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: DECEMBER 31
Date of reporting period: DECEMBER 31, 2005
ITEM 1. REPORT TO STOCKHOLDERS.
USAA TOTAL RETURN STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING
DECEMBER 31, 2005
[LOGO OF USAA]
USAA(R)
USAA TOTAL RETURN
STRATEGY Fund(SM)
[GRAPHIC OF USAA TOTAL RETURN STRATEGY FUND]
A n n u a l R e p o r t
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DECEMBER 31, 2005
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
INVESTMENT OVERVIEW 8
FINANCIAL INFORMATION
Report of Independent Registered
Public Accounting Firm 11
Portfolio of Investments 12
Notes to Portfolio of Investments 13
Financial Statements 14
Notes to Financial Statements 17
EXPENSE EXAMPLE 27
DIRECTORS' AND OFFICERS' INFORMATION 29
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)2006, USAA. All rights reserved.
2
M E S S A G E
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from the PRESIDENT
"
MARKETS RUN IN CYCLES; LAST YEAR'S
[PHOTO OF CHRISTOPHER W. CLAUS] UNDERPERFORMINSG SECTOR OR MARKET COULD BE
NEXT YEAR'S BIG WINNER - AND VICE VERSA.
"
January 2006
- --------------------------------------------------------------------------------
In some respects, 2005 was a repeat of 2004. The majority of the stock market's
gains occurred in a relatively short period of time and in the final months of
the year. This observation is significant, particularly for index fund
investors, because it reminds us that we get only what the market gives us. So
it makes sense for us to be patient and let our strategy work. After all, when
it comes to investing, we must be present to win.
2005 was also a year that proved once again the value of that tried-and-true
investment practice, diversification. A quick comparison of USAA's index funds -
the S&P 500, the Extended Market, and the Nasdaq-100 - vividly makes the point.
The USAA S&P 500 returned 4.77%, the USAA Extended Market returned 10.11%, and
the USAA Nasdaq-100 returned 0.97%.*
As you can see, the USAA Extended Market Index Fund was the strongest performer,
but no one could have predicted that a year ago. Markets run in cycles; last
year's underperforming sector or market could be next year's big winner - and
vice versa. So it pays to diversify your investment dollars across a number of
different funds. Just because the USAA Extended Market Index Fund
- --------------------------------------------------------------------------------
* As of 12/31/05, the average annual total returns for the following funds were
as follows: USAA S&P 500 Index Fund 1-year 4.77%, 5-year 0.28%, since
inception on 5/01/96 8.60%; USAA Nasdaq-100 Index Fund 1-year 0.97%, 5-year
-7.47%, since inception on 10/27/00 -12.05%; and USAA Extended Market Index
Fund 1-year 10.11%, 5-year 6.75%, since inception on 10/27/00 5.15%.
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.
3
. . . C O N T I N U E D
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did well in '05 does not mean you should chase it in '06. A balanced approach is
wiser, and diversification helps investors achieve that balance.
The same holds true for all your investment decision-making. Index investing is
an excellent core strategy. A diversified low-cost index fund strategy gives you
exposure to the primary areas of the market, but its returns are dependent on
the performance of the underlying indexes, whereas the performance of actively
managed funds is not. Active managers of these funds have the discretion to
invest fund assets based on their experienced judgment and on changes in the
economic and investment environment. Sometimes, their funds do not beat the
indexes. However, in 2005, every one of our actively managed equity funds
outperformed the USAA S&P 500 Index Fund.
So while indexing works well as a core investment strategy, it's not necessarily
the sole solution. At USAA Investment Management Company, we are proud to offer
a range of investment options. We believe that by combining our index and
actively managed funds and using dollar-cost averaging, you can make the most of
these opportunities. From all of us here at USAA, thank you for your business.
It is a privilege to help you with your investment needs.
Sincerely,
/S/ CHRISTOPHER W. CLAUS
Christopher W. Claus
President and Vice Chairman of the Board
CONSIDER THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES OF THE USAA
MUTUAL FUNDS CAREFULLY BEFORE INVESTING. CONTACT US AT (800) 531-8448 FOR A
PROSPECTUS CONTAINING THIS AND OTHER INFORMATION ABOUT THE FUNDS FROM USAA
INVESTMENT MANAGEMENT COMPANY, DISTRIBUTOR (USAA). READ IT CAREFULLY BEFORE
INVESTING.
INDEX PRODUCTS INCUR FEES AND EXPENSES AND MAY NOT ALWAYS BE INVESTED IN ALL
SECURITIES OF THE INDEX THE FUND ATTEMPTS TO MIRROR. IT IS NOT POSSIBLE TO
INVEST DIRECTLY IN AN INDEX.
