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, 2006
ITEM 1. REPORT TO STOCKHOLDERS.
USAA BALANCED STRATEGY FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006
[LOGO OF USAA]
USAA(R)
USAA BALANCED
STRATEGY Fund
[GRAPHIC OF USAA BALANCED STRATEGY FUND]
A n n u a l R e p o r t
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MAY 31, 2006
Table of CONTENTS
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MESSAGE FROM THE PRESIDENT 2
MANAGERS' COMMENTARY 4
FUND RECOGNITION 11
INVESTMENT OVERVIEW 12
FINANCIAL INFORMATION
Distributions to Shareholders 16
Report of Independent Registered Public Accounting Firm 17
Portfolio of Investments 18
Notes to Portfolio of Investments 43
Financial Statements 47
Notes to Financial Statements 50
EXPENSE EXAMPLE 65
ADVISORY AGREEMENTS 67
DIRECTORS' AND OFFICERS' INFORMATION 79
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
"
IT IS A CLASSIC SCENARIO. WHEN MARKETS
[PHOTO OF CHRISTOPHER W. CLAUS] GO UP, RISK TOLERANCE GOES UP, AND
INVESTORS START TO CHASE PERFORMANCE.
"
June 2006
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Remember risk? It is the flip side of the risk/reward equation. In
exchange for the possibility of higher returns, you take on more risk.
But during the last two to three years, many investors have forgotten
this fundamental investment truth. Hungry for returns in the
low-interest-rate environment, they flocked into the riskier asset
classes - the emerging markets, small-cap stocks, precious metals, and
commodities. Investor experience has been all about reward and very
little about risk.
In May, however, risk finally re-emerged as a consideration in
investment decision-making. Rising global interest rates and the
potential for a worldwide economic slowdown have led to increased
market volatility, reminding investors that outsized rewards are
generally paired with greater risk. As a result, the old adage that
you should be paid for the risk you assume has taken on renewed
meaning.
It is a classic scenario. When markets go up, risk tolerance goes up,
and investors start to chase performance. The opposite approach is
often the better course. You would be wise to cultivate patience
during rising markets and potentially reduce the amount of risk you
take. Experienced investors know that as market returns increase, so
do the chances of a correction.
Still, when the financial markets are awash in liquidity, it is easy
to forget the fundamentals. If you cannot find the returns you want in
conservative equity and fixed-income investments, you are tempted to
seek higher returns elsewhere. This is precisely what happened during
the last couple of years.
But in the spring, it all began to unravel as global interest rates
continued to rise. In the months ahead, we may see even higher
short-term rates as
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the Federal Reserve Board (the Fed) tries to combat inflation. We may
also see a slowdown in the U.S. economy, and if the U.S. economy
cools, the world economy is likely to follow suit.
In this environment, money market fund yields - currently near 5% -
are appealing, especially for risk-averse investors. Once the Fed
pauses, bonds should become more attractive. For equity investors, the
most prudent play may be a conservative stance. They might also want
to consider locking in some of their gains in the emerging markets,
small-cap stocks, precious metals, and commodities.
At USAA Investment Management Company, we have already taken a more
conservative position in our international and emerging markets
portfolios - perhaps earlier than a crystal ball would have suggested -
but as the market has fallen, our relative performance has been solid.
Going forward, we will continue to look for investment opportunities
that have the potential to add value while evaluating the risks that
could affect them.
From all of us here, 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
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.
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. o Foreign and precious metals
and minerals investing are subject to additional risks, such as
currency fluctuations, market illiquidity, and political instability.
4
M A N A G E R S '
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COMMENTARY on the Fund
USAA Investment Management Company
STUART H. WESTER, CFA (Bonds and Stocks)
ARNOLD J. ESPE, CFA (Bonds and Money Market Instruments)
Wellington Management Company, LLP (Stocks)
MATTHEW E. MEGARGEL, CFA
MAYA K. BITTAR, CFA
FRANCIS J. BOGGAN, CFA
JEFFREY L. KRIPKE
Loomis, Sayles & Company, L.P. (Stocks)
MARK B. BARIBEAU, CFA
PAMELA N. CZEKANSKI, CFA
RICHARD SKAGGS, CFA
Barrow, Hanley, Mewhinney & Strauss, Inc. (Stocks)
TIMOTHY J. CULLER, CFA
MARK GIAMBRONE, CPA
JAMES P. BARROW
RICHARD A. ENGLANDER, CFA
ROBERT J. CHAMBERS, CFA
RAY NIXON, Jr.
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HOW DID THE FUND PERFORM?
For the year ended May 31, 2006, the USAA Balanced Strategy Fund
had a total return of 3.84%. This compares to a return of 7.87% for
the Lipper Balanced Funds Index, 10.13% for the Russell 3000 Index,
and -0.48% for the Lehman Brothers U.S. Aggregate Bond Index.
HOW WAS THE FUND ALLOCATED BETWEEN STOCKS AND BONDS?
The Fund began the reporting year with 65% of its net assets in
stocks and other equity securities and 35% in bonds and money
market instruments. Because of asset allocation adjustments and
investment performance, the Fund ended the year with 60% of
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 14 FOR BENCHMARK DEFINITIONS.
PERCENTAGES ARE OF NET ASSETS OF THE FUND AND MANY NOT EQUAL 100%.
5
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its net assets in stocks and 41% of its net assets in bonds and
money market instruments.
WHAT LED THE FUND TO UNDERPERFORM ITS LIPPER PEER GROUP INDEX?
There were two factors. First, there was underperformance relative
to the peer group within the stock portions of the portfolio.
Second, the Fund was underweight in stocks for part of the
reporting year, and this detracted from performance because stocks
outperformed bonds.
HAVE ANY STEPS BEEN TAKEN IN AN EFFORT TO IMPROVE PERFORMANCE?
Yes. In March 2006, your Fund's Board of Trustees added two
subadvisers to the Fund - Barrow, Hanley, Mewhinney & Strauss, Inc.
(BHMS) and Loomis, Sayles & Company, L.P. (Loomis Sayles) - and a
substantial portion of the Fund's equity portfolio was shifted to
BHMS and Loomis Sayles. BHMS is managing its portion of the assets
using its value-oriented style, and Loomis Sayles is managing its
portion using its growth-oriented style. The incumbent equity
subadviser, Wellington Management Company, LLP (Wellington),
continues to manage a smaller portion of the Fund's equity
securities using a core style that encompasses both value and
growth.
Additionally, the Fund increased its utilization of exchange-traded
funds (ETFs) for cost efficiency and investment flexibility. ETFs,
relatively low-cost vehicles that typically track a market index,
offer the ability to adjust the Fund's asset allocation quickly
when USAA Investment Management Company (IMCO) believes it is
warranted. At the end of the reporting year, 8.2% of the Fund's net
assets were in ETFs tied to the U.S. stock market.
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COMMENTARY on the Fund
HOW DID THE FUND'S BOND PORTION, WHICH IMCO MANAGES, PERFORM?
It's hard for most people to be excited about performance that
barely manages to break even, as was the case with the bond portion
during the reporting year. However, this represented outstanding
performance relative to the Lehman Brothers U.S. Aggregate Bond
Index.
It was a tough environment for bonds because interest rates rose
across all maturities on the yield curve, but we managed to provide
a positive total return because interest on the bonds we owned
offset the principal erosion caused by rising rates. The IMCO
strategy regarding duration, a measure of interest-rate
sensitivity, was a key factor in the good performance. We began the
year with a shorter-than-average duration and gradually moved
toward a neutral duration. Throughout the reporting year, we were
opportunistic, buying when rates rose, selling as they fell, and
investing in floating-rate bonds whose income rose as the Federal
Reserve Board (the Fed) raised rates.
The biggest driver of our outperformance, however, was security
selection. We were overweight in corporate bonds, with a focus on
individual issues in finance, utilities, and real estate investment
trusts. We also benefited from our decision to emphasize commercial
mortgage-backed securities over residential mortgages. Credit for
our ability to pick the right bonds in the right sectors goes
largely to the IMCO team of 17 analysts here in San Antonio.
With the economy in the sensitive transition period from high to
moderate growth and the Fed under new leadership, we're avoiding
making any big bets on duration as we move into the new reporting
year. Instead, we are continuing to focus on what we do best, which
is to use our research advantage to find
7
. . . C O N T I N U E D
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individual securities that, we believe, give us the most value for
a given level of risk.
HOW DID THE WELLINGTON-MANAGED PORTION OF THE FUND PERFORM?
Stock selection was positive relative to the Russell 3000 Index,
while sector allocation detracted from relative performance.
Energy was the top-performing area of the market, and the
Wellington portion of the Fund benefited from its overweight
exposure to this sector, with Schlumberger Ltd., Chesapeake Energy
Corp., and GlobalSantaFe Corp. among the top positive contributors
to performance. In the materials sector, exploration and mining
companies Rio Tinto plc and Newmont Mining Corp. benefited from an
increase in commodity and gold prices. Industrials company
Precision Castparts Corp. delivered excellent performance with
strong fundamental growth. In the financials sector, many of our
capital markets-related stocks, including E*TRADE Financial Corp.,
Merrill Lynch & Co., Inc., and State Street Corp. outperformed on a
relative basis.
On a sector level, the Wellington portion of the Fund was
overweight in the poorly performing health care and information
technology sectors and underweight in the strongly performing
financials sector. Information technology holding Adobe Systems,
Inc. was our weakest-performing stock, because the company was
between product cycles and struggled to meet its revenue and
earnings targets. However, we view this as a short-term concern
because the new version of the hugely popular Adobe Acrobat remains
on track for a fall 2006 release. Dell, Inc., Yahoo!, Inc., and
Microsoft Corp. also hurt performance, as did the mattress company
Tempur-Pedic International, Inc. and the retailer Kohl's Corp.
GLOBALSANTAFE CORP., DELL, INC., YAHOO!, INC., TEMPUR-PEDIC
INTERNATIONAL, INC., AND KOHL'S CORP. WERE SOLD OUT OF THE FUND
PRIOR TO MAY 31, 2006.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 18-42.
8
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COMMENTARY on the Fund
As of the end of the reporting year, the Wellington portion of the
portfolio was overweight in the health care and consumer
discretionary sectors, where we have been finding stocks with
attractive valuations and good relative earnings potential. We were
modestly overweight in energy as global demand and constrained
supply foster long-term growth prospects. We also maintained an
overweight position in information technology, with an emphasis on
software companies, which should benefit from higher corporate
spending amid new product cycles. We were underweight in utilities,
which appear expensive on a price-to-earnings basis and less
attractive on a yield basis given our modestly higher interest-rate
outlook.
