool 603869 6.00 1/15/2033 14,795
3,839 Pool 553069 6.00 2/15/2033 3,970
5,723 Pool 581541 6.00 7/15/2033 5,919
3,863 Pool 615955 6.00 9/15/2033 3,995
1,191 Pool 456861 6.50 5/15/2028 1,251
1,002 Pool 472596 6.50 5/15/2028 1,053
1,150 Pool 462642 6.50 7/15/2028 1,208
1,175 Pool 464827 6.50 9/15/2028 1,235
66 Pool 467338 6.50 11/15/2028 69
2,879 Pool 490804 6.50 11/15/2028 3,024
145 Pool 434165 6.50 1/15/2029 152
186 Pool 469900 6.50 1/15/2029 196
3,686 Pool 486065 6.50 3/15/2031 3,866
3,328 Pool 485860 6.50 10/15/2031 3,491
2,540 Pool 577423 6.50 1/15/2032 2,664
1,078 Pool 581120 6.50 3/15/2032 1,130
3,859 Pool 552707 6.50 8/15/2032 4,047
16,395 Pool 781516 6.50 9/15/2032 17,195
116 Pool 474279 6.75 5/15/2028 123
325 Pool 474256 6.75 5/15/2028 343
567 Pool 440293 7.00 4/15/2027 603
71 Pool 440325 7.00 4/15/2027 75
2,055 Pool 780570 7.00 5/15/2027 2,183
263 Pool 478209 7.00 6/15/2028 279
181 Pool 458908 7.00 7/15/2028 192
575 Pool 464128 7.00 8/15/2028 610
365 Pool 486467 7.00 8/15/2028 388
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS (continued)
(in thousands)
USAA GNMA TRUST
MAY 31, 2005
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. I,
$ 733 Pool 464854 7.00% 9/15/2028 $ 778
3,107 Pool 487603 7.00 5/15/2029 3,296
2,631 Pool 487613 7.00 6/15/2029 2,792
1,608 Pool 555482 7.00 8/15/2031 1,705
933 Pool 781328 7.00 9/15/2031 989
1,804 Pool 564438 7.00 10/15/2031 1,913
681 Pool 563599 7.00 6/15/2032 723
2,024 Pool 563613 7.00 7/15/2032 2,147
914 Pool 780716 7.50 2/15/2028 984
160 Pool 781001 7.50 3/15/2029 172
356 Pool 499432 7.50 4/15/2029 382
713 Pool 470683 7.50 7/15/2029 766
1,162 Pool 510533 7.50 10/15/2029 1,248
314 Pool 518539 7.50 10/15/2029 337
248 Pool 538003 7.50 8/15/2030 266
317 Pool 443263 7.50 12/15/2030 340
176 Pool 486050 7.50 1/15/2031 189
171 Pool 530250 7.50 1/15/2031 184
409 Pool 552172 7.50 11/15/2031 438
19 Pool 178674 8.00 1/15/2022 21
553 Pool 352169 8.00 6/15/2023 600
706 Pool 442548 8.00 5/15/2027 764
479 Pool 511530 8.00 7/15/2030 518
274 Pool 520978 8.00 9/15/2030 297
142 Pool 307542 8.50 6/15/2021 157
65 Pool 329602 8.50 7/15/2022 71
190 Pool 312950 9.00 7/15/2021 210
Government National Mortgage Assn. II,
17,979 Pool 003389 5.00 5/20/2033 18,089
19,318 Pool 003414 5.00 7/20/2033 19,436
12,144 Pool 003568 5.00 6/20/2034 12,214
5,263 Pool 003375 5.50 4/20/2033 5,371
16,385 Pool 003530 5.50 3/20/2034 16,720
49,400 Pool 003678 5.50 2/20/2035 50,409
32,964 Pool 003702 5.50 4/20/2035 33,638
3,157 Pool 003052 6.00 3/20/2031 3,261
7,167 Pool 003273 6.00 8/20/2032 7,400
5,773 Pool 003285 6.00 9/20/2032 5,960
5,726 Pool 003460 6.00 10/20/2033 5,931
6,411 Pool 448816 6.00 12/20/2033 6,627
17,864 Pool 003517 6.00 2/20/2034 18,439
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS (continued)
(in thousands)
USAA GNMA TRUST
MAY 31, 2005
PRINCIPAL COUPON MARKET
AMOUNT SECURITY RATE MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. II,
$18,440 Pool 003531 6.00% 3/20/2034 $ 19,034
13,403 Pool 003611 6.00 9/20/2034 13,834
31,724 Pool 003625 6.00 10/20/2034 32,746
10,737 Pool 605742 6.00 11/20/2034 11,096
1,144 Pool 003080 6.50 5/20/2031 1,195
991 Pool 003107 6.50 7/20/2031 1,035
2,726 Pool 781494 6.50 8/20/2031 2,848
4,322 Pool 781427 6.50 4/20/2032 4,514
4,067 Pool 003250 6.50 6/20/2032 4,248
16,532 Pool 003599 6.50 8/20/2034 17,261
3,075 Pool 002971 7.00 9/20/2030 3,246
466 Pool 003070 7.50 4/20/2031 497
128 Pool 000563 8.00 12/20/2022 138
3,328 Pool 002958 8.00 8/20/2030 3,585
Fannie Mae(+),
1,868 Pool 598427 6.00 2/01/2017 1,938
1,959 Pool 608749 6.50 10/01/2016 2,045
5,733 Pool 618473 6.50 12/01/2016 5,986
--------
529,994
--------
COLLATERALIZED MORTGAGE OBLIGATIONS (8.1%)
Government National Mortgage Assn. I,
6,108 Series 2003-99, Class KA 5.50 6/16/2021 6,135
15,000 Series 2003-50, Class PC 5.50 3/16/2032 15,376
10,000 Series 2002-35, Class C 5.88 10/16/2023 10,515
15,000 Series 2001-12, Class B 6.16 6/16/2021 15,864
--------
47,890
--------