SYSTEMATIC INVESTMENT PLANS DO NOT ASSURE A PROFIT OR PROTECT AGAINST LOSS IN
DECLINING MARKETS. DOLLAR-COST AVERAGING INVOLVES CONTINUOUS INVESTMENT IN
SECURITIES REGARDLESS OF FLUCTUATING PRICE LEVELS OF SUCH SECURITIES. INVESTORS
SHOULD CONSIDER THEIR FINANCIAL ABILITY TO CONTINUE PURCHASES THROUGH PERIODS OF
LOW PRICE LEVELS.
4
M A N A G E R S '
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COMMENTARY on the Fund
[PHOTO OF STUART H. WESTER] [PHOTO OF PAMELA BLEDSOE NOBLE]
STUART H. WESTER, CFA PAMELA BLEDSOE NOBLE, CFA
USAA Investment Management Company USAA Investment Management Company
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
From its inception date on January 24, 2005, through December
31, 2005, the USAA Total Return Strategy Fund had a total
return of 0.44%. Your Fund seeks to have a positive total
return every calendar year and, over the long term, seeks
returns greater than the S&P 500 Index, which returned 9.17%
for the period of January 24, 2005, through December 31, 2005.
The Lipper Flexible Portfolio Funds Index returned 9.44% for
the same period.
DID THE FUND ACHIEVE ITS INVESTMENT OBJECTIVE?
Yes. Your Fund has a very clear and measurable investment
objective, which, again, is to seek a positive total return
every calendar year and to seek returns greater than the S&P
500 Index, with less risk, over the long term. "LONG TERM" IS
DEFINED AS FIVE YEARS OR MORE, since this period of time
usually encompasses a full market cycle with both a bull and a
bear market.
For the calendar year, the Fund had a positive total return,
and we believe it's too soon to make a judgment on its
performance versus the S&P 500 Index, since that objective
covers a five-year period.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 9 FOR BENCHMARK DEFINITIONS.
THIS FUND MAY CHANGE THE ALLOCATION OF ITS PORTFOLIO HOLDINGS
REGULARLY, WHICH MAY RESULT IN A HIGHER PROPORTION OF CAPITAL
GAINS AND A LOWER RETURN. THE FUND UTILIZES A FOCUSED
INVESTMENT STRATEGY, WHICH MAY INCREASE THE VOLATILITY OF THE
FUND'S INVESTMENT RESULTS. THERE IS NO ASSURANCE THAT THE
FUND'S OBJECTIVES WILL BE ACHIEVED.
5
. . . C O N T I N U E D
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WHILE A FIVE-YEAR TIME FRAME HAS NOT TRANSPIRED TO MEASURE THE FUND'S
PERFORMANCE AGAINST THE S&P 500 INDEX, WHAT ARE YOUR THOUGHTS ON THE PROGRESS OF
THE FUND IN MEETING THAT OBJECTIVE CONSIDERING THE SHORTFALL EXPERIENCED IN
2005?
Given the nature of the Fund's strategy and the investment
models used in implementing that strategy, weak or strong
performance relative to the S&P 500 Index over short periods
of time such as a year is not surprising. The fact that the
Fund fell short of the S&P 500 Index return in 2005 does not
lessen our confidence in the Fund's ability to outperform the
index with less risk over a five-year time period.
CAN YOU COMMENT ON THE FUND'S PERFORMANCE RELATIVE TO THE S&P 500 INDEX AND THE
LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX?
The Fund's strategy is to shift assets among stocks,
investment-grade bonds, or money market instruments so that,
at any given time, virtually 100% of the Fund's assets are
invested in one of these three asset classes. From the Fund's
inception date through December 31, 2005, the Fund was invested
in stocks 31% of the time and in money market instruments 69%
of the time. The Fund was not invested in investment-grade
bonds during the period. The Fund had performance below both
the S&P 500 Index and the Lipper Flexible Portfolio Funds Index
because it experienced a slight net loss during the periods of
time when the Fund was invested in stocks, and largely it was
not invested in stocks during the latter part of the year when
stocks rose.
WHY WAS THE FUND LARGELY NOT INVESTED IN STOCKS IN THE LATTER PART OF THE YEAR?
Our investment model for the most part indicated risks were too
high to invest in stocks in the latter part of the year.
THE PERCENTAGE OF TIME INVESTED IN ASSET CLASSES IS CALCULATED
BY DIVIDING THE NUMBER OF MARKET DAYS (INCLUDING DAYS WHEN THE
MARKET WAS CLOSED DUE TO HOLIDAY) IN THE PERIOD THAT THE FUND
HELD THE PARTICULAR ASSET CLASS AS OF THE CLOSE OF THE MARKET
DAY, BY THE TOTAL NUMBER OF MARKET DAYS IN THE PERIOD, WHICH
CONSISTED OF 260 DAYS FROM 1/24/05 THROUGH 12/31/05.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
It's very important for shareholders to understand how the
Fund works. It is not a short-term trading vehicle that seeks
to be among the top-performing mutual funds each and every
reporting period. Instead, it has been designed to give you
exposure to stocks or bonds when our investment model shows
that there is a high probability that one of these markets
will move significantly higher, with acceptable risk. In 2005,
even though stocks rose, there was generally a high level of
risk, and we want to avoid being in the stock market when we
believe the risk exceeds the potential reward.