HOW DID THE BHMS-MANAGED PORTION OF THE FUND PERFORM?
In the short period of time (about three months) that we at BHMS
managed a portion of the Fund, it benefited from a good stock
selection in the information technology and energy sectors relative
to the Russell 3000 Value Index. Among the specific stocks that
helped relative performance were Nokia Corp., which continued to
gain market share and used its impressive free cash flow to buy
back its stock; El Paso Corp., an energy company helped by a
turnaround situation; and Murphy Oil Corp., an exploration company
that benefited from success in its drilling program as well as
higher commodity prices.
We were hurt by our overweight position in health care, despite
good stock selection. Among the health care stocks that detracted
most from performance were our holdings in HMOs, because the market
feared that the group was beginning to set prices based on gaining
or holding market share as opposed to profit. We ended up selling
our position in CIGNA Corp. before the
THE RUSSELL 3000(R) VALUE INDEX MEASURES THE PERFORMANCE OF THOSE
RUSSELL 3000 INDEX COMPANIES WITH LOWER PRICE-TO-BOOK RATIOS AND
LOWER FORECASTED GROWTH VALUES. THE STOCKS IN THIS INDEX ARE ALSO
MEMBERS OF EITHER THE RUSSELL 1000 VALUE OR THE RUSSELL 2000 VALUE
INDEXES.
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end of the period because, as the highest-cost producer in the
industry, it was hurt most by the margin concerns. Our holding in
WellPoint, Inc., a lower-cost producer, did better on a relative
basis. In the consumer discretionary sector, our large holding in
Carnival Corp. was down significantly in the face of higher energy
costs. We continue to have confidence in Carnival because we
believe it is the dominant company in a growing business, with
outstanding management and improving fundamentals.
As a value-oriented manager, we at BHMS are continuing to find good
companies trading at low valuations, especially among former growth
companies whose earnings rates have slowed but are still very
healthy. These include UnitedHealth Group, Inc., 3M Co., and
American International Group (AIG), companies that traditionally
trade at a premium relative to their earnings but are now trading
in line with the market despite better-than-market earnings
growth. We expect the market to remain somewhat volatile as the
economy likely shifts to a slower rate of growth and believe that
we are well-positioned for such an environment.
HOW DID THE LOOMIS SAYLES-MANAGED PORTION OF THE FUND PERFORM?
Like BHMS, we managed a portion of the Fund for about one-fourth
of the reporting year. During that time, growth was out of favor
relative to value, and the Loomis Sayles high-growth style was hit
hard, especially in May. Several of the major detractors from
performance relative to the Russell 3000 Growth Index were in the
financials sector, including NYSE Group and the Chicago Board of
Trade, both of which were sold under our stop-loss discipline. TD
Ameritrade Holding Corp. declined
THE RUSSELL 3000(R) GROWTH INDEX MEASURES THE PERFORMANCE OF THOSE
RUSSELL 3000 INDEX COMPANIES WITH HIGHER PRICE-TO-BOOK RATIOS AND
HIGHER FORECASTED GROWTH VALUES. THE STOCKS IN THIS INDEX ARE ALSO
MEMBERS OF EITHER THE RUSSELL 1000 GROWTH OR THE RUSSELL 2000
GROWTH INDEXES.
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COMMENTARY on the Fund
because of mildly disappointing quarterly earnings, but we
maintained our position because we at Loomis Sayles continue to
have confidence in the company's growth prospects, and our
stop-loss line was not crossed.
Health care was another disappointing sector during the brief
period, and we were especially hurt by St. Jude Medical, Inc., the
equipment company that specializes in cardiac-rhythm management.
The company lowered earning forecasts, leading us to sell it based
on declining fundamentals. We also sold weak-performing Cephalon,
Inc., because U.S. Food and Drug Administration approval for the
company's attention-deficit/hyperactivity disorder drug Sparlon
was deferred.
On a more positive note, our holding in beverage company Hansen
Natural Corp. was a very strong performer, as was steel company
Allegheny Technologies, Inc. in the materials sector. Our view
going forward is that growth stocks, and high-growth stocks in
particular, are increasingly undervalued relative to the market. We
believe that growth is on sale today, but there's no way to know
when the sale is going to end. In the meantime, we continue to
invest in companies with strong growth profiles, and earnings
growth expectations for the Loomis Sayles portion of the portfolio
actually are much higher than those of the overall stock market.
From all of us at USAA IMCO, Wellington, BHMS, and Loomis Sayles,
we thank you for your investment in the Fund.
11
F U N D
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RECOGNITION
USAA BALANCED STRATEGY FUND
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OVERALL MORNINGSTAR RATING(TM)
out of 792 moderate allocation funds for the period ending May 31, 2006:
OVERALL RATING
* * * *
3-YEAR 5-YEAR 10-YEAR
* * * * * * * * * *
out of 792 funds out of 620 funds out of 298 funds
The Overall Morningstar Rating for a fund is derived from a
weighted average of the performance figures associated with its
three-, five-, and 10-year (if applicable) Morningstar
Ratings metrics. Ratings are based on risk-adjusted returns.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. FOR EACH FUND WITH AT LEAST
A THREE-YEAR HISTORY, MORNINGSTAR CALCULATES A MORNINGSTAR RATING(TM) BASED ON A
MORNINGSTAR RISK-ADJUSTED RETURN MEASURE THAT ACCOUNTS FOR VARIATION IN A FUND'S
MONTHLY PERFORMANCE (INCLUDING THE EFFECTS OF SALES CHARGES, LOADS, AND
REDEMPTION FEES), PLACING MORE EMPHASIS ON DOWNWARD VARIATIONS AND REWARDING
CONSISTENT PERFORMANCE. THE TOP 10% OF THE FUNDS IN EACH BROAD ASSET CLASS
RECEIVE 5 STARS, THE NEXT 22.5% RECEIVE 4 STARS, THE NEXT 35% RECEIVE 3 STARS,
THE NEXT 22.5% RECEIVE 2 STARS, AND THE BOTTOM 10% RECEIVE 1 STAR. (EACH SHARE
CLASS IS COUNTED AS A FRACTION OF ONE FUND WITHIN THIS SCALE AND RATED
SEPARATELY, WHICH MAY CAUSE SLIGHT VARIATIONS IN THE DISTRIBUTION PERCENTAGES.)
12
I N V E S T M E N T
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OVERVIEW
USAA BALANCED STRATEGY FUND (Ticker Symbol: USBSX)
OBJECTIVE
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High total return, with reduced risk over time, through an asset
allocation strategy that seeks a combination of long-term growth of
capital and current income.
TYPES OF INVESTMENTS
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Using preset target ranges, the Fund's strategy is to invest its
assets in a combination of stocks on the one hand and bonds and
money market instruments on the other.
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5/31/06 5/31/05
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Net Assets $634.1 Million $609.8 Million
Net Asset Value Per Share $14.97 $15.41
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AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/06
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1 YEAR 5 YEARS 10 YEARS
3.84% 3.98% 8.03%
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.
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CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
RUSSELL 3000 USAA BALANCED LIPPER BALANCED LEHMAN BROTHERS U.S.
INDEX STRATEGY FUND FUNDS INDEX AGGREGATE BOND INDEX
------------ ------------- --------------- --------------------
05/31/96 $10,000.00 $10,000.00 $10,000.00 $10,000.00
06/30/96 9,967.71 10,010.35 10,032.97 10,134.29
07/31/96 9,445.92 9,683.71 9,774.78 10,162.02
08/31/96 9,732.47 9,914.28 9,929.13 10,144.99
09/30/96 10,262.17 10,317.98 10,297.42 10,321.79
10/31/96 10,449.76 10,559.96 10,515.29 10,550.43
11/30/96 11,186.86 11,031.34 11,005.35 10,731.14
12/31/96 11,052.13 11,011.47 10,873.54 10,631.37
01/31/97 11,663.73 11,285.29 11,209.79 10,663.92
02/28/97 11,676.47 11,353.74 11,251.39 10,690.45
03/31/97 11,148.11 11,157.47 10,924.38 10,571.98
04/30/97 11,697.24 11,393.82 11,252.79 10,730.24
05/31/97 12,496.15 11,925.60 11,713.59 10,831.67
06/30/97 13,015.64 12,250.79 12,101.88 10,960.24
07/31/97 14,036.00 12,884.18 12,791.20 11,255.80
08/31/97 13,466.72 12,613.46 12,385.73 11,159.79
09/30/97 14,230.33 13,024.83 12,879.42 11,324.38
10/31/97 13,752.34 12,762.31 12,644.91 11,488.67
11/30/97 14,278.89 12,994.54 12,877.18 11,541.57
12/31/97 14,564.91 13,109.25 13,080.62 11,657.77
01/31/98 14,640.39 13,088.67 13,173.57 11,807.44
02/28/98 15,687.69 13,613.46 13,696.59 11,798.55
03/31/98 16,465.19 14,025.17 14,115.40 11,839.09
04/30/98 16,627.08 14,087.27 14,214.27 11,900.88