Total U.S. government agency issues (cost: $571,713) 577,884
--------
REPURCHASE AGREEMENTS (2.4%)(b)
14,330 Credit Suisse First Boston Corp., 3.00%,
acquired on 5/31/2005 and due on 6/01/2005
at $14,330 (collateralized by $13,656 of
Government National Mortgage Assn.(a),
5.00% - 7.25%, due 10/15/2006 - 8/15/2043;
combined market value $14,618) (cost: $14,330) 14,330
--------
TOTAL INVESTMENTS (COST: $586,043) $592,214
========
19
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA GNMA TRUST
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%.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) U.S. government agency issues - mortgage-backed securities issued
by Government National Mortgage Association (GNMA) 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.
(b) 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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA GNMA TRUST
MAY 31, 2005
ASSETS
Investments in securities, at market value (identified cost of $586,043) $592,214
Receivables:
Capital shares sold 373
Interest 2,744
--------
Total assets 595,331
--------
LIABILITIES
Payables:
Capital shares redeemed 517
Dividends on capital shares 474
Accrued management fees 63
Accrued transfer agent's fees 3
Other accrued expenses and payables 63
--------
Total liabilities 1,120
--------
Net assets applicable to capital shares outstanding $594,211
========
NET ASSETS CONSIST OF:
Paid-in capital $627,502
Accumulated net realized loss on investments (39,462)
Net unrealized appreciation of investments 6,171
--------
Net assets applicable to capital shares outstanding $594,211
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 60,907
========
Net asset value, redemption price, and offering price per share $ 9.76
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA GNMA TRUST
YEAR ENDED MAY 31, 2005
INVESTMENT INCOME
Interest income $27,452
-------
EXPENSES
Management fees 800
Administration and servicing fees 907
Transfer agent's fees 848
Custody and accounting fees 124
Postage 92
Shareholder reporting fees 24
Trustees' fees 8
Registration fees 41
Professional fees 48
Other 11
-------
Total expenses 2,903
Expenses paid indirectly (3)
-------
Net expenses 2,900
-------
NET INVESTMENT INCOME 24,552
-------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain 686
Change in net unrealized appreciation/depreciation 5,792
-------
Net realized and unrealized gain 6,478
-------
Increase in net assets resulting from operations $31,030
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA GNMA TRUST
YEARS ENDED MAY 31,
2005 2004
--------------------------
FROM OPERATIONS
Net investment income $ 24,552 $ 24,101
Net realized gain (loss) on investments 686 (266)
Change in net unrealized appreciation/depreciation
of investments 5,792 (21,536)
--------------------------
Increase in net assets resulting from operations 31,030 2,299
--------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (28,942) (32,030)
--------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 79,152 108,530
Reinvested dividends 22,918 25,261
Cost of shares redeemed (120,435) (245,366)
--------------------------
Decrease in net assets from capital
share transactions (18,365) (111,575)
--------------------------
Net decrease in net assets (16,277) (141,306)
NET ASSETS
Beginning of period 610,488 751,794
--------------------------
End of period $ 594,211 $ 610,488
==========================
CHANGE IN SHARES OUTSTANDING
Shares sold 8,082 10,878
Shares issued for dividends reinvested 2,341 2,543
Shares redeemed (12,309) (24,641)
--------------------------
Decrease in shares outstanding (1,886) (11,220)
==========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA GNMA TRUST
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 GNMA Trust (the Fund),
which is classified as diversified under the 1940 Act. The Fund's
investment objective is to provide a high level of current income
consistent with preservation of principal.