Your Fund seeks to avoid or minimize big losses, which is one
of the keys to investing successfully over the long term.
Since World War II, the median decline of the 13 bear markets
as measured by the S&P 500 Index is 27%. If you lose 27% of
your money, you have to then earn 37% just to get back to
even. Our long-term strategy is to seek to minimize the big
losses associated with bear markets while still seeking to
participate to a significant degree in strong upward moves.
WITH THE FUND INVESTED IN MONEY MARKET INSTRUMENTS 69% OF THE TIME DURING THE
YEAR, WHY DIDN'T THE FUND EARN A RETURN CLOSER TO THAT OF MONEY MARKET
SECURITIES?
When the Fund is invested in money market instruments, it
earns the returns of money market securities. But as noted
above, slight losses when the Fund was invested in stocks
reduced those returns, resulting in a 0.44% return for the
year.
WHY DID SOME SHAREHOLDERS HAVE A NEGATIVE RETURN IN 2005?
As with any mutual fund that invests in stocks or bonds, the
Fund's share price fluctuated over the course of the year.
Therefore, some shareholders experienced a negative return in
2005 because of timing; depending on when you invested, you
captured the return from that point until the end of the
calendar year.
7
. . . C O N T I N U E D
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ARE YOU SATISFIED WITH THE PERFORMANCE OF THE FUND?
Yes, given that we fulfilled the only measurable objective we
had, which was to provide a positive return for the calendar
year. We believe it's way too soon to judge the Fund's
performance accurately against the longer-term objective, sort
of like calling the winner of a marathon 5 miles into the
26-mile race.
Successful investing over the long term requires knowledge,
patience, and discipline. The Fund's investment model
incorporates a tremendous amount of knowledge about how
financial markets have operated historically. It's up to the
shareholder to be patient and maintain discipline. Certainly
you should monitor the Fund carefully against its objectives,
but you shouldn't have unrealistic short-term expectations.
To go back to our marathon analogy, you can't expect a long-
distance runner to beat a sprinter in a 100-yard dash.
DO YOU EXPECT TO BE IN STOCKS OR INVESTMENT-GRADE BONDS MORE IN 2006?
We were in money market instruments at the end of the
reporting period. If our proprietary indicators give us a buy
signal, we will move into stocks or investment-grade bonds as
the case may be, but we don't want to speculate on whether a
buy signal will occur.
We thank you, our shareholders, for investing in this
innovative mutual fund. We have a high degree of confidence in
the Fund's strategy, and look forward to serving you for many
years to come.
8
I N V E S T M E N T
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OVERVIEW
USAA TOTAL RETURN STRATEGY FUND
OBJECTIVE
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Seeks a positive return every calendar year and over the long
term (five years and more) to achieve returns greater than the
S&P 500 Index with less risk.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Shifts the Fund's assets among stocks, investment-grade bonds,
or cash equivalents. Generally invests at any given time
substantially all of the Fund's assets in either (1) stocks
through the use of stock-based exchange-traded funds (ETFs),
(2) investment-grade bonds through either ETFs or direct
investment, or (3) cash equivalents through direct investment
in short-term, high-quality money market instruments or money
market funds.
- --------------------------------------------------------------------------------
SINCE INCEPTION ON 1/24/05
- --------------------------------------------------------------------------------
Net Assets $205.6 Million
Net Asset Value Per Share $9.89
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/05
- --------------------------------------------------------------------------------
SINCE INCEPTION ON 1/24/05* 0.44%
*TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. THIS RETURN
IS CUMULATIVE.
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 AND REALIZED CAPITAL
GAIN DISTRIBUTIONS. THE TOTAL RETURNS QUOTED DO NOT REFLECT THE
DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
9
. . . C O N T I N U E D
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CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER FLEXIBLE USAA TOTAL
PORTFOLIO RETURN STRATEGY
FUNDS INDEX S&P 500 INDEX FUND
1/24/05 $10,000.00 $10,000.00 $10,000.00
1/31/05 10,126.44 10,152.39 10,000.00
2/28/05 10,317.34 10,365.92 10,020.00
3/31/05 10,134.26 10,182.55 9,854.00
4/30/05 9,949.08 9,989.52 9,874.07
5/31/05 10,178.67 10,307.10 9,884.10
6/30/05 10,253.39 10,321.87 9,925.25
7/31/05 10,581.46 10,705.56 10,096.37
8/31/05 10,581.04 10,607.94 9,965.51
9/30/05 10,734.60 10,693.81 9,998.75
10/31/05 10,588.04 10,515.44 10,018.93
11/30/05 10,842.09 10,912.75 10,039.11
12/31/05 10,943.60 10,916.59 10,043.95
[END OF CHART]
DATA SINCE FUND INCEPTION ON 1/24/05 THROUGH 12/31/05.