05/31/98 16,216.77 13,932.01 14,070.56 12,013.77
06/30/98 16,765.11 13,939.60 14,330.03 12,115.66
07/31/98 16,460.70 13,447.59 14,162.15 12,141.43
08/31/98 13,939.14 12,129.20 12,942.07 12,339.03
09/30/98 14,890.00 12,328.09 13,500.67 12,627.96
10/31/98 16,020.24 13,007.68 14,005.75 12,561.19
11/30/98 17,000.07 13,676.65 14,518.40 12,632.48
12/31/98 18,080.56 14,248.56 15,054.02 12,670.46
01/31/99 18,694.79 14,760.49 15,294.75 12,760.90
02/28/99 18,032.61 14,429.87 14,927.11 12,538.13
03/31/99 18,694.27 15,090.69 15,295.57 12,607.61
04/30/99 19,538.10 15,315.28 15,796.58 12,647.55
05/31/99 19,166.76 14,994.43 15,553.00 12,536.77
06/30/99 20,135.37 15,723.45 15,983.01 12,496.83
07/31/99 19,524.82 15,433.47 15,684.09 12,443.63
08/31/99 19,302.81 15,401.25 15,519.52 12,437.30
09/30/99 18,809.45 15,154.36 15,320.68 12,581.69
10/31/99 19,989.30 15,844.67 15,764.28 12,628.11
11/30/99 20,548.72 16,189.82 15,933.90 12,627.21
12/31/99 21,859.89 16,941.66 16,405.37 12,566.32
01/31/00 21,002.96 16,497.53 15,993.24 12,525.17
02/29/00 21,197.63 16,465.04 15,954.71 12,676.64
03/31/00 22,858.22 17,385.33 16,894.11 12,843.64
04/30/00 22,052.69 16,885.19 16,584.51 12,806.87
05/31/00 21,433.30 16,591.63 16,428.46 12,800.99
06/30/00 22,067.89 16,961.58 16,690.68 13,067.31
07/31/00 21,677.84 16,757.93 16,645.19 13,185.93
08/31/00 23,285.52 17,413.53 17,388.17 13,377.04
09/30/00 22,231.20 16,827.52 17,022.24 13,461.14
10/31/00 21,914.67 16,654.04 17,007.18 13,550.22
11/30/00 19,894.76 15,879.16 16,389.83 13,771.78
12/31/00 20,229.09 16,179.80 16,797.19 14,027.25
01/31/01 20,921.10 17,377.01 17,153.68 14,256.65
02/28/01 19,009.58 16,970.19 16,487.83 14,380.84
03/31/01 17,770.43 16,691.82 15,955.38 14,453.04
04/30/01 19,195.53 17,393.65 16,624.98 14,393.05
05/31/01 19,349.70 17,814.75 16,773.05 14,479.86
06/30/01 18,992.91 17,652.33 16,516.05 14,534.58
07/31/01 18,679.89 17,899.63 16,504.10 14,859.53
08/31/01 17,577.10 17,534.57 16,034.41 15,029.69
09/30/01 16,026.36 16,418.28 15,263.86 15,204.83
10/31/01 16,399.23 16,749.96 15,519.32 15,523.00
11/30/01 17,662.35 17,745.01 16,137.20 15,308.98
12/31/01 17,911.30 17,953.53 16,253.58 15,211.76
01/31/02 17,686.70 17,791.45 16,111.02 15,334.90
02/28/02 17,325.02 17,454.82 16,001.55 15,483.51
03/31/02 18,084.64 17,954.02 16,351.42 15,225.93
04/30/02 17,135.84 17,665.65 15,959.03 15,521.19
05/31/02 16,937.31 17,803.57 15,951.58 15,653.07
06/30/02 15,718.09 16,801.32 15,271.07 15,788.42
07/31/02 14,468.45 15,980.82 14,488.38 15,978.93
08/31/02 14,536.80 16,144.92 14,637.02 16,248.72
09/30/02 13,009.41 15,423.90 13,763.14 16,511.88
10/31/02 14,045.30 15,931.68 14,336.84 16,436.67
11/30/02 14,895.20 16,629.88 14,918.46 16,432.30
12/31/02 14,053.10 16,139.24 14,516.33 16,771.72
01/31/03 13,709.23 15,842.27 14,298.88 16,786.04
02/28/03 13,483.69 15,777.72 14,191.65 17,018.30
03/31/03 13,625.48 15,828.42 14,249.56 17,005.18
04/30/03 14,738.11 16,593.90 15,020.69 17,145.50
05/31/03 15,627.76 17,320.45 15,685.04 17,465.18
06/30/03 15,838.66 17,519.69 15,803.97 17,430.52
07/31/03 16,202.00 17,610.94 15,840.60 16,844.51
08/31/03 16,561.04 17,858.62 16,108.02 16,956.35
09/30/03 16,381.24 17,849.64 16,128.46 17,405.19
10/31/03 17,372.62 18,543.22 16,660.57 17,242.87
11/30/03 17,611.91 18,739.51 16,808.08 17,284.16
12/31/03 18,417.47 19,268.15 17,410.32 17,460.05
01/31/04 18,801.68 19,478.30 17,670.30 17,600.53
02/29/04 19,054.97 19,740.98 17,911.13 17,791.04
03/31/04 18,828.78 19,591.54 17,825.69 17,924.27
04/30/04 18,439.47 19,235.81 17,451.07 17,457.94
05/31/04 18,707.46 19,367.56 17,528.12 17,388.01
06/30/04 19,079.26 19,747.43 17,802.17 17,486.28
07/31/04 18,357.77 19,258.37 17,467.03 17,659.61
08/31/04 18,433.37 19,284.81 17,573.28 17,996.47
09/30/04 18,716.73 19,512.39 17,834.35 18,045.30
10/31/04 19,024.14 19,684.83 18,027.21 18,196.63
11/30/04 19,908.50 20,255.21 18,512.80 18,051.48
12/31/04 20,617.87 20,820.44 18,974.93 18,217.57
01/31/05 20,068.72 20,537.45 18,730.49 18,331.97
02/28/05 20,510.50 20,753.06 18,995.48 18,223.75
03/31/05 20,163.58 20,500.60 18,733.95 18,130.16
04/30/05 19,725.50 20,297.63 18,508.83 18,375.53
05/31/05 20,472.92 20,852.43 18,933.25 18,574.33
06/30/05 20,615.94 20,956.22 19,069.31 18,675.61
07/31/05 21,461.71 21,445.47 19,493.06 18,505.60
08/31/05 21,257.12 21,527.01 19,549.44 18,742.84
09/30/05 21,443.09 21,539.84 19,626.95 18,549.76
10/31/05 21,041.49 21,103.03 19,318.78 18,402.96
11/30/05 21,861.63 21,608.09 19,787.79 18,484.35
12/31/05 21,879.62 21,726.91 19,961.11 18,660.09
01/31/06 22,610.64 22,100.77 20,437.60 18,661.15
02/28/06 22,650.84 22,043.25 20,412.03 18,723.09
03/31/06 23,042.38 22,116.25 20,610.79 18,539.36
04/30/06 23,292.36 22,246.43 20,835.52 18,505.75
05/31/06 22,546.63 21,653.38 20,422.40 18,486.01
[END CHART]
DATA FROM 5/31/96 THROUGH 5/31/06.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE
CUMULATIVE PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION OF
TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES.
14
. . . C O N T I N U E D
========================--------------------------------------------------------
OVERVIEW
The graph on page 13 illustrates the comparison of a $10,000
hypothetical investment in the USAA Balanced Strategy Fund to the
following benchmarks:
o The Russell 3000 Index measures the performance of the 3,000
largest U.S. companies based on total market capitalization,
which represents approximately 98% of the investable U.S. equity
market.
o The Lipper Balanced Funds Index tracks the total return
performance of the 30 largest funds within the Lipper Balanced
Funds category.
o The Lehman Brothers U.S. Aggregate Bond Index covers the U.S.
investment-grade fixed-rate bond market, including government and
credit securities, agency mortgage pass-through securities,
asset-backed securities, and commercial mortgage-backed
securities that have remaining maturities of more than one year.
15
. . . C O N T I N U E D
========================--------------------------------------------------------
- ------------------------------------------------------
TOP 5 EQUITY HOLDINGS
(% of Net Assets)
- ------------------------------------------------------
iShares Trust* 8.1%
Bank of America Corp. 0.8%
Altria Group, Inc. 0.7%
Citigroup, Inc. 0.6%
Google, Inc. "A" 0.6%
- ------------------------------------------------------
*PURSUANT TO A SECURITIES AND EXCHANGE COMMISSION (SEC) EXEMPTIVE ORDER AND A
RELATED AGREEMENT WITH ISHARES TRUST (ISHARES), THE FUND MAY INVEST IN ISHARES
IN AMOUNTS EXCEEDING LIMITS SET FORTH IN THE INVESTMENT COMPANY ACT OF 1940
THAT WOULD OTHERWISE BE APPLICABLE.
- -----------------------------------------------------------------------------
TOP 5 FIXED-INCOME HOLDINGS
(% of Net Assets)
- -----------------------------------------------------------------------------
Consumers Funding, LLC, Series 2001-1, Class A5 0.6%
Berkshire Hathaway Finance Corp., Senior Notes 0.5%
Freddie Mac Series 2389 VH 0.5%
Oglethorpe Power Corp., Secured Series Facility Bonds 0.4%
Prudential Holdings, LLC, Bonds 0.4%
- -----------------------------------------------------------------------------
ASSET ALLOCATION
5/31/06
[PIE CHART OF ASSET ALLOCATION]
Equity Securities 59.5%
Bonds 38.8%
Other* 8.1%
[END CHART]
*INCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS
PURCHASED WITH CASH COLLATERAL FROM SECURITIES LOANED.
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL
100%.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 18-42.
16
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA BALANCED STRATEGY FUND
The following federal tax information related to the Fund's fiscal
year ended May 31, 2006, is provided for information purposes only
and should not be used for reporting to federal or state revenue
agencies. Federal tax information for the calendar year will be
reported to you on Form 1099-DIV in January 2007.
For the year ended May 31, 2006, the Fund distributed long-term
realized capital gains of $0.523155 per share.
Certain dividends paid by the Fund may be subject to a maximum tax
rate of 15%, as provided for by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. Of the distributions paid during the
fiscal year, the maximum amount that may be considered qualified
dividend income is $4,242,000.
21.24% of ordinary income distributions qualify for dividends-
received deductions eligible to corporations.
For the fiscal year ended May 31, 2006, certain dividends paid by
the Fund qualify as interest-related dividends. The Fund designates
$10,370,000 as qualifying interest income.
The Fund has designated a portion of the amount paid to redeeming
shareholders, in the amount of $2,257,000, as a long-term capital
gain distribution for tax purposes.