A. SECURITY VALUATION - The value of each security is determined
(as of the close of trading on the New York Stock Exchange on
each business day the exchange is open) as set forth below:
1. Debt securities are valued each business day by a pricing
service (the Service) approved by the Trust's Board of
Trustees. The Service uses the mean between quoted bid and
asked prices or the last sales price to price securities
when, in the Service's judgment, these prices are readily
available and are representative of the securities' market
values. For many securities, such prices are not readily
available. The Service generally prices these securities
based on methods that include 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.
2. 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.
3. 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
24
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
in good faith at fair value, using methods determined by USAA
Investment Management Company (the Manager), an affiliate of
the Fund, under valuation procedures approved by the Trust's
Board of Trustees. Valuing these securities at fair value is
intended to cause the Fund's net asset value (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. 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
25
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
U.S. government, its agencies, or its instrumentalities.
Government-sponsored enterprises (GSEs), such as Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan
Mortgage Corporation (Freddie Mac), are supported only by the
credit of the issuing U.S. government agency, and are neither
issued nor guaranteed by the U.S. government. Obligations
pledged as collateral are required to maintain a value equal to
or in excess of the repurchase agreement price plus accrued
interest and are held by the Fund, either through its regular
custodian or through a special "tri-party" custodian that
maintains separate accounts for both the Fund and its
counterparty, until maturity of the repurchase agreement. The
Fund's Manager monitors the creditworthiness of sellers with
which the Fund may enter into repurchase agreements.
E. SECURITIES PURCHASED ON A WHEN-ISSUED BASIS - Delivery and
payment for securities that have been purchased by the Fund on a
when-issued basis can take place a month or more after the trade
date. During the period prior to settlement, these securities do
not earn interest, are subject to market fluctuation, and may
increase or decrease in value prior to their delivery. The Fund
maintains segregated assets with a market value equal to or
greater than the amount of its purchase commitments. The
purchase of securities on a when-issued basis may increase the
volatility of the Fund's NAV to the extent that the Fund makes
such purchases while remaining substantially fully invested. The
Fund had no when-issued commitments as of May 31, 2005.
F. EXPENSES PAID INDIRECTLY - 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
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
reduce the Fund's expenses. For the year ended May 31, 2005,
these custodian and other bank credits reduced the Fund's
expenses by $3,000.
G. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liabilities arising out of the performance of their duties to
the Trust. In addition, in the normal course of business the
Trust enters into contracts that contain a variety of
representations and warranties that provide general
indemnifications. The Trust's maximum exposure under these
arrangements is unknown, as this would involve future claims
that may be made against the Trust that have not yet occurred.
However, the Trust expects the risk of loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(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
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
share of CAPCO's operating expenses related to obtaining and
maintaining CAPCO's funding programs in total (in no event to exceed
0.09% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period.
Prior to January 6, 2005, the loan agreement with CAPCO was in the
amount of $400 million, and the Fund also participated with other USAA
funds in a joint, short-term, revolving, committed loan agreement of
$100 million with Bank of America and State Street Bank and Trust
Company (State Street), under which Bank of America and State Street
both committed $50 million. Subject to availability under its agreement
with Bank of America and State Street, the Fund could borrow from Bank
of America and State Street, at the federal funds rate plus a 0.50%
markup, an amount which, when added to outstanding borrowings under the
CAPCO agreement, did not exceed 25% of the Fund's total assets. The
USAA funds that were party to the loan agreement with Bank of America
and State Street were assessed facility fees in an annual amount equal
to 0.09% of the $100 million loan agreement, whether used or not. The
facility fees were allocated among the funds based on their respective
average net assets for the period.
For the year ended May 31, 2005, the Fund paid CAPCO facility fees of
$4,000, which represents 2.1% 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
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
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 for security paydowns, and the
expiration of capital loss carryovers resulted in reclassifications
made to the statement of assets and liabilities to decrease paid-in
capital by $3,499,000, increase accumulated undistributed net
investment income by $4,390,000, and increase accumulated net realized
loss on investments by $891,000. 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* $28,942,000 $32,030,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
As of May 31, 2005, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 474,000
Accumulated capital and other losses (39,462,000)
Unrealized appreciation 6,171,000
Net investment income is accrued daily as dividends and distributed to
shareholders monthly. Distributions of realized gains from security
transactions not offset by capital losses are made annually in the
succeeding fiscal year or as otherwise required to avoid the payment of
federal taxes. For the year ended May 31, 2005, the Fund had expired
capital loss carryovers of $3,499,000. At May 31, 2005, the Fund had a
current post-October deferred capital loss of $2,129,000 and capital
loss carryovers of $37,333,000, for federal income tax purposes. The
post-October loss will be recognized on the first day of the following
fiscal year. If not offset by subsequent capital gains, the capital
loss carryovers will expire between 2008 and 2013, as shown on the next
page. It is
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
unlikely that the Trust's Board of Trustees will authorize a
distribution of capital gains realized in the future until the capital
loss carryovers have been used or expire.