The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA Total Return Strategy Fund to the
following benchmarks:
THE S&P 500 INDEX IS AN UNMANAGED INDEX REPRESENTING THE
WEIGHTED AVERAGE PERFORMANCE OF A GROUP OF 500 WIDELY HELD,
PUBLICLY TRADED STOCKS. IT IS NOT POSSIBLE TO INVEST DIRECTLY
IN THE S&P 500 INDEX.
THE LIPPER FLEXIBLE PORTFOLIO FUNDS INDEX TRACKS THE
PERFORMANCE OF THE 30 LARGEST FUNDS WITHIN THE LIPPER FLEXIBLE
FUNDS CATEGORY. THIS CATEGORY ALLOCATES ITS INVESTMENTS
ACROSS VARIOUS ASSET CLASSES, INCLUDING DOMESTIC COMMON
STOCKS, BONDS, AND MONEY MARKET INSTRUMENTS WITH A FOCUS ON
TOTAL RETURN.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE
CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION
OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR
THE REDEMPTION OF FUND SHARES.
10
P O R T F O L I O
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HIGHLIGHTS
PERCENTAGE OF TIME INVESTED
IN ASSET CLASSES
[PIE CHART OF PERCENTAGE OF TIME INVESTED
IN ASSET CLASSES]
Money Market Instruments 69%
Stock-Based Exchange-Traded Funds 31%
[END CHART]
DATA SINCE FUND INCEPTION ON 1/24/05 THROUGH 12/31/05.
THE PERCENTAGE OF TIME INVESTED IN ASSET CLASSES IS CALCULATED
BY DIVIDING THE NUMBER OF MARKET DAYS (INCLUDING DAYS WHEN THE
MARKET WAS CLOSED DUE TO HOLIDAY) IN THE PERIOD THAT THE FUND
HELD THE PARTICULAR ASSET CLASS AS OF THE CLOSE OF THE MARKET
DAY, BY THE TOTAL NUMBER OF MARKET DAYS IN THE PERIOD, WHICH
CONSISTED OF 260 DAYS FROM 1/24/05 THROUGH 12/31/05.
11
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 TOTAL RETURN STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities of USAA
Total Return Strategy Fund (a portfolio of USAA Investment Trust) (the "Fund"),
including the portfolio of investments, as of December 31, 2005, and the related
statement of operations, the statement of changes in net assets, and the
financial highlights for 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.
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 December 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 USAA
Total Return Strategy Fund as of December 31, 2005, the results of its
operations, the changes in its net assets, and the financial highlights for the
period then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
February 15, 2006
12
P O R T F O L I O
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of INVESTMENTS
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- --------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (99.9%)(a)
$102,000 Deutsche Bank Securities, 4.15%, acquired on 12/30/2005 and
due 1/03/2006 at $102,000 (collateralized by $104,045 of
Federal Home Loan Bank Bonds(b), 2.38%, due 4/05/2006;
market value $104,044) $102,000
103,473 UBS Securities LLC, 4.26%, acquired on 12/30/2005 and
due 1/03/2006 at $103,473 (collateralized by $105,955 of
Freddie Mac Notes(b), 5.25%, due 11/05/2012;
market value $105,547) 103,473
--------
205,473
--------
TOTAL INVESTMENTS (COST: $205,473) $205,473
========
13
N O T E S
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to Portfolio of INVESTMENTS
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 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) 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.
(b) U.S. government agency issues. Securities issued by
government-sponsored enterprises (GSEs) are supported only
by the credit of the issuing agency, instrumentality, or
corporation, and are neither issued nor guaranteed by the
U.S. government.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
S T A T E M E N T
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of ASSETS and LIABILITIES
(in thousands)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
ASSETS
Investments in repurchase agreements (cost approximates market value) $205,473
Cash 1
Receivables:
Capital shares sold 562
Interest 48
USAA Investment Management Company (Note 5C) 185
--------
Total assets 206,269
--------
LIABILITIES
Payables:
Capital shares redeemed 472
Accrued management fees 114
Accrued transfer agent's fees 6
Other accrued expenses and payables 47
--------
Total liabilities 639
--------
Net assets applicable to capital shares outstanding $205,630
========
NET ASSETS CONSIST OF:
Paid-in capital $206,752
Accumulated net realized loss on investments (1,122)
--------
Net assets applicable to capital shares outstanding $205,630
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 20,786
========
Net asset value, redemption price, and offering price per share $ 9.89
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
15
S T A T E M E N T
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of OPERATIONS
(in thousands)
USAA TOTAL RETURN STRATEGY FUND
PERIOD ENDED DECEMBER 31, 2005*
INVESTMENT INCOME
Dividends $ 371
Interest 3,640
-------
Total income 4,011
-------
EXPENSES
Management fees 904
Administration and servicing fees 208
Transfer agent's fees 346
Custody and accounting fees 43
Postage 23
Shareholder reporting fees 6
Trustees' fees 9
Registration fees 111
Professional fees 38
Other 2
-------
Total expenses 1,690
Expenses paid indirectly (2)
Expenses reimbursed (298)
-------
Net expenses 1,390
-------
NET INVESTMENT INCOME 2,621
-------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments (1,122)
-------
Increase in net assets resulting from operations $ 1,499
=======
* FUND COMMENCED OPERATIONS ON JANUARY 24, 2005.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
16
S T A T E M E N T
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of Changes in NET ASSETS
(in thousands)
USAA TOTAL RETURN STRATEGY FUND
PERIOD ENDED DECEMBER 31, 2005*
FROM OPERATIONS
Net investment income $ 2,621
Net realized loss on investments (1,122)
--------