17
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF USAA BALANCED STRATEGY FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Balanced Strategy Fund (a portfolio of USAA Investment Trust) (the "Fund"),
including the portfolio of investments, as of May 31, 2006, 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 four 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 the period presented through May 31, 2002, were audited by other auditors
whose report, dated July 5, 2002, expressed an unqualified opinion on those
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, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
USAA Balanced Strategy Fund at May 31, 2006, 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 four years
in the period then ended, in conformity with U.S. generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
San Antonio, Texas
July 14, 2006
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES (59.5%)
COMMON STOCKS (50.0%)
AEROSPACE & DEFENSE (1.2%)
8,500 Boeing Co. $ 708
34,300 Goodrich Corp. 1,462
22,700 Honeywell International, Inc. 935
12,600 Lockheed Martin Corp. 913
41,425 Precision Castparts Corp. 2,387
15,900 United Technologies Corp. 994
--------
7,399
--------
AGRICULTURAL PRODUCTS (0.3%)
47,750 Archer-Daniels-Midland Co. 1,985
--------
AIR FREIGHT & LOGISTICS (0.5%)
28,875 C.H. Robinson Worldwide, Inc. 1,272
22,325 Expeditors International of Washington, Inc. 2,198
--------
3,470
--------
APPAREL RETAIL (0.1%)
7,400 Abercrombie & Fitch Co. "A" 428
1,500 Christopher & Banks Corp. 40
12,575 Jos. A. Bank Clothiers, Inc.* 457
--------
925
--------
APPLICATION SOFTWARE (0.3%)
30,200 Adobe Systems, Inc.* 865
12,600 Amdocs Ltd. (United Kingdom)* 472
7,900 Autodesk, Inc.* 287
6,200 Intuit, Inc.* 343
--------
1,967
--------
ASSET MANAGEMENT & CUSTODY BANKS (1.7%)
20,950 Affiliated Managers Group, Inc.(g)* 1,890
13,450 BlackRock, Inc. "A" 1,802
32,725 Northern Trust Corp. 1,830
19,200 Nuveen Investments, Inc. "A" 862
42,725 State Street Corp. 2,653
23,750 T. Rowe Price Group, Inc. 1,879
--------
10,916
--------
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE MANUFACTURERS (0.1%)
21,300 Winnebago Industries, Inc.(g) $ 604
--------
AUTOMOTIVE RETAIL (0.0%)(o)
9,300 O'Reilly Automotive, Inc.* 295
--------
BIOTECHNOLOGY (1.0%)
15,400 Alkermes, Inc.* 305
14,600 Amgen, Inc.* 987
31,000 Genentech, Inc.* 2,572
43,400 Gilead Sciences, Inc.* 2,488
--------
6,352
--------
BROADCASTING & CABLE TV (0.3%)
43,900 CBS Corp. "B" 1,138
14,800 Univision Communications, Inc. "A"* 532
--------
1,670
--------
CASINOS & GAMING (0.7%)
46,800 GTECH Holdings Corp. 1,617
24,325 Las Vegas Sands Corp.* 1,717
21,700 Penn National Gaming, Inc.* 834
2,800 Scientific Games Corp. "A"* 107
4,600 Shuffle Master, Inc.* 168
--------
4,443
--------
CATALOG RETAIL (0.3%)
71,125 Coldwater Creek, Inc.* 1,828
--------
COAL & CONSUMABLE FUELS (0.2%)
8,900 Cameco Corp. (Canada) 369
13,100 Peabody Energy Corp. 817
--------
1,186
--------
COMMODITY CHEMICALS (0.1%)
30,500 Lyondell Chemical Co. 738
--------
COMMUNICATIONS EQUIPMENT (2.2%)
161,700 Cisco Systems, Inc.* 3,182
150,700 Corning, Inc.* 3,655
20
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
10,300 Foundry Networks, Inc.* $ 132
139,600 Nokia Corp. ADR (Finland) 2,997
81,000 QUALCOMM, Inc. 3,662
--------
13,628
--------
COMPUTER & ELECTRONICS RETAIL (0.3%)
67,175 Circuit City Stores, Inc. 2,019
--------
COMPUTER HARDWARE (0.5%)
47,400 Apple Computer, Inc.* 2,833
8,100 Avid Technology, Inc.* 319
--------
3,152
--------
COMPUTER STORAGE & PERIPHERALS (0.9%)
47,700 EMC Corp.* 611
72,625 Network Appliance, Inc.* 2,324
16,300 QLogic Corp.* 291
46,050 SanDisk Corp.* 2,591
--------
5,817
--------
CONSTRUCTION & ENGINEERING (0.1%)
10,200 Fluor Corp. 894
--------
CONSTRUCTION & FARM MACHINERY & HEAVY TRUCKS (0.4%)
26,925 Caterpillar, Inc. 1,964
6,800 Oshkosh Truck Corp. 360
3,400 Terex Corp.* 311
--------
2,635
--------
CONSTRUCTION MATERIALS (0.0%)(o)
2,900 Martin Marietta Materials, Inc. 265
--------
CONSUMER FINANCE (0.8%)
22,300 Capital One Financial Corp. 1,846
5,900 Doral Financial Corp. 45
22,800 First Marblehead Corp. 1,034
38,000 SLM Corp. 2,043
--------
4,968
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.7%)
12,500 Alliance Data Systems Corp.* 663
49,125 CheckFree Corp.* 2,453
21
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
4,900 DST Systems, Inc.* $ 288
13,300 First Data Corp. 613
15,100 Mastercard, Inc. "A"* 679
--------
4,696
--------
DEPARTMENT STORES (0.5%)
8,300 Federated Department Stores, Inc. 605
43,750 Nordstrom, Inc. 1,611
8,025 Sears Holdings Corp.* 1,219
--------
3,435
--------
DISTRIBUTORS (0.1%)
21,100 Genuine Parts Co. 909
--------
DIVERSIFIED BANKS (0.3%)
26,300 Wells Fargo & Co. 1,746
--------
DIVERSIFIED CAPITAL MARKETS (0.1%)
6,800 UBS AG (Switzerland) 770
--------
DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES (0.3%)
15,800 Corporate Executive Board Co. 1,607
--------
DIVERSIFIED METALS & MINING (0.4%)
23,250 Phelps Dodge Corp. 1,992
2,000 Rio Tinto plc ADR (United Kingdom) 444
--------
2,436
--------
EDUCATIONAL SERVICES (0.1%)
7,500 Career Education Corp.* 244
3,000 ITT Educational Services, Inc.* 195
--------
439
--------
ELECTRIC UTILITIES (0.5%)
30,900 Entergy Corp. 2,166
31,000 Pinnacle West Capital Corp. 1,221
--------
3,387
--------
ELECTRICAL COMPONENTS & EQUIPMENT (0.6%)
122,600 American Power Conversion Corp. 2,413
18,100 Emerson Electric Co. 1,493
--------
3,906
--------
22
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT MANUFACTURERS (0.1%)
7,800 Amphenol Corp. "A" $ 433
--------
ENVIRONMENTAL & FACILITIES SERVICES (0.2%)
27,800 Waste Management, Inc. 1,018
--------
FERTILIZERS & AGRICULTURAL CHEMICALS (0.2%)
18,500 Monsanto Co. 1,557
--------
FOOD RETAIL (0.4%)
39,200 Whole Foods Market, Inc. 2,548
--------
GENERAL MERCHANDISE STORES (0.3%)
45,600 Dollar General Corp. 743
49,100 Family Dollar Stores, Inc. 1,227
--------
1,970
--------
GOLD (0.1%)
5,100 Freeport-McMoRan Copper & Gold, Inc. "B" 285
7,800 Newmont Mining Corp. 407
--------
692
--------
HEALTH CARE DISTRIBUTORS (0.0%)(o)
6,900 Patterson Companies, Inc.* 236
--------
HEALTH CARE EQUIPMENT (1.3%)
47,800 Baxter International, Inc. 1,802
5,900 Biomet, Inc. 208
27,600 Hillenbrand Industries, Inc. 1,395
14,450 Intuitive Surgical, Inc.* 1,608
8,700 Kinetic Concepts, Inc.* 338
25,400 Medtronic, Inc. 1,282
31,050 ResMed, Inc.* 1,412
--------
8,045
--------
HEALTH CARE FACILITIES (0.6%)
227,600 HEALTHSOUTH Corp.* 985
59,700 Service Corp. International 477
30,500 Triad Hospitals, Inc.* 1,229
18,700 Universal Health Services, Inc. "B" 949
--------
3,640
--------
23
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
HEALTH CARE SERVICES (0.8%)
5,700 Amedisys, Inc.* $ 204
45,900 DaVita, Inc.* 2,431
20,900 Express Scripts, Inc.* 1,531
13,300 Medco Health Solutions, Inc.* 717
7,600 Omnicare, Inc. 352
--------
5,235
--------
HEALTH CARE SUPPLIES (0.0%)(o)
3,000 Cooper Companies, Inc. 142
--------
HOME IMPROVEMENT RETAIL (0.4%)
9,700 Lowe's Companies, Inc. 604
33,400 Sherwin-Williams Co. 1,616
--------
2,220
--------
HOMEBUILDING (0.1%)
14,400 D.R. Horton, Inc. 380
--------
HOTELS, RESORTS, & CRUISE LINES (0.7%)
25,200 Carnival Corp. 1,006
29,600 Royal Caribbean Cruises Ltd. 1,127
40,750 Starwood Hotels and Resorts, Inc. 2,490
--------
4,623
--------
HOUSEHOLD APPLIANCES (0.8%)
66,200 Stanley Works 3,214
17,600 Whirlpool Corp. 1,583
--------
4,797
--------
HOUSEHOLD PRODUCTS (0.2%)
22,100 Procter & Gamble Co. 1,199
--------
HUMAN RESOURCE & EMPLOYMENT SERVICES (0.4%)
54,200 Monster Worldwide, Inc.* 2,649
--------
INDUSTRIAL CONGLOMERATES (0.7%)
13,800 3M Co. 1,155
42,000 General Electric Co. 1,439
11,100 Textron, Inc. 1,009
22,800 Tyco International Ltd. 618
--------
4,221
--------
24
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL MACHINERY (0.5%)
43,400 Illinois Tool Works, Inc. $ 2,155
22,700 ITT Industries, Inc. 1,184
--------
3,339
--------
INDUSTRIAL REITs (0.1%)
11,700 First Industrial Realty Trust, Inc. 433
--------
INSURANCE BROKERS (0.2%)
44,000 Willis Group Holdings Ltd. (United Kingdom) 1,529
--------
INTEGRATED OIL & GAS (2.1%)
28,200 BP plc ADR (United Kingdom) 1,994
16,300 Chevron Corp. 975
60,600 ConocoPhillips 3,835
23,200 Exxon Mobil Corp. 1,413
13,400 Marathon Oil Corp. 1,006
15,000 Murphy Oil Corp. 791
30,200 Occidental Petroleum Corp. 2,992
--------
13,006
--------
INTEGRATED TELECOMMUNICATION SERVICES (0.4%)
6,500 NeuStar, Inc. "A"* 209
77,000 Verizon Communications, Inc. 2,403