CAPITAL LOSS CARRYOVERS
----------------------------------------
EXPIRES BALANCE
------- ------------
2008 $ 8,011,000
2009 13,754,000
2010 1,177,000
2012 9,577,000
2013 4,814,000
-----------
Total $37,333,000
===========
(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
$211,506,000 and $224,839,000, respectively.
As of May 31, 2005, the cost of securities, including short-term
securities, for federal income tax purposes, was $586,043,000.
Gross unrealized appreciation and depreciation of investments as of May
31, 2005, for federal income tax purposes, were $7,219,000 and
$1,048,000, respectively, resulting in net unrealized appreciation of
$6,171,000.
(5) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party securities-lending agent,
Metropolitan West Securities LLC (MetWest), may lend its securities to
qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
securities loaned, initially in an amount at least equal to 102% of the
fair value of domestic securities loaned and 105% of the fair value of
international securities loaned. Cash collateral is invested in
high-quality short-term investments. The Fund and MetWest retain 80%
and 20%, respectively, of the income earned from the investment of cash
received as collateral. MetWest receives no other fees from the Fund
for its services as securities-lending agent. Risks to the Fund in
securities-lending transactions are that the borrower may not provide
additional collateral when required or return the securities when due,
and that the value of the short-term investments will be less than the
amount of cash collateral required to be returned to the borrower. The
Fund had no securities-lending transactions during the year ended May
31, 2005.
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's investment
policies and manages the Fund's portfolio. The investment
management fee for the Fund is composed of a base fee and a
performance adjustment that increases or decreases the base fee
depending upon the performance of the Fund relative to the
performance of the Lipper GNMA Funds Index, which tracks the
total return performance of the 10 largest funds in the Lipper
GNMA Funds category. The Fund's base fee is accrued daily and
paid monthly at an annualized rate of 0.125% of its 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
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
which is the number of days in the month and the denominator of
which is 365 (366 in leap years). The resulting amount is then
added to (in the case of overperformance) or subtracted from (in
the case of underperformance) the base fee, as referenced in the
following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
+/- 0.20% to 0.50% +/- 0.04%
+/- 0.51% to 1.00% +/- 0.05%
+/- 1.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
whenever the Fund outperforms the Lipper GNMA 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 $800,000,
which included a performance adjustment of $45,000 that
increased the base management fee of 0.125% by 0.007%.
B. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and shareholder servicing functions for the Fund.
For such services, the Manager receives a fee accrued 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 $907,000.
C. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
Manager, provides transfer agent services to the Fund based on
an annual charge of $25.50 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
$848,000.
D. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(7) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors,
officers, and/or employees of the Manager. None of the
affiliated trustees or Fund officers received any compensation
from the Fund.
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA GNMA TRUST
MAY 31, 2005
(8) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
-----------------------------------------------------------------
Net asset value at beginning of period $ 9.72 $ 10.16 $ 10.08 $ 9.89 $ 9.37
-----------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .47 .48 .56 .57(b) .66
Net realized and unrealized gain (loss) .04 (.44) .08 .19(b) .52
-----------------------------------------------------------------
Total from investment operations .51 .04 .64 .76 1.18
Less distributions:
From net investment income (.47) (.48) (.56) (.57) (.66)
-----------------------------------------------------------------
Net asset value at end of period $ 9.76 $ 9.72 $ 10.16 $ 10.08 $ 9.89
=================================================================
Total return (%)* 5.33 .39 6.49 7.83 12.91
Net assets at end of period (000) $594,211 $610,488 $751,794 $589,157 $476,641
Ratio of expenses to average
net assets (%)**(a) .48 .47 .46 .41 .32
Ratio of net investment income to
average net assets (%)** 4.06 3.62 4.43 5.62(b) 6.74
Portfolio turnover (%) 37.29 58.53 74.64 44.77 94.72
* Assumes reinvestment of all net investment income distributions during the
period. May differ from the Lipper reported return due to Lipper calculation
rounding.
** For the year ended May 31, 2005, average net assets were $604,707,000.
(a) Reflects total operating expenses of the Fund before reductions of any
expenses paid indirectly. The Fund's expenses paid indirectly decreased the
expense ratios by less than 0.01%.
(b) 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 $ .57
Net realized and unrealized gain $ .19
Ratio of net investment income to average net assets 5.63%
34
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA GNMA TRUST
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
35
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2005
use this information to compare the ongoing costs of investing in the
Fund and other funds. To do so, compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder
reports of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any direct costs, such as
wire fees, redemption fees, or low balance fees. Therefore, the second
line of the table is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different
funds. In addition, if these direct costs were included, your costs
would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE DECEMBER 1, 2004 -
DECEMBER 1, 2004 MAY 31, 2005 MAY 31, 2005
-----------------------------------------------------------
Actual $1,000.00 $1,019.30 $2.43
Hypothetical
(5% return before expenses) 1,000.00 1,022.52 2.44
*Expenses are equal to the Fund's annualized expense ratio of 0.48%,
which is net of any expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 183 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
1.93% for the six-month period of December 1, 2004, through May 31,
2005.