Increase in net assets resulting from operations 1,499
--------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,621)
--------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 241,837
Reinvested dividends 2,185
Cost of shares redeemed (37,270)
--------
Increase in net assets from capital share transactions 206,752
--------
Net increase in net assets 205,630
--------
NET ASSETS
End of period $205,630
========
CHANGE IN SHARES OUTSTANDING
Shares sold 24,323
Shares issued for dividends reinvested 221
Shares redeemed (3,758)
--------
Increase in shares outstanding 20,786
========
* FUND COMMENCED OPERATIONS ON JANUARY 24, 2005.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
17
N O T E S
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to FINANCIAL Statements
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 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 Total Return Strategy
Fund (the Fund), which is classified as non-diversified under the 1940
Act. The Fund's investment objective is to seek a positive return
every calendar year and over the long term (five years and more) to
achieve returns greater than the S&P 500 Index with less risk. The
Fund commenced operations on January 24, 2005.
As a non-diversified fund, the Fund may invest a greater percentage of
its assets in a single issuer, such as a single stock-based or
bond-based exchange-traded fund (ETF) or a single money market
instrument. Because a relatively high percentage of the Fund's total
assets may be invested in the securities of a single issuer or a
limited number of issuers, the securities of the Fund may be more
sensitive to changes in the market value of a single issuer, a limited
number of issuers, or large companies generally. Such a focused
investment strategy may increase the volatility of the Fund's
investment results because this Fund may be more susceptible to risk
associated with a single economic, political, or regulatory event than
a diversified fund.
A. SECURITY VALUATION - The value of each security is determined (as
of the close of trading on the New York Stock Exchange (NYSE) on
each business day the exchange is open) as set forth below:
1. Equity securities, including ETFs, except as otherwise noted,
traded primarily on a domestic securities exchange or the
Nasdaq over-the-counter markets are valued at the last sales
price or official closing price on the exchange or primary
market on which they trade. If no last sale or official closing
price is reported or available, the average of the bid and
asked prices is generally used.
18
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
2. Investments in open-end investment companies, other than ETFs,
are valued at their net asset value (NAV) at the end of each
business day.
3. Debt securities purchased with original maturities of 60 days
or less are valued at amortized cost, which approximates market
value.
4. Repurchase agreements are valued at cost, which approximates
market value.
5. Other debt securities are valued each business day by a pricing
service (the Service) approved by the Trust's Board of
Trustees. The Service uses the mean between quoted bid and
asked prices or the last sales price to price securities when,
in the Service's judgment, these prices are readily available
and are representative of the securities' market values. For
many securities, such prices are not readily available. The
Service generally prices these securities based on methods
that include consideration of yields or prices of securities
of comparable quality, coupon, maturity, and type; indications
as to values from dealers in securities; and general market
conditions.
6. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by USAA Investment Management Company (the Manager),
an affiliate of the Fund, under valuation procedures approved
by the Trust's Board of Trustees. The effect of fair value
pricing is that securities may not be priced on the basis of
quotations from the primary market in which they are traded and
the actual price realized from the sale of a security may
differ materially from the fair value price. Valuing these
securities at fair value
19
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
is intended to cause the Fund's NAV to be more reliable than
it otherwise would be.
Fair value methods used by the Manager include, but are not
limited to, obtaining market quotations from secondary pricing
services, broker-dealers, or widely used quotation systems.
General factors considered in determining the fair value of
securities include fundamental analytical data, the nature and
duration of any restrictions on disposition of the securities,
and an evaluation of the forces that influenced the market in
which the securities are purchased and sold.
B. FEDERAL TAXES - The Fund's policy is to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
income to its shareholders. Therefore, no federal income tax
provision is required.
C. INVESTMENTS IN SECURITIES - Security transactions are accounted
for on the date the securities are purchased or sold (trade date).
Gains or losses from sales of investment securities are computed
on the identified cost basis. Dividend income, less foreign taxes,
if any, is recorded on the ex-dividend date. If the ex-dividend
date has passed, certain dividends from foreign securities are
recorded upon notification. Interest income is recorded on the
accrual basis. Discounts and premiums are amortized over the life
of the respective securities, using the effective yield method for
long-term securities and the straight-line method for short-term
securities.
D. REPURCHASE AGREEMENTS - The Fund may enter into repurchase
agreements with commercial banks or recognized security dealers.