--------
2,612
--------
INTERNET SOFTWARE & SERVICES (0.9%)
62,775 Akamai Technologies, Inc.* 1,964
10,400 Google, Inc. "A"* 3,867
--------
5,831
--------
INVESTMENT BANKING & BROKERAGE (2.3%)
9,625 Bear Stearns Companies, Inc. 1,287
95,600 E*TRADE Financial Corp.* 2,320
21,250 Goldman Sachs Group, Inc. 3,208
23,650 Investment Technology Group, Inc.* 1,119
37,700 Lazard Ltd. "A" (Bermuda)(g) 1,496
46,200 Lehman Brothers Holdings, Inc. 3,077
10,600 Merrill Lynch & Co., Inc. 768
72,350 TD Ameritrade Holding Corp. 1,230
--------
14,505
--------
25
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
IT CONSULTING & OTHER SERVICES (0.4%)
11,900 Accenture Ltd. "A" $ 335
35,100 Cognizant Technology Solutions Corp. "A"* 2,071
--------
2,406
--------
LEISURE PRODUCTS (0.4%)
25,900 Brunswick Corp. 931
113,100 Mattel, Inc. 1,901
--------
2,832
--------
LIFE SCIENCES TOOLS & SERVICES (0.1%)
3,600 Applera Corp. - Applied Biosystems Group 106
5,400 Fisher Scientific International, Inc.* 401
6,000 Waters Corp.* 250
--------
757
--------
MANAGED HEALTH CARE (1.0%)
5,200 Aetna, Inc. 200
26,750 Coventry Health Care, Inc.* 1,398
9,500 Health Net, Inc.* 409
17,100 UnitedHealth Group, Inc. 752
47,800 WellPoint, Inc.* 3,421
--------
6,180
--------
MOVIES & ENTERTAINMENT (0.2%)
38,500 Time Warner, Inc. 662
11,200 Viacom, Inc. "B"* 423
--------
1,085
--------
MULTI-LINE INSURANCE (0.8%)
32,700 American International Group, Inc. 1,988
35,675 Hartford Financial Services Group, Inc. 3,137
--------
5,125
--------
MULTI-UTILITIES (1.1%)
54,700 CenterPoint Energy, Inc.(g) 656
21,400 Dominion Resources, Inc. 1,553
71,000 Duke Energy Corp. 2,004
29,700 MDU Resources Group, Inc. 1,054
80,000 Xcel Energy, Inc. 1,501
--------
6,768
--------
OFFICE REITs (0.1%)
86,500 American Financial Realty Trust 856
--------
26
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
OIL & GAS DRILLING (0.1%)
17,100 Patterson-UTI Energy, Inc. $ 511
--------
OIL & GAS EQUIPMENT & SERVICES (0.7%)
21,075 Baker Hughes, Inc. 1,819
25,000 National-Oilwell Varco, Inc.* 1,652
12,800 Schlumberger Ltd. 839
--------
4,310
--------
OIL & GAS EXPLORATION & PRODUCTION (1.2%)
11,200 Anadarko Petroleum Corp. 556
29,600 Chesapeake Energy Corp. 906
1 Hugoton Royalty Trust -
36,800 Noble Energy, Inc. 1,599
52,650 Southwestern Energy Co.* 1,701
28,725 Ultra Petroleum Corp.* 1,653
5,700 Woodside Petroleum Ltd. ADR (Australia) 190
31,750 XTO Energy, Inc. 1,309
--------
7,914
--------
OIL & GAS STORAGE & TRANSPORTATION (0.1%)
37,800 El Paso Corp. 589
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (1.4%)
100,700 Bank of America Corp. 4,874
81,039 Citigroup, Inc. 3,995
--------
8,869
--------
PACKAGED FOODS & MEAT (0.2%)
44,000 ConAgra Foods, Inc. 994
6,200 General Mills, Inc. 322
--------
1,316
--------
PHARMACEUTICALS (1.7%)
13,500 Abbott Laboratories 576
6,300 Biovail Corp. (Canada) 155
65,400 Bristol-Myers Squibb Co. 1,605
11,900 Eisai Co. Ltd. ADR (Japan) 541
12,600 Eli Lilly and Co. 651
103,300 Pfizer, Inc. 2,444
20,600 Sanofi-Aventis ADR (France) 974
121,400 Schering-Plough Corp. 2,314
27
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==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
46,900 Valeant Pharmaceuticals International $ 807
18,300 Wyeth 837
--------
10,904
--------
PROPERTY & CASUALTY INSURANCE (1.2%)
15,500 ACE Ltd. 802
40,400 Allstate Corp. 2,222
40,400 Axis Capital Holdings Ltd. 1,059
9,700 Chubb Corp. 490
12,500 W.R. Berkley Corp. 430
40,400 XL Capital Ltd. "A" 2,557
--------
7,560
--------
PUBLISHING (0.2%)
19,200 Gannett Co., Inc. 1,037
--------
RAILROADS (0.3%)
24,200 Burlington Northern Santa Fe Corp. 1,873
--------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.6%)
35,525 CB Richard Ellis Group, Inc. "A"* 2,748
15,000 Jones Lang LaSalle, Inc. 1,193
--------
3,941
--------
REGIONAL BANKS (0.4%)
7,700 PNC Financial Services Group, Inc. 531
53,300 South Financial Group, Inc. 1,479
26,100 TCF Financial Corp. 697
--------
2,707
--------
RESTAURANTS (1.3%)
30,375 Chipotle Mexican Grill, Inc. "A"* 1,755
8,200 RARE Hospitality International, Inc.* 252
70,075 Starbucks Corp.* 2,498
80,475 Tim Hortons, Inc. (Canada)(g)* 2,128
25,675 Wendy's International, Inc. 1,548
--------
8,181
--------
RETAIL REITs (0.1%)
6,500 Simon Property Group, Inc. 518
--------
28
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT (0.2%)
5,000 Lam Research Corp.* $ 224
7,000 MEMC Electronic Materials, Inc.* 245
18,100 Varian Semiconductor Equipment Associates, Inc.* 560
--------
1,029
--------
SEMICONDUCTORS (0.2%)
16,900 Analog Devices, Inc. 570
14,200 Microchip Technology, Inc. 487
--------
1,057
--------
SOFT DRINKS (0.6%)
14,625 Hansen Natural Corp.(g)* 2,704
17,900 PepsiCo, Inc. 1,082
--------
3,786
--------
SPECIALIZED CONSUMER SERVICES (0.2%)
47,400 H&R Block, Inc. 1,078
--------
SPECIALIZED FINANCE (0.6%)
4,700 Chicago Mercantile Exchange Holdings, Inc. 2,074
22,975 IntercontinentalExchange, Inc.* 1,280
15,000 Nasdaq Stock Market, Inc.* 456
--------
3,810
--------
SPECIALTY STORES (0.4%)
29,100 Michaels Stores, Inc. 1,131
32,400 Office Depot, Inc.* 1,347
--------
2,478
--------
STEEL (0.3%)
18,100 Allegheny Technologies, Inc.(g) 1,152
12,500 Companhia Vale Do Rio Doce ADR (Brazil) 582
--------
1,734
--------
SYSTEMS SOFTWARE (0.2%)
61,000 Microsoft Corp. 1,382
--------
TECHNOLOGY DISTRIBUTORS (0.3%)
3,200 CDW Corp. 179
41,900 Tech Data Corp.* 1,521
--------
1,700
--------
29
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE (1.4%)
8,800 Golden West Financial Corp. $ 643
7,000 IndyMac Bancorp, Inc. 321
20,900 MGIC Investment Corp. 1,377
84,300 New York Community Bancorp, Inc. 1,404
45,700 People's Bank 1,505
24,800 Radian Group, Inc. 1,516
51,000 Washington Mutual, Inc. 2,341
--------
9,107
--------
TOBACCO (2.1%)
57,700 Altria Group, Inc. 4,175
42,400 Imperial Tobacco Group plc ADR (United Kingdom) 2,609
41,400 Loews Corp. - Carolina Group 1,923
14,000 Reynolds American, Inc. 1,539
64,700 UST, Inc. 2,847
--------
13,093
--------
TRADING COMPANIES & DISTRIBUTORS (0.0%)(o)
4,200 Fastenal Co. 181
--------
TRUCKING (0.3%)
3,500 Con-Way, Inc. 207
28,200 Ryder System, Inc. 1,523
--------
1,730
--------
WIRELESS TELECOMMUNICATION SERVICES (0.2%)
46,252 Sprint Nextel Corp. 981
3,100 Syniverse Holdings, Inc.* 51
--------
1,032
--------
Total common stocks (cost: $305,756) 316,783
--------
PREFERRED SECURITIES (1.3%)
ELECTRIC UTILITIES (0.2%)
10,000 Southern California Edison Co., Series A, 5.35%, perpetual(j) 985
--------
LIFE & HEALTH INSURANCE (0.2%)
40,000 Aegon N.V., 6.38% (Netherlands) 946
--------
30
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
OFFICE REITs (0.2%)
60,000 Duke Realty Corp., Series M, 6.95%, perpetual $ 1,475
--------
PROPERTY & CASUALTY INSURANCE (0.1%)
7,500 Axis Capital Holdings Ltd., Series B, 7.50%, perpetual 754
--------
PRINCIPAL
AMOUNT
(000)
- ---------
REGIONAL BANKS (0.3%)
$2,000 Farm Credit Bank of Texas, Series 1, 7.56%, perpetual(j) 2,096
--------
NUMBER
OF SHARES
- ---------
REINSURANCE (0.3%)
40,000 Endurance Specialty Holdings Ltd., 7.75%, Series A (Bermuda) 951
1,000,000 Swiss Re Capital I, L.P. (Switzerland), 6.85%, perpetual(a,j) 989
--------
1,940
--------
Total preferred securities (cost: $8,393) 8,196
--------
EXCHANGE-TRADED FUNDS (8.2%)
402,100 iShares Trust, S&P 500 Index Fund(g) 51,296
5,500 MidCap SPDR Trust Series 1 771
--------
Total exchange-traded funds (cost: $52,376) 52,067
--------
Total equity securities (cost: $366,525) 377,046
--------
PRINCIPAL
AMOUNT COUPON
(000) RATE MATURITY
- --------- ------ --------
BONDS (38.8%)
CORPORATE OBLIGATIONS (25.2%)
APPAREL & ACCESSORIES & LUXURY GOODS (0.3%)
$ 1,000 Kellwood Co., Debentures 7.63% 10/15/2017 911
1,000 Kellwood Co., Senior Notes 7.88 7/15/2009 1,006
--------
1,917
--------
BREWERS (0.2%)
1,000 Miller Brewing Co., Guaranteed Notes(a) 4.25 8/15/2008 971
--------
31
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
BROADCASTING & CABLE TV (0.4%)
$ 1,000 Cox Communications, Inc., Notes 4.63% 6/01/2013 $ 904
1,000 Cox Enterprises, Inc., Notes(a) 8.00 2/15/2007 1,011
1,000 Liberty Media Corp., Senior Notes(g) 5.70 5/15/2013 924
--------
2,839
--------
CONSUMER FINANCE (1.4%)
1,000 Ford Motor Credit Co., Senior Notes 4.95 1/15/2008 937
1,000 Ford Motor Credit Co., Notes 7.00 10/01/2013 864
1,000 General Motors Acceptance Corp., Notes 6.13 8/28/2007 979
1,000 General Motors Acceptance Corp., Notes(g) 6.75 12/01/2014 909
2,000 Household Finance Corp., Notes 6.38 10/15/2011 2,057
1,000 HSBC Finance Corp., Notes 5.50 1/19/2016 958