36
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
USAA GNMA TRUST
MAY 31, 2005
At a meeting of the Board of Trustees held on April 27-28, 2005, the
Board, including the Trustees who are not "interested persons" of the
Trust (the "Independent Trustees"), approved the continuance of the
Investment Advisory Agreement between the Trust and the Manager with
respect to the Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and the Manager, and were given the opportunity to ask questions and
request additional information from management. The information
provided to the Board included, among other things: (i) a separate
report prepared by an independent third party, which provided a
statistical analysis comparing the Fund's investment performance,
expenses, and fees to comparable investment companies; (ii) information
concerning the services rendered to the Fund, as well as information
regarding the Manager's revenues and costs of providing services to the
Fund and compensation paid to affiliates of the Manager; and (iii)
information about the Manager's operations and personnel. Prior to
voting, the Independent Trustees reviewed the proposed continuance of
the Investment Advisory Agreement with management and with experienced
independent counsel and received materials from such counsel discussing
the legal standards for their consideration of the proposed
continuation of the Investment Advisory Agreement with respect to the
Fund. The Independent Trustees also reviewed the proposed continuation
of the Investment Advisory Agreement with respect to the Fund in
private sessions with their counsel at which no representatives of
management were present.
At each regularly scheduled meeting of the Board and its committees,
the Board of Trustees of the Trust receives and reviews, among other
things, information concerning the Fund's performance and related
services provided by the Manager. At the meeting at which the renewal
of the Investment Advisory Agreement is considered, particular focus is
given to information concerning Fund performance, comparability
37
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2005
of fees and total expenses, and profitability. However, the Board noted
that the evaluation process with respect to the Manager is an ongoing
one. In this regard, the Board's and its committees' consideration of
the Investment Advisory Agreement included certain types of information
previously received at such meetings.
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the
Investment Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment
advisory services provided to the Fund, the Manager and its affiliates
provide administrative services, stockholder services, oversight of
Fund accounting, marketing services, assistance in meeting legal and
regulatory requirements, and other services necessary for the operation
of the Fund and the Trust.
The Board considered the Manager's management style and the performance
of its duties under the Investment Advisory Agreement. The Board
considered the level and depth of knowledge of the Manager, including
the professional experience and qualifications of
38
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2005
its senior and investment personnel, as well as current staffing
levels. The allocation of the Fund's brokerage, including the Manager's
process for monitoring "best execution," was also considered. The
Manager's role in coordinating the activities of the Fund's other
service providers was also considered. The Board considered the
Manager's financial condition and that it had the financial wherewithal
to continue to provide the same scope and high quality of services
under the Investment Advisory Agreement. In reviewing the Investment
Advisory Agreement, the Board focused on the experience, resources, and
strengths of the Manager and its affiliates in managing investment
companies, including the Fund.
The Board also reviewed the compliance and administrative services
provided to the Fund by the Manager, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager and
its affiliates provide compliance and administrative services to the
Fund. The Trustees, guided also by information obtained from their
experiences as directors/trustees of the Fund and other investment
companies managed by the Manager, also focused on the quality of the
Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE. In connection with its consideration of the
Investment Advisory Agreement, the Board evaluated the Fund's advisory
fees and total expense ratio as compared to other open-end investment
companies deemed to be comparable to the Fund as determined by the
independent third party in its report. The Fund's expenses were
compared to (i) a group of investment companies chosen by the
independent third party to be comparable to the Fund based upon certain
factors, including fund type, comparability of investment objectives
and classifications, 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 similar
investment classifications/objectives
39
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2005
as the Fund regardless of asset size, excluding outliers (the "expense
universe"). Among other data, the Board noted that the Fund's
management fee rate -- which includes advisory and administrative
services and the effects of any performance adjustment -- was the
lowest in its expense group and below the median of its expense
universe. The data indicated that the Fund's total expenses were the
lowest in its expense group and below the median of its expense
universe. The Board took into account the various services provided to
the Fund by the Manager and its affiliates. The Board also noted the
level and method of computing the management fee, including the
performance adjustment to such fee.
In considering the Fund's performance, the Board of Trustees noted that
the Board reviews at its regularly scheduled meetings information about
the Fund's performance results. The Trustees also reviewed various
comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other mutual
funds deemed to be in its peer group by the independent third party in
its report (the "performance universe"). The Fund's performance
universe consisted of the Fund and all retail and institutional
open-end investment companies with the same classification/objective as
the Fund regardless of asset size or primary channel of distribution.
This comparison indicated that the Fund's performance exceeded the
average of its performance universe and its Lipper index for the one-,
three-, and five-year periods ended December 31, 2004. The Board also
noted that the Fund's percentile performance ranking was in the top 50%
of its performance universe for the one-and three-year periods ended
December 31, 2004.