These agreements are collateralized by obligations issued or
guaranteed as to both principal and interest by the U.S.
government, its agencies, or its instrumentalities.
Government-sponsored enterprises (GSEs), such as Fannie Mae and
Freddie
20
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
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. 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 reduce
the Fund's expenses. For the period ended December 31, 2005,
these custodian and other bank credits reduced the Fund's
expenses by $2,000.
F. 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.
G. 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.
21
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
(2) LINES OF CREDIT
- --------------------------------------------------------------------------------
The Fund participates in a joint, short-term, revolving, committed
loan agreement of $300 million with USAA Capital Corporation (CAPCO),
an affiliate of the Manager. The purpose of the agreement is to meet
temporary or emergency cash needs, including redemption requests that
might otherwise require the untimely disposition of securities.
Subject to availability under the agreement, the Fund may borrow from
CAPCO an amount up to 5% of the Fund's total assets at a rate per
annum equal to the rate at which CAPCO obtains funding in the capital
markets, with no markup.
The USAA funds that are party to the loan agreement are assessed
facility fees by CAPCO based on the funds' assessed proportionate
share of CAPCO's operating expenses related to obtaining and
maintaining CAPCO's funding programs in total (in no event to exceed
0.09% annually of the $300 million loan agreement). The facility fees
are allocated among the funds based on their respective average net
assets for the period. Effective January 6, 2006, the facility fees
assessed by CAPCO will be limited to an amount not to exceed 0.07%
annually of the $300 million loan agreement.
For the period ended December 31, 2005, the Fund paid CAPCO facility
fees of less than $500, which represents 0.2% of total fees paid to
CAPCO by the USAA funds. The Fund had no borrowings under this
agreement during the year ended December 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
22
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
distributed may differ from the year that the income or realized gains
were recorded by the Fund.
The tax character of distributions paid during the period ended
December 31, 2005, was as follows:
2005
----------
Ordinary income* $2,621,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
As of December 31, 2005, the components of net assets representing
distributable earnings on a tax basis were as follows:
Accumulated capital and other losses $(1,122,000)
Distributions of net investment income are made quarterly.
Distributions of realized gains from security transactions not offset
by capital losses are made annually in the succeeding fiscal year or
as otherwise required to avoid the payment of federal taxes. At
December 31, 2005, the Fund had a current post-October loss of
$285,000 and capital loss carryovers of $837,000, for federal income
tax purposes. The post-October loss will be recognized on the first
day of the following fiscal year. If not offset by subsequent capital
gains, the capital loss carryovers will expire in 2013. It is unlikely
that the Trust's Board of Trustees will authorize a distribution of
capital gains realized in the future until the capital loss carryovers
have been used or expire.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the period ended December 31, 2005, were
$616,312,000 and $615,190,000, respectively.
The cost of securities, including short-term securities, at
December 31, 2005, for federal income tax purposes, was $205,473,000.
23
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
(5) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager carries out the Fund's investment
policies and manages the Fund's portfolio. The Fund's management
fees are accrued daily and paid monthly at an annualized rate of
0.65% of the Fund's average net assets for the fiscal year. For
the period ended December 31, 2005, the Fund incurred total
management fees, paid or payable to the Manager, of $904,000.
Beginning with the month ending January 31, 2006, the investment
management fee for the Fund will be 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 Flexible Portfolio Funds Index, which
tracks the performance of the 30 largest funds within the Lipper
Flexible Funds category. The base fee for the Fund will be
computed as referenced above. The performance adjustment will be
calculated monthly by comparing the Fund's performance to that of
the Lipper index over the performance period. For the month ended
January 31, 2006, the performance period will consist of the
previous 12-month period. A new month will be added to the
performance period each month thereafter until the performance
period consists of the previous 36 months. Thereafter, the
performance period for the Fund will consist of the current month
plus the previous 35 months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance
period, which is then multiplied by a fraction, the numerator of
which is the number of days in the month and the denominator of
which is 365 (366 in leap years). The resulting amount is then
added to (in the case of overperformance) or subtracted from
24
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
(in the case of underperformance) the base fee, as referenced in
the following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
+/-1.00% to 4.00% +/-0.04%
+/-4.01% to 7.00% +/-0.05%
+/-7.01% and greater +/-0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
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 period ended December 31, 2005, the Fund
incurred administration and servicing fees, paid or payable to
the Manager, of $208,000.
In addition to the services provided under its Administration and
Servicing Agreement with the Fund, the Manager also provides
certain legal and tax services for the benefit of the Fund. The
Trust's Board of Trustees has approved the reimbursement of these
expenses incurred by the Manager. For the period ended December
31, 2005, the Fund reimbursed the Manager $2,000 for these legal
and tax services. These expenses are included in the professional
fees expenses on the Fund's statement of operations.
C. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit
the annual expenses of the Fund to 1.00% of its annual average net
assets, before reductions of any expenses paid indirectly, and
will reimburse the Fund for all expenses in excess of that amount.