2,000 SLM Corp., Notes 5.38 1/15/2013 1,956
--------
8,660
--------
DATA PROCESSING & OUTSOURCED SERVICES (0.3%)
1,750 Fiserv, Inc., Notes 4.00 4/15/2008 1,693
--------
DIVERSIFIED BANKS (0.6%)
1,000 Emigrant Bancorp, Inc., Senior Notes(a) 6.25 6/15/2014 969
2,050 First Union Corp., Bonds 6.82 8/01/2026(c) 2,326
636 U.S. Central Credit Union, Senior Notes 2.70 9/30/2009 605
--------
3,900
--------
DIVERSIFIED CHEMICALS (0.1%)
1,000 ICI Wilmington, Inc., Notes 4.38 12/01/2008 967
--------
DIVERSIFIED REITs (0.1%)
1,000 Liberty Property, LP, Senior Notes 5.65 8/15/2014 966
--------
ELECTRIC UTILITIES (3.8%)
1,000 American Electric Power Co., Inc., Senior Notes 4.71 8/16/2007 990
1,000 Black Hills Corp., Notes 6.50 5/15/2013 991
1,831 Cedar Brakes II, LLC, Senior Notes, Series C(a) 9.88 9/01/2013 2,054
868 Entergy Gulf States, Inc., First Mortgage Bonds 6.20 7/01/2033 787
1,000 Entergy Mississippi, Inc., First Mortgage Bonds 5.15 2/01/2013 932
950 FPL Energy National Wind, LLC, Secured Notes(a) 5.61 3/10/2024 913
2,000 Monongahela Power Co., Notes, Series A 7.36 1/15/2010 2,101
32
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
$ 1,000 Northern States Power Co., First Mortgage Bonds 2.88% 8/01/2006 $ 996
2,681 Oglethorpe Power Corp., Secured Series Facility Bonds 6.97 6/30/2011 2,724
2,000 Power Contract Financing, Senior Notes(a) 6.26 2/01/2010 2,006
1,000 PPL Capital Funding, Inc., Guaranteed Notes, Series A 4.33 3/01/2009 960
1,000 PPL Energy Supply, LLC, Bonds, Series A 5.70 10/15/2015 955
1,000 Sempra Energy ESOP, Series 1999 (NBGA)(a) 4.21 11/01/2014(q) 984
2,000 Tristate General & Transport Association, Bonds(a) 6.04 1/31/2018 1,969
2,000 TXU Energy Co., LLC, Senior Notes 7.00 3/15/2013 2,069
1,500 Virginia Electric Power Co., Senior Notes 5.40 1/15/2016 1,432
1,000 West Penn Power Co., Notes 6.63 4/15/2012 1,025
--------
23,888
--------
FOOD RETAIL (0.1%)
1,000 Safeway, Inc., Notes 5.63 8/15/2014 958
--------
GAS UTILITIES (1.2%)
2,000 Boardwalk Pipelines, LLC, Notes 5.50 2/01/2017 1,892
1,000 Enbridge Energy Partners, LP, Senior Notes 5.35 12/15/2014 940
2,000 Energy Transfer Partners, LP, Senior Notes 5.95 2/01/2015 1,935
1,000 Gulfstream Natural Gas Systems, LLC, Senior Notes(a) 6.19 11/01/2025 972
1,000 Noram Energy Corp., Debentures 6.50 2/01/2008 1,012
1,000 Valero Logistics Operations, LP, Senior Notes 6.05 3/15/2013 995
--------
7,746
--------
HEALTH CARE FACILITIES (0.2%)
1,000 HCA, Inc., Notes 5.25 11/06/2008 984
--------
HOUSEHOLD APPLIANCES (0.4%)
2,500 Stanley Works Capital Trust I, Bonds(a,j) 5.90 12/01/2045 2,339
--------
HOUSEWARES & SPECIALTIES (0.2%)
1,380 Newell Rubbermaid, Inc., MTN, Series A(j) 6.35 7/15/2028 1,386
--------
INTEGRATED OIL & GAS (0.3%)
1,893 Merey Sweeny, LP, Senior Notes(a) 8.85 12/18/2019 2,180
--------
33
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
LIFE & HEALTH INSURANCE (1.0%)
$ 1,000 Great West Life & Annuity, Inc., Bonds(a,j) 7.15% 5/16/2046 $ 1,001
1,000 Lincoln National Corp., Bonds(j) 7.00 5/17/2066 998
2,000 Phoenix Companies, Inc., Senior Notes 6.68 2/16/2008 2,007
2,000 Prudential Holdings, LLC, Bonds(a) 8.70 12/18/2023 2,388
--------
6,394
--------
MANAGED HEALTH CARE (0.5%)
1,000 Coventry Health Care, Inc., Senior Notes 6.13 1/15/2015 975
2,000 Highmark, Inc., Senior Notes(a) 6.80 8/15/2013 2,056
--------
3,031
--------
MULTI-LINE INSURANCE (1.1%)
1,000 American General Finance Corp., MTN, Series I 4.88 7/15/2012 951
1,000 American General Finance Corp., MTN 5.40 12/01/2015 955
1,000 ASIF Global Financing XIX, Senior Notes(a) 4.90 1/17/2013 955
2,000 ILFC E-Capital Trust I, Bonds(a,g,j) 5.90 12/21/2065 1,956
2,000 Oil Casualty Insurance Ltd., Subordinated Debentures(a) 8.00 9/15/2034 1,898
--------
6,715
--------
MULTI-SECTOR HOLDINGS (0.2%)
1,000 Leucadia National Corp., Senior Notes 7.00 8/15/2013 990
--------
MULTI-UTILITIES (0.2%)
1,000 PSEG Funding Trust, Notes 5.38 11/16/2007 995
--------
OFFICE REITs (1.1%)
1,000 Arden Realty, LP, Notes 5.25 3/01/2015 959
1,500 Brandywine Operating Partnership, LP, Notes 5.63 12/15/2010 1,476
1,500 Carramerica Realty Corp., Notes 5.50 12/15/2010 1,490
1,000 EOP Operating, LP, Guaranteed Notes 4.75 3/15/2014 915
2,000 HRPT Properties Trust, Notes 5.75 11/01/2015 1,926
--------
6,766
--------
OIL & GAS EQUIPMENT & SERVICES (0.2%)
1,381 Seacor Holdings, Inc., Senior Notes 5.88 10/01/2012 1,333
--------
OIL & GAS EXPLORATION & PRODUCTION (0.3%)
1,000 Southwestern Energy Co., MTN 7.35 10/02/2017 1,045
1,000 Southwestern Energy Co., MTN 7.63 5/01/2027(c) 1,044
--------
2,089
--------
34
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
OIL & GAS STORAGE & TRANSPORTATION (0.3%)
$ 2,000 Kinder Morgan Finance Co., Guaranteed Notes 5.70% 1/05/2016 $ 1,783
--------
OTHER DIVERSIFIED FINANCIAL SERVICES (0.6%)
1,000 Bank of America Corp., Subordinated Notes 9.38 9/15/2009 1,109
1,000 Textron Financial Corp., Notes 2.75 6/01/2006 1,000
2,000 ZFS Finance USA Trust I, Notes(a,g,j) 6.15 12/15/2065 1,924
--------
4,033
--------
PACKAGED FOODS & MEAT (0.2%)
1,000 General Mills, Inc., Notes 2.63 10/24/2006 990
--------
PROPERTY & CASUALTY INSURANCE (2.7%)
1,000 21st Century Insurance Group, Senior Notes 5.90 12/15/2013 964
1,000 ACE INA Holdings, Inc., Senior Notes 5.88 6/15/2014 976
1,000 AXIS Capital Holdings Ltd., Senior Notes 5.75 12/01/2014 955
3,185 Berkshire Hathaway Finance Corp., Senior Notes 4.85 1/15/2015 2,978
1,000 Fidelity National Title Group, Inc., Notes 5.25 3/15/2013 914
1,000 Fidelity National Title Group, Inc., Notes 7.30 8/15/2011 1,021
2,000 Fund American Companies, Inc., Notes 5.88 5/15/2013 1,944
500 Markel Corp., Senior Notes 6.80 2/15/2013 506
1,000 Markel Corp., Notes 7.20 8/15/2007 1,015
1,000 Ohio Casualty Corp., Notes 7.30 6/15/2014 1,025
1,000 RLI Corp., Senior Notes 5.95 1/15/2014 954
1,000 St. Paul Travelers Companies, Inc., Senior Notes 5.50 12/01/2015 961
1,000 W.R. Berkley Corp., Senior Notes 5.60 5/15/2015 948
2,000 XL Capital Ltd., Senior Notes 6.38 11/15/2024 1,894
--------
17,055
--------
PUBLISHING (0.5%)
1,000 Knight-Ridder, Inc., Notes 5.75 9/01/2017 909
2,500 Scholastic Corp., Notes 5.00 4/15/2013 2,161
--------
3,070
--------
RAILROADS (0.3%)
2,000 TTX Co., Notes(a) 5.40 2/15/2016 1,902
--------
REGIONAL BANKS (1.5%)
1,000 Bank of Hawaii, Notes 6.88 3/01/2009 1,024
1,000 First Republic Bank Corp., Subordinated Notes 7.75 9/15/2012 1,105
1,000 Fulton Capital Trust I, Notes 6.29 2/01/2036 912
35
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
$ 1,000 Imperial Bank, Subordinated Capital Notes 8.50% 4/01/2009 $ 1,076
2,000 PNC Financial Services, Trust Preferred Securities, Series C 8.88 3/15/2027 2,130
1,500 Popular North America Capital Trust I, Bonds 6.56 9/15/2034 1,414
1,000 TCF National Bank, Subordinated Notes 5.50 2/01/2016 959
1,000 Union Planters Bank, N.A., Subordinated Notes 6.50 3/15/2018(c) 1,015
--------
9,635
--------
RESIDENTIAL REITs (0.6%)
2,000 ERP Operating, LP, Notes 5.25 9/15/2014 1,906
1,000 Post Apartment Homes, LP, Senior Notes 5.45 6/01/2012 955
1,000 United Dominion Realty Trust, Senior Notes 5.25 1/15/2015 934
--------
3,795
--------
RETAIL REITs (1.6%)
2,000 Federal Realty Investment Trust, Notes 5.65 6/01/2016 1,927
2,000 Kimco Realty Corp., Notes 5.58 11/23/2015 1,923
2,000 Pan Pacific Retail Properties, Inc., Notes 7.95 4/15/2011 2,163
2,000 Simon Property Group, LP, Notes(a) 5.75 12/01/2015 1,953
2,000 Tanger Factory Outlets, Senior Notes 6.15 11/15/2015 1,949
--------
9,915
--------
SPECIALIZED REITs (0.4%)
1,000 Hospitality Properties Trust, Senior Notes 5.13 2/15/2015 918
2,000 Nationwide Health Properties, Inc., Notes 6.00 5/20/2015 1,919
--------
2,837
--------
THRIFTS & MORTGAGE FINANCE (1.2%)
1,000 Countrywide Home Loan, Guaranteed Notes, Series MTNL 4.00 3/22/2011 927
1,000 Independence Community Bank Corp., Notes(j) 3.50 6/20/2013 957
2,000 Roslyn Bancorp, Inc., Senior Notes 7.50 12/01/2008 2,076
2,000 Washington Mutual Bank, Subordinated Notes 5.65 8/15/2014 1,947
2,000 World Savings Bank Federal Savings Bank, Notes 4.13 12/15/2009 1,911
--------
7,818
--------
TOBACCO (0.5%)
1,000 Universal Corp., MTN, Series C 5.20 10/15/2013 899
1,000 Universal Corp., MTN, Series B 7.88 2/15/2008 1,026
1,000 UST, Inc., Notes 6.63 7/15/2012 1,030
--------
2,955
--------
36
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
TRUCKING (0.2%)
$ 1,500 Roadway Corp., Senior Notes 8.25% 12/01/2008 $ 1,562
--------
WIRELESS TELECOMMUNICATION SERVICES (0.4%)
2,000 Iwo Holdings Inc., Senior Discount Notes, 10.75%, 1/15/2010 8.43(m) 1/15/2015 1,575