COMPENSATION AND PROFITABILITY. The Board took into consideration the
level and method of computing the management fee. The information
considered by the Board included operating profit margin information
40
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2005
for the Manager's business as a whole. The Board also received and
considered profitability information related to the management revenues
from the Fund. This consideration included a broad review of the
methodology used in the allocation of certain costs to the Fund. The
Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax expenses. In reviewing the overall profitability of
the management fee to the Manager, the Board also considered the fact
that affiliates provide shareholder servicing and administrative
services to the Fund for which they receive compensation. The Board
also considered the possible direct and indirect benefits to the
Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its association
with the Fund. The Trustees recognized that the Manager should be
entitled to earn a reasonable level of profits in exchange for the
level of services it provides to the Fund and the entrepreneurial risk
that it assumes as Manager. The Trustees also noted the relatively low
management fee and total expenses of the Fund as compared to its peer
group and peer universe.
ECONOMIES OF SCALE. The Board considered whether there should be
changes in the management fee rate or structure in order to enable the
Fund to participate in any economies of scale that the Manager may
experience as a result of growth in the Fund's assets. The Board noted
that the Fund's contractual management fee is below the asset-weighted
average of funds at all asset levels in its peer group as set forth in
the report prepared by the independent third party. The Board also took
into account management's discussion of the relatively small universe
of funds that currently have breakpoints in their advisory fee. The
Board determined that the current investment management fee structure
was reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability
41
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENT (unaudited)
(continued)
USAA GNMA TRUST
MAY 31, 2005
and resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is reasonable in
relation to the performance of funds with similar investment objectives
and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to
be provided by the Manager; and (v) the Manager's level of
profitability from its relationship with the Fund is reasonable. Based
on its conclusions, the Board determined that continuation of the
Investment Advisory Agreement would be in the interests of the Fund and
its shareholders.
42
D I R E C T O R S ' A N D O F F I C E R S '
====================------------------------------------------------------------
INFORMATION
DIRECTORS* AND OFFICERS OF THE COMPANY
- --------------------------------------------------------------------------------
The Board of Directors of the Company consists of six Directors.
These Directors and the Company's Officers supervise the business
affairs of the USAA family of funds. The Board of Directors is
responsible for the general oversight of the funds' business and for
assuring that the funds are managed in the best interests of each
fund's respective shareholders. The Board of Directors periodically
reviews the funds' investment performance as well as the quality of
other services provided to the funds and their shareholders by each of
the fund's service providers, including USAA Investment Management
Company (IMCO) and its affiliates. The term of office for each
Director shall be 20 years or until the Director reaches age 70. All
members of the Board of Directors shall be presented to shareholders
for election or reelection, as the case may be, at least once every
five years. Vacancies on the Board of Directors can be filled by the
action of a majority of the Directors, provided that at least
two-thirds of the Directors have been elected by the shareholders.
Set forth below are the Directors and Officers of the Company, their
respective offices and principal occupations during the last five
years, length of time served, and information relating to any other
directorships held. Each serves on the Board of Directors of the USAA
family of funds consisting of four registered investment companies
offering 39 individual funds as of May 31, 2005. Unless otherwise
indicated, the business address of each is 9800 Fredericksburg Road,
San Antonio, TX 78288.
If you would like more information about the funds' Directors, you
may call (800) 531-8181 to request a free copy of the funds'
statement of additional information (SAI).
* FOR SIMPLICITY THROUGHOUT THIS SECTION, THE BOARDS OF DIRECTORS AND
BOARDS OF TRUSTEES OF THE FOUR LEGAL ENTITIES THAT COMPRISE THE USAA
FAMILY OF FUNDS WILL BE IDENTIFIED AS THE BOARD OF DIRECTORS.
43
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED DIRECTOR(1)
- --------------------------------------------------------------------------------
CHRISTOPHER W. CLAUS (2,4)
Director
Born: December 1960
Year of Election or Appointment: 2001
President, Chief Executive Officer, Director, and Chairman of the
Board of Directors, IMCO (12/04-present); President and Chief
Executive Officer, Director, and Vice Chairman of the Board of
Directors, IMCO (2/01-12/04); Senior Vice President, Investment Sales
and Service, IMCO (7/00-2/01); Vice President, Investment Sales and
Service, IMCO (12/94-7/00). Mr. Claus serves as President,
Director/Trustee, and Vice Chairman of the Boards of Director/Trustee
of the USAA family of funds. He also serves as President, Director,
and Chairman of the Board of Directors of USAA Shareholder Account
Services. He also holds the Officer position of Senior Vice President
of USAA Life Investment Trust, a registered investment company
offering five individual funds.
(1) INDICATES THE DIRECTOR IS AN EMPLOYEE OF USAA INVESTMENT
MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND IS CONSIDERED AN
"INTERESTED PERSON" UNDER THE INVESTMENT COMPANY ACT OF 1940.