This agreement may be modified or terminated at any time. For the
period ended December 31, 2005, the Fund incurred reimbursable
expenses of $298,000, of which $185,000 was receivable from the
Manager at year-end.
25
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
Up to January 7, 2008, the Manager may recover from the Fund all
or a portion of expenses waived or reimbursed, provided that the
additional amount paid by the Fund, together with all other
expenses of the Fund, in aggregate, would not cause the Fund's
expense ratio in any period up to January 7, 2008, to exceed
1.00% of the Fund's average net assets. As of December 31, 2005,
the carryover of excess expenses potentially reimbursable to the
Manager was $298,000. The Fund has not recorded a liability for
this potential reimbursement due to the current assessment that a
reimbursement is unlikely.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket expenses.
The Fund also pays SAS fees that are related to the administration
and servicing of accounts that are traded on an omnibus basis. For
the period ended December 31, 2005, the Fund incurred transfer
agent's fees, paid or payable to SAS, of $346,000.
E. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a continuing
best-efforts basis. The Manager receives no commissions or fees
for this service.
(6) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
USAA Investment Management Company is an indirectly wholly owned
subsidiary of United Services Automobile Association (the
Association), a large, diversified financial services institution. At
December 31, 2005, the Association and its affiliates owned 2,500,000
shares (12.0%) of the Fund.
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.
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
(7) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout the period
is as follows:
PERIOD ENDED
DECEMBER 31,
2005*
------------
Net asset value at beginning of period $ 10.00
--------
Income (loss) from investment operations:
Net investment income .15
Net realized and unrealized gain (loss) (.11)
--------
Total from investment operations .04
--------
Less distributions:
From net investment income (.15)
--------
Net asset value at end of period $ 9.89
========
Total return (%)** .44
Net assets at end of period (000) $205,630
Ratio of expenses to average net assets (%)***(a,b,c) 1.00
Ratio of expenses to average net assets, excluding reimbursements (%)***(a,b) 1.21
Ratio of net investment income to average net assets (%)***(b) 1.88
Portfolio turnover (%)(d) 443.18
* Fund commenced operations on January 24, 2005.
** Assumes reinvestment of all net investment income distributions during the
period. Total returns for periods of less than one year are not annualized.
*** For the period ended December 31, 2005, average net assets were
$149,057,000.
(a) Reflects 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) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
(c) Effective January 24, 2005, the Manager voluntarily agreed to limit the
annual expenses of the Fund to 1.00% of the Fund's average net assets.
(d) Calculated using average daily market value for the months during which the
Fund was invested in long-term securities, which, for the period ended
December 31, 2005, included seven months.
27
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 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 period of July 1,
2005, through December 31, 2005.
ACTUAL EXPENSES
- --------------------------------------------------------------------------------
The first line of the table on the next page provides information
about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested at the
beginning of the period, to estimate the expenses that you paid over
the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading "Expenses
Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
- --------------------------------------------------------------------------------
The second line of the table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual
expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the Fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may
use this information to compare the ongoing costs of investing in the
28
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA TOTAL RETURN STRATEGY FUND
DECEMBER 31, 2005
Fund and other funds. To do so, compare this 5% hypothetical example
with the 5% hypothetical examples that appear in the shareholder
reports of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and do not reflect any direct costs, such as
wire fees, redemption fees, or low balance fees. Therefore, the second
line of the table is useful in comparing ongoing costs only, and will
not help you determine the relative total costs of owning different
funds. In addition, if these direct costs were included, your costs
would have been higher.
EXPENSES PAID
BEGINNING ENDING DURING PERIOD*
ACCOUNT VALUE ACCOUNT VALUE JULY 1, 2005 -
JULY 1, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005
--------------------------------------------------------------
Actual $1,000.00 $1,012.00 $5.04
Hypothetical
(5% return before expenses) 1,000.00 1,020.20 5.06
*Expenses are equal to the Fund's annualized expense ratio of 0.99%,
which is net of any reimbursements and expenses paid indirectly,
multiplied by the average account value over the period, multiplied by
184 days/365 days (to reflect the current period). The Fund's ending
account value on the first line in the table is based on its actual
total return of 1.20% for the six-month period of July 1, 2005,
through December 31, 2005.
29
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 December 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.
30
. . . 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). 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 (SAS). 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.
31
. . . 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.
32
. . . 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.
33
. . . 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). 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). 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). 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 SAS; and Secretary for USAA Life
Investment Trust, a registered investment company offering five
individual funds.
34
. . . 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, SAS, FPS, and FAI, and
Treasurer of USAA Life Investment Trust, a registered investment
company offering five individual funds.
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,
SAS, 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). Mr. Galindo also
holds the Officer position of Assistant Treasurer of USAA Life
Investment Trust, a registered investment company offering five
individual funds.
35
. . . 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.
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TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Laura T. Starks, Ph.D.