1,000 US Unwired, Inc., Secured Notes 10.00 6/15/2012 1,121
--------
2,696
--------
Total corporate obligations (cost: $164,993) 159,753
--------
EURODOLLAR AND YANKEE OBLIGATIONS (4.9%)(l)
DIVERSIFIED BANKS (1.5%)
1,000 Bayerische Landesbank, MTN (Germany) 2.60 10/16/2006 990
1,000 BOI Capital Funding Number 3 LP, Guaranteed Bonds (Ireland)(a,g,j) 6.11 1/29/2049 939
500 Chinatrust Commercial Bank Co. Ltd., Bonds (Hong Kong)(a,j) 5.63 12/29/2049 462
1,000 Chuo Mitsui Trust & Banking Co., Subordinated Notes (Japan)(a,j) 5.51 12/29/2049 938
1,000 HBOS plc, Subordinated Notes (United Kingdom)(a) 6.41 10/01/2035 906
1,000 Mizuho Finance, Notes (Japan)(a) 5.79 4/15/2014 986
1,000 Nordea Bank AB, Subordinated Notes (Sweden)(a) 5.25 11/30/2012 969
1,000 Skandinaviska Enskilda Banken, Subordinated Bonds (Sweden)(a,j) 5.47 3/29/2049 938
2,000 UFJ Finance Aruba AEC, Notes (Japan) 8.75 11/13/2049 2,122
--------
9,250
--------
DIVERSIFIED METALS & MINING (0.5%)
2,000 Brascan Corp., Notes (Canada) 8.13 12/15/2008 2,110
1,000 Glencore Funding, LLC, Notes (Switzerland)(a) 6.00 4/15/2014 939
--------
3,049
--------
FOOD RETAIL (0.3%)
2,000 Woolworths Ltd., Senior Notes (Australia)(a) 5.25 11/15/2011 1,953
--------
INTEGRATED OIL & GAS (0.2%)
1,000 Pemex Finance Ltd., Senior Notes (Mexico) 8.88 11/15/2010 1,089
--------
37
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
OIL & GAS DRILLING (0.3%)
$ 1,721 Delek & Avner-Yam Tethys Ltd., Secured Notes (Israel)(a) 5.33% 8/01/2013 $ 1,657
--------
OIL & GAS EXPLORATION & PRODUCTION (0.4%)
2,000 EOG Resources Canada, Inc., Senior Notes (Canada)(a) 4.75 3/15/2014 1,865
1,000 RAS Laffan Liquefied Natural Gas Co. Ltd. II, Bonds,
Series A (Qatar)(a) 5.30 9/30/2020 942
--------
2,807
--------
OIL & GAS REFINING & MARKETING (0.3%)
2,000 GS Caltex Corp., Notes (Korea)(a,g) 5.50 10/15/2015 1,899
--------
PAPER PRODUCTS (0.1%)
1,000 Domtar, Inc., Notes (Canada) 5.38 12/01/2013 815
--------
PROPERTY & CASUALTY INSURANCE (0.1%)
1,000 Mantis Reef Ltd. II, Notes (Australia)(a) 4.80 11/03/2009 962
--------
REGIONAL BANKS (0.2%)
1,000 Kaupthing Bank, Bonds (Iceland)(a) 7.13 5/19/2016 1,004
--------
REINSURANCE (1.0%)
1,000 Endurance Specialty Holdings, Ltd., Senior Notes (Bermuda) 6.15 10/15/2015 965
2,500 Montpelier Re Holdings Ltd., Senior Notes (Bermuda) 6.13 8/15/2013 2,326
1,500 Platinum Underwriters Finance, Inc., Guaranteed Notes,
Series B (Bermuda) 7.50 6/01/2017 1,476
2,000 Stingray, Pass-Through Trust, Pass-Through Certificates
(Bermuda)(a) 5.90 1/12/2015 1,923
--------
6,690
--------
Total Eurodollar and Yankee obligations (cost: $32,362) 31,175
--------
38
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (1.5%)
AIRLINES (0.4%)
America West Airlines, Inc., Pass-Through Certificates,
$ 470 Series 1996-1, Class A, EETC 6.85% 7/02/2009 $ 470
1,460 Series 1999-1, Class G, EETC (INS) 7.93 1/02/2019 1,541
686 American Airlines, Pass-Through Certificates,
Series 2002-1, Class G, EETC (INS) 5.56(d) 9/23/2007 689
--------
2,700
--------
ASSET-BACKED FINANCING (1.1%)
922 Aerco Ltd., Series 2A, Class A4(a) 5.60(d) 7/15/2025 885
711 Airport Airplanes, Pass-Through Certificates,
Series 1R, Class A8 5.46(d) 3/15/2019 682
4,000 Consumers Funding, LLC, Series 2001-1, Class A5 5.43 4/20/2015 3,974
1,000 Detroit Edison Securitization Funding, LLC,
Series 2001-1, Class A5 6.42 3/01/2015 1,040
231 Oncor Electric Delivery Transition Bond Co., Bonds,
Series 2003-1, Class A1 2.26 2/15/2009 228
120 Whole Auto Loan Trust, Series 2003-1, Class A3B(a) 1.99 5/15/2007 120
--------
6,929
--------
Total asset-backed securities (cost: $9,510) 9,629
--------
COMMERCIAL MORTGAGE SECURITIES (4.7%)
COMMERCIAL MORTGAGE-BACKED SECURITIES (4.6%)
Banc of America Commercial Mortgage Inc.,
2,165 Series 2001 PB1, Class A2 5.79 5/11/2035 2,178
1,348 Series 2000-2, Class A1 7.02 9/15/2032 1,385
400 Commercial Mortgage Asset Trust, Series 1999-C1, Class A4 6.98 1/17/2032 427
Credit Suisse First Boston Mortgage Securities Corp.,
1,267 Series 2001-CK6, Class A2 6.10 8/15/2036 1,276
1,000 Series 1998-C1, Class D 7.17 5/17/2040 1,057
1,680 Series 2000-C1, Class A2 7.55 4/15/2062 1,779
2,000 DLJ Commercial Mortgage Corp., Series 1999-CG1, Class A1B 6.46 3/10/2032 2,042
39
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
$ 2,000 G-Force, LLC, Series 2005-RR2, Class A2(a) 5.16% 12/25/2039 $ 1,954
1,000 GE Capital Commercial Mortgage Corp., Series 2001-3, Class A2 6.07 6/10/2038 1,020
1,000 Government Lease Trust, Series 1999-GSA1, Class A4(a) 6.48 5/18/2011 1,024
1,000 GS Mortgage Securities Corp. II, Series 2001-GL3A, Class A2(a) 6.45 8/05/2018 1,036
625 J.P. Morgan Chase Commercial Mortgage Securities Corp.,
Series 2004-CBX, Class A1 3.18 1/12/2037 620
JP Morgan Chase Commercial Mortgage Securities Corp.,
1,000 Series 2005-CB12, Class A3A1 4.82 9/12/2037 962
2,000 Series 2006-LDP6, Class A-SB 5.49(d) 4/15/2043 1,964
855 Mach One Trust, Series 2004-1A, Class A1(a) 3.89 5/28/2040 822
1,250 Merrill Lynch Mortgage Investors, Inc.,
Series 1998-C1, Class A2 6.48 11/15/2026 1,263
1,972 Paine Webber Mortgage Acceptance Corp.,
Series 1999-C1, Class A2 6.82 6/15/2032 2,016
2,000 Prudential Mortgage Capital Funding, LLC,
Series 2001-ROCK, Class B 6.76 5/10/2034 2,099
1,558 Salomon Brothers Mortgage Securities VII, Inc.,
Series 2000-C3, Class A1(a) 6.34 12/18/2033 1,568
Wachovia Bank Commercial Mortgage Trust,
1,000 Series 2005-C19, Class A5 4.66 5/15/2044 943
2,000 Series 2005-C18, Class APB 4.81 4/15/2042 1,903
--------
29,338
--------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.1%)(f)
8,126 Greenwich Capital Commercial Funding Corp.,
Series 2002-C1, Class XP (acquired 8/13/2003; cost $834)(a,b) 1.93 1/11/2035 559
--------
Total commercial mortgage securities (cost: $30,432) 29,897
--------
U.S. GOVERNMENT AGENCY ISSUES (1.8%)(i)
COLLATERALIZED MORTGAGE OBLIGATIONS (1.4%)
Freddie Mac(+),
2,088 Series 2435 VG 6.00 2/15/2013 2,099
2,979 Series 2389 VH 6.00 10/15/2018 2,985
791 Series 2427 VL 6.50 11/15/2017 791
1,265 Series 2445 VD 6.50 4/15/2018 1,270
40
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
Government National Mortgage Assn. I,
$ 1,000 Series 1999-14 VD 6.00% 3/20/2014 $ 1,005
683 Series 2001-49 VB 7.00 11/16/2016 685
--------
8,835
--------
INTEREST-ONLY COMMERCIAL MORTGAGE-BACKED SECURITIES (0.1%)(f)
21,875 Government National Mortgage Assn. I, Series 2003-59, Class XB 2.28 7/16/2010 671
--------
MORTGAGE-BACKED PASS-THROUGH SECURITIES (0.1%)
106 Government National Mortgage Assn. I, Pool 587184 7.00 4/15/2032 110
449 Government National Mortgage Assn. II, Pool 781494 6.50 8/20/2031 455
--------
565
--------
OTHER U.S. GOVERNMENT GUARANTEED SECURITIES (0.2%)
1,429 Rowan Companies, Inc., Guaranteed Bond, Title XI 2.80 10/20/2013 1,295
--------
Total U.S. government agency issues (cost: $11,421) 11,366
--------
U.S. TREASURY SECURITIES (0.2%)
BONDS
1,000 4.50%, 2/15/2036(g) (cost: $885) 894
--------
MUNICIPAL BONDS (0.5%)
CASINOS & GAMING (0.3%)
2,000 Mashantucket (Western) Pequot Tribe, CT, Bonds(a) 5.91 9/01/2021 1,864
--------
COMMUNITY SERVICE (0.0%)(o)
325 Jicarilla Apache Nation, NM, RB 2.95 12/01/2006 321
--------
MULTI-UTILITIES (0.2%)
1,097 California Maritime Infrastructure Auth. RB, Series 1999 6.63 11/01/2009 1,107
--------
Total municipal bonds (cost: $3,453) 3,292
--------
Total bonds (cost: $253,056) 246,006
--------
41
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT COUPON VALUE
(000) SECURITY RATE MATURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS (1.8%)
VARIABLE-RATE DEMAND NOTES (0.4%)(e)
------------------------------------
ELECTRIC UTILITIES (0.1%)
$ 455 Sempra Energy ESOP, Series 1999A (NBGA)(a) 5.71% 11/01/2014 $ 455
--------
REAL ESTATE MANAGEMENT & DEVELOPMENT (0.3%)
1,790 145 Associates Ltd., Notes, Series 2000 (LOC - Sky Bank) 6.08 10/01/2020 1,790
--------
2,245
--------
NUMBER
OF SHARES
- ---------
MONEY MARKET FUNDS (1.4%)
-------------------------
9,136,303 SSgA Prime Money Market Fund 4.84(h) - 9,136
--------
Total money market instruments (cost: $11,381) 11,381
--------
PRINCIPAL
AMOUNT
(000)
- ---------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (6.3%)
COMMERCIAL PAPER (1.4%)
-----------------------
ASSET-BACKED FINANCING
$ 9,000 Harwood Street Funding I(a,n,p) 5.12 6/01/2006 9,000
--------
NUMBER
OF SHARES
- ---------
MONEY MARKET FUNDS (0.2%)
-------------------------
1,254,264 AIM Short-Term Investment Co. Liquid Assets Portfolio 4.92(h) - 1,254
28,467 Merrill Lynch Premier Institutional Fund 4.81(h) - 29