(2) MEMBER OF EXECUTIVE COMMITTEE
(3) MEMBER OF AUDIT COMMITTEE
(4) MEMBER OF PRICING AND INVESTMENT COMMITTEE
(5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE
(6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE USAA
FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430.
44
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
NON-INTERESTED (INDEPENDENT) DIRECTORS
- --------------------------------------------------------------------------------
BARBARA B. DREEBEN (3,4,5,6)
Director
Born: June 1945
Year of Election or Appointment: 1994
President, Postal Addvantage (7/92-present), a postal mail list
management service. Mrs. Dreeben serves as Director/Trustee of the
USAA family of funds. Mrs. Dreeben holds no other directorships of any
publicly held corporations or other investment companies outside the
USAA family of funds.
ROBERT L. MASON, PH.D. (3,4,5,6)
Director
Born: July 1946
Year of Election or Appointment: 1997
Institute Analyst, Southwest Research Institute (3/02-present); Staff
Analyst, Southwest Research Institute (9/98-3/02), which focuses in
the fields of technological research. Dr. Mason serves as a
Director/Trustee of the USAA family of funds. Dr. Mason holds no other
directorships of any publicly held corporations or other investment
companies outside the USAA family of funds.
MICHAEL F. REIMHERR (3,4,5,6)
Director
Born: August 1945
Year of Election or Appointment: 2000
President of Reimherr Business Consulting (5/95-present), an
organization that performs business valuations of large companies to
include the development of annual business plans, budgets, and
internal financial reporting. Mr. Reimherr serves as a
Director/Trustee of the USAA family of funds. Mr. Reimherr holds no
other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
45
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
LAURA T. STARKS, PH.D.(3,4,5,6)
Director
Born: February 1950
Year of Election or Appointment: 2000
Charles E. and Sarah M. Seay Regents Chair Professor of Finance,
University of Texas at Austin (9/96-present). Dr. Starks serves as a
Director/Trustee of the USAA family of funds. Dr. Starks holds no
other directorships of any publicly held corporations or other
investment companies outside the USAA family of funds.
RICHARD A. ZUCKER(2,3,4,5,6)
Director and Chairman of the Board of Directors
Born: July 1943
Year of Election or Appointment: 1992(+)
Vice President, Beldon Roofing Company (7/85-present). Mr. Zucker
serves as a Director/Trustee of the USAA family of funds. Mr. Zucker
holds no other directorships of any publicly held corporations or
other investment companies outside the USAA family of funds.
(1) INDICATES THE DIRECTOR IS AN EMPLOYEE OF USAA INVESTMENT MANAGEMENT
COMPANY OR AFFILIATED COMPANIES AND IS CONSIDERED AN "INTERESTED
PERSON" UNDER THE INVESTMENT COMPANY ACT OF 1940.
(2) MEMBER OF EXECUTIVE COMMITTEE
(3) MEMBER OF AUDIT COMMITTEE
(4) MEMBER OF PRICING AND INVESTMENT COMMITTEE
(5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE
(6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE USAA
FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430.
(+) MR. ZUCKER WAS ELECTED AS CHAIRMAN OF THE BOARD IN 2005.
46
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED OFFICERS(1)
- --------------------------------------------------------------------------------
CLIFFORD A. GLADSON
Vice President
Born: November 1950
Year of Appointment: 2002
Senior Vice President, Fixed Income Investments, IMCO (9/02-present);
Vice President, Fixed Income Investments, IMCO (5/02-9/02); Vice
President, Mutual Fund Portfolios, IMCO (12/99-5/02); Assistant Vice
President, Fixed Income Investments, IMCO (11/94-12/99). Mr. Gladson
also holds the Officer position of Vice President of USAA Life
Investment Trust, a registered investment company offering five
individual funds.
STUART WESTER
Vice President
Born: June 1947
Year of Appointment: 2002
Vice President, Equity Investments, IMCO (1/99-present); Vice
President, Investment Strategy and Analysis, USAA Capital Corporation
(CAPCO) (6/96-1/99). Mr. Wester also holds the Officer position of
Vice President of USAA Life Investment Trust, a registered investment
company offering five individual funds.
MARK S. HOWARD
Secretary
Born: October 1963
Year of Appointment: 2002
Senior Vice President, Life/IMCO/USAA Financial Planning Services
(FPS) General Counsel, USAA (10/03-present); Senior Vice President,
Securities Counsel, USAA (12/02-10/03); Senior Vice President,
Securities Counsel & Compliance, IMCO (1/02-12/02); Vice President,
Securities Counsel & Compliance, IMCO (7/00-1/02); and Assistant Vice
President, Securities Counsel, USAA (2/98-7/00). Mr. Howard also holds
the Officer positions of Senior Vice President, Secretary, and Counsel
for USAA Life Insurance Company, IMCO, USAA Financial Advisers, Inc.