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1800
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
COPIES OF THE MANAGER'S PROXY VOTING POLICIES AND PROCEDURES, APPROVED BY THE
COMPANY'S BOARD OF DIRECTORS FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND,
ARE AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM;
AND (III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING
HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST
RECENT 12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON
THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE
AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND
COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800)
SEC-0330.
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and others electronically.
Sign up at USAA.COM.
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
48703-0306 (C)2006, 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. On September 14, 2005, the Board of Trustees of USAA
Investment Trust approved a revised Sarbanes Code applicable to the Funds'
senior financial officers. There were no substantive changes to the ethical
duties or responsibilities of the Funds' senior financial officers. The changes
to the Sarbanes Code were necessary because of the change of the Funds' Chairman
of the Board to an independent director. The revised Sarbanes Code clarifies
that the same USAA personnel will continue to receive reports of all violations
of the Sarbanes Code and be required to approve outside employment and certain
financial interests in transactions. Under the revised Sarbanes Code, the Funds'
Board of Trustees will continue to receive the same notifications, reports and
have the same power that it had before under the original Sarbanes Code. A copy
of the revised Sarbanes Code is attached as an Exhibit to this Form N-CSR.
No waivers (explicit or implicit) have been granted from a provision of the
Sarbanes Code or the revised Sarbanes Code.
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 and an expert witness in cases involving
financial reporting 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 1 fund of the Registrant, the Total Return Strategy Fund has a fiscal
year-end of December 31 and is included within this report (the Fund). The Fund
did not commence operations until January 24, 2005, therefore, December 31, 2005
is the first fiscal year end reporting period of the Fund. The aggregate fees
billed by the Registrant's independent auditor, Ernst & Young LLP, for
professional services rendered for the audit of the Fund's annual financial
statements and services provided in connection with statutory and regulatory
filings by the Registrant for the Fund for the fiscal year ended December 31,
2005 was $17,000.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid by the Fund's transfer
agent USAA Transfer Agency Company (dba USAA Shareholder Account Services) (SAS)
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 the fiscal year ended December 31, 2005 was $50,000. 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,
State and City Passive Quarterly
Income and tax Foreign Diversification Tax Consulting &
returns and excise Investment Review under Other Additional
tax calculations Company Subchapter M Tax Services TOTAL
- -----------------------------------------------------------------------------------------------
FYE 12-31-2005 $ 4,575 $ 0 $1,243 $ 944 $ 6,762
- -----------------------------------------------------------------------------------------------
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for the fiscal
year ended December 31, 2005.
(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 December 31, 2005 was $118,762.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2005 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:
- honest and ethical conduct, including the ethical handling of
actual or apparent conflicts of interest between the Covered
Officers' personal and professional relationships;
- 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;
- compliance with applicable laws and governmental rules and
regulations;
- 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), the Chair/CEO of USAA,
and if deemed material to the Funds' financial condition or
reputation, the Chair of the relevant Funds' Board of Directors/
Trustees; and
- 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:
- 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;
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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 Chair/
CEO of USAA and reported to each affected Board.
- 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 Chair/CEO
of USAA and reported to each affected Board.
III. DISCLOSURE AND COMPLIANCE REQUIREMENTS
--------------------------------------
- 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.
- 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.
- 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.
- 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.
- A Covered Officer should not retaliate against any person who
reports a potential violation of this Code in good faith.
- 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 Chair/CEO of
USAA and will be considered by the Board of Directors/Trustees.
B. REQUIRED REPORTS
----------------
- EACH COVERED OFFICER MUST:
-------------------------
- Upon adoption of the Code, affirm in writing to
the Boards that he has received, read and
understands the Code.
- Annually thereafter affirm to the Chief Legal
Officer that he has complied with the requirements
of the Code.
- THE CHIEF LEGAL OFFICER MUST:
----------------------------
- 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;
- 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:
- 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/CEO of USAA and the Chair of the relevant Funds'
Audit Committee (if the complaint involves the President) 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.
- INVESTIGATIONS. The Chief Legal Officer will take all
appropriate action to investigate any potential violation
unless the Chair/CEO of USAA directs 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 Chief Legal
Officer 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.
- 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.
- 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 Chair/CEO of USAA 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 Chair
of the relevant Funds' Audit Committee. 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 Boards 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.
Approved and adopted as amended by IMCO's Code of Ethics Committee: August 15,
2005.
Approved and adopted as amended by the Boards of Directors/Trustees of USAA
Mutual Fund, Inc., USAA Tax-Exempt Fund, Inc., USAA Investment Trust & USAA
State Tax-Free Trust: September 14, 2005.
Approved and adopted as amended by the Board of Trustees of USAA Life Investment
Trust: December 8, 2005.
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, TOTAL RETURN STRATEGY FUND
By:* /s/ EILEEN M. SMILEY
-----------------------------------------------------------
Signature and Title: Eileen M. Smiley, Assistant Secretary
Date: FEBRUARY 23, 2006
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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: FEBRUARY 28, 2006
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By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: FEBRUARY 27, 2006
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*Print the name and title of each signing officer under his or her signature.