(FAI), FPS, and USAA Shareholder Account Services; and Secretary for
USAA Life Investment Trust, a registered investment company offering
five individual funds.
47
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
DEBRA K. DUNN
Treasurer
Born: August 1969
Year of Appointment: 2005
Assistant Vice President, IMCO/FPS Finance, USAA (9/04-present);
Executive Director, IMCO/FPS Finance, USAA (12/03-9/04); Executive
Director, FPS Finance, USAA (2/03-12/03); Director, FPS Finance, USAA
(12/02-2/03); Director, Strategic Financial Analysis, IMCO
(1/01-12/02). Financial Business Analyst, Strategic Financial
Analysis, IMCO (3/00-1/01). Ms. Dunn also holds the officer positions
of Assistant Vice President and Treasurer for IMCO, USAA Shareholder
Account Services, FPS, and FAI.
EILEEN M. SMILEY
Assistant Secretary
Born: November 1959
Year of Appointment: 2003
Vice President, Securities Counsel, USAA (2/04-present); Assistant
Vice President, Securities Counsel, USAA (1/03-2/04); Attorney,
Morrison & Foerster, LLP (1/99-1/03). Ms. Smiley also holds the
Officer position of Vice President and Assistant Secretary of IMCO,
FAI, and FPS; and Assistant Secretary of USAA Life Investment Trust, a
registered investment company offering five individual funds.
ROBERTO GALINDO, JR.
Assistant Treasurer
Born: November 1960
Year of Appointment: 2000
Assistant Vice President, Portfolio Accounting/Financial
Administration, USAA (12/02-present); Assistant Vice President, Mutual
Fund Analysis & Support, IMCO (10/01-12/02); Executive Director,
Mutual Fund Analysis & Support, IMCO (6/00-10/01); Director, Mutual
Fund Analysis, IMCO (9/99-6/00); Vice President, Portfolio
Administration, Founders Asset Management LLC (7/98-8/99). Mr. Galindo
also holds the Officer position of Assistant Treasurer of USAA Life
Investment Trust, a registered investment company offering five
individual funds.
48
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
JEFFREY D. HILL
Chief Compliance Officer
Born: December 1967
Year of Appointment: 2004
Assistant Vice President, Mutual Funds Compliance, USAA
(9/04-present); Assistant Vice President, Investment Management
Administration & Compliance, USAA (12/02-9/04); Assistant Vice
President, Investment Management Administration & Compliance, IMCO
(9/01-12/02); Senior Manager, Investment Management Assurance and
Advisory Services, KPMG LLP (6/98-8/01). Mr. Hill also serves as Chief
Compliance Officer of USAA Life Investment Trust, a registered
investment company offering five individual funds.
(1) INDICATES THOSE OFFICERS WHO ARE EMPLOYEES OF USAA INVESTMENT
MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND ARE CONSIDERED
"INTERESTED PERSONS" UNDER THE INVESTMENT COMPANY ACT OF 1940.
TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Laura T. Starks, Ph.D.
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1900
ACCOUNTING FIRM San Antonio, Texas 78205
TELEPHONE Call toll free - Central time
ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m.
Saturday, 8:30 a.m. to 5 p.m.
Sunday, 10:30 a.m. to 7 p.m.
FOR ADDITIONAL (800) 531-8181
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions
(800) 531-8448
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES (800) 531-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
(800) 531-8777
INTERNET ACCESS USAA.COM
THROUGH OUR ONGOING EFFORTS TO REDUCE EXPENSES, YOUR REPORT MAILINGS ARE
STREAMLINED. WE DEVELOP MAILING LISTS USING CRITERIA SUCH AS ADDRESS, MEMBER
NUMBER, AND SURNAME TO SEND ONE REPORT TO EACH HOUSEHOLD INSTEAD OF SENDING A
REPORT TO EVERY REGISTERED OWNER. THIS PRACTICE IS DESIGNED TO REDUCE DUPLICATE
COPIES AND SAVE PAPER AND POSTAGE COSTS TO THE FUND. IF YOU PREFER NOT TO
PARTICIPATE IN STREAMLINING AND WOULD LIKE TO CONTINUE RECEIVING ONE REPORT PER
REGISTERED ACCOUNT OWNER, PLEASE CALL US AND WE WILL BEGIN YOUR INDIVIDUAL
DELIVERY WITHIN 30 DAYS OF YOUR REQUEST.
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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- --------------------------------------------------------------------------------
[LOGO OF USAA] 9800 Fredericksburg Road -------------
USAA(R) San Antonio, Texas 78288 PRSRT STD
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23413-0705 (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
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:* /s/ CHRISTOPHER W. CLAUS
----------------------------------------------------
Signature and Title: Christopher W. Claus/President
Date: August 2, 2005
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By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: August 2, 2005
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*Print the name and title of each signing officer under his or her signature.