--------
1,283
--------
42
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- ----------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (4.7%)(k)
-------------------------------
$20,000 Credit Suisse First Boston, LLC, 5.00%, acquired on 5/31/2006
and due 6/01/2006 at $20,000 (collateralized by $19,760 of
Tennessee Valley Auth. Bonds(i,+), 6.00%, due 3/15/2013;
market value $20,402) $ 20,000
10,000 Merrill Lynch Government Securities, Inc., 5.01%, acquired on
5/31/2006 and due 6/01/2006 at $10,000 (collateralized by
$11,480 of International Bank for Reconstruction and
Development Notes(i,+), 4.75%, due 2/15/2035; market
value $10,202) 10,000
--------
30,000
--------
Total short-term investments purchased with cash collateral from
securities loaned (cost: $40,283) 40,283
--------
TOTAL INVESTMENTS (COST: $671,245) $674,716
========
43
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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%. Investments in foreign securities were 8.1% of net assets
as of May 31, 2006.
ADR - American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
ISHARES - exchange-traded funds, managed by Barclays Global Fund
Advisors, that represent a portfolio of stocks designed to closely
track a specific market index. iShares funds are traded on securities
exchanges.
SPDR - Standard & Poor's depositary receipt, or "spider," is an
exchange-traded fund based on either the S&P 500 Index or the S&P
MidCap 400 Index, and is traded on the American Stock Exchange (AMEX).
PORTFOLIO DESCRIPTION ABBREVIATIONS
EETC Enhanced Equipment Trust Certificate
ESOP Employee Stock Ownership Plan
MTN Medium-Term Note
RB Revenue Bond
REIT Real Estate Investment Trust
CREDIT ENHANCEMENTS - add the financial strength of the provider of
the enhancement to support the issuer's ability to repay the principal
and interest payments when due. A high-quality bank, insurance
company, or other corporation, or a collateral trust may provide the
enhancement.
44
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
(LOC) Principal and interest payments are guaranteed by a bank letter
of credit.
(NBGA) Principal and interest payments are guaranteed by a non-bank
guarantee agreement from Sempra Energy.
(INS) Principal and interest payments are insured by AMBAC Assurance
Corp. or MBIA Insurance Corp. The insurance does not guarantee
the market value of the security.
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Restricted security that is not registered under the Securities Act
of 1933. A resale of this security in the United States may occur
in an exempt transaction to a qualified institutional buyer as
defined by Rule 144A, and as such, has been deemed liquid by USAA
Investment Management Company (the Manager) under liquidity
guidelines approved by the Board of Trustees, unless otherwise
noted as illiquid.
(b) Security deemed illiquid by the Manager, under liquidity guidelines
approved by the Board of Trustees. The market value of this
security at May 31, 2006, was $559,000, which represented 0.1% of
the Fund's net assets.
(c) Put bond - provides the right to sell the bond at face value at
specific tender dates prior to final maturity. The put feature may
shorten the effective maturity of the security.
(d) Variable-rate or floating-rate security - interest rate is adjusted
periodically. The interest rate disclosed represents the current
rate at May 31, 2006.
(e) Variable-rate demand notes (VRDNs) - provide the right to sell the
security at face value on either that day or within the rate-reset
period. The interest rate is adjusted at a stipulated daily,
weekly, monthly, quarterly, or other specified time interval to a
rate that reflects current market conditions. VRDNs will normally
trade as
45
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
if the maturity is the earlier put date, even though stated
maturity is longer.
(f) Interest-only commercial mortgage-backed securities (IO CMBSs) -
represent the right to receive only the interest payments on an
underlying pool of commercial mortgage loans. The interest rate
disclosed is the purchase yield, which reflects an anticipated
yield based upon interest rates at the time of purchase and the
estimated timing and amount of future cash flows. The principal
amount represents the notional amount of the underlying pool on
which the current interest rate is calculated. IO CMBSs are backed
by loans that have various forms of prepayment protection, which
include lock-out provisions, yield maintenance provisions, and
prepayment penalties. This serves to moderate their prepayment
risk. IO CMBSs are subject to recessionary default-related
prepayments that may have a negative impact on yield.
(g) The security or a portion thereof was out on loan as of May 31,
2006.
(h) Rate represents the money market fund annualized seven-day yield at
May 31, 2006.
(i) U.S. government agency issues - mortgage-backed securities issued
by Government National Mortgage Association (GNMA) and certain
other U.S. government agencies are supported by the full faith and
credit of the U.S. government. Securities issued by
government-sponsored enterprises (GSEs) indicated with "+" are
supported only by the credit of the issuing agency,
instrumentality, or corporation, and are neither issued nor
guaranteed by the U.S. government.
(j) Callable security expected to be called prior to maturity due to a
scheduled change from a fixed to a floating interest rate, which is
likely to be uneconomical to the issuer.
(k) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is
46
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
marked-to-market daily to ensure its market value is equal to or in
excess of the repurchase agreement price plus accrued interest.
(l) Eurodollar and Yankee obligations are dollar-denominated
instruments that are issued outside the U.S. capital markets by
foreign corporations and financial institutions and by foreign
branches of U.S. corporations and financial institutions
(Eurodollar obligations) as well as dollar-denominated instruments
that are issued by foreign issuers in the U.S. capital markets
(Yankee obligations).
(m) Stepped coupon security that is initially issued in zero-coupon
form and converts to coupon form at the specified date and rate
shown in the security's description. The rate presented in the
coupon rate column represents the effective yield at the date of
purchase.
(n) Commercial paper issued in reliance on the "private placement"
exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Unless this commercial paper is
subsequently registered, a resale of this commercial paper in the
United States must be effected in a transaction exempt from
registration under the Securities Act of 1933. Section 4(2)
commercial paper is normally resold to other investors through or
with the assistance of the issuer or an investment dealer who makes
a market in this security, and as such has been deemed liquid by
the Manager under liquidity guidelines approved by the Board of
Trustees, unless otherwise noted as illiquid.
(o) Represents less than 0.01% of net assets.
(p) Zero-coupon security. Rate represents the effective yield at date
of purchase.
(q) Security has a mandatory call or put, which shortens its effective
maturity.
* Non-income-producing security for the year ended May 31, 2006.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
47
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
ASSETS
Investments in securities, at market value (including securities
on loan of $39,434) (identified cost of $671,245) $674,716
Receivables:
Capital shares sold 314
Dividends and interest 4,332
Securities sold 2,469
Other 41
USAA Investment Management Company (Note 6D) 766
USAA Transfer Agency Company (Note 6E) 4
--------
Total assets 682,642
--------
LIABILITIES
Payables:
Upon return of securities loaned 40,331
Securities purchased 5,056
Capital shares redeemed 283
Bank overdraft 2,362
Accrued management fees 411
Accrued transfer agent's fees 7
Other accrued expenses and payables 68
--------
Total liabilities 48,518
--------
Net assets applicable to capital shares outstanding $634,124
========
NET ASSETS CONSIST OF:
Paid-in capital $600,938
Accumulated undistributed net investment income 2,783
Accumulated net realized gain on investments 26,932
Net unrealized appreciation of investments 3,471
--------
Net assets applicable to capital shares outstanding $634,124
========
Capital shares outstanding, unlimited number of shares
authorized, no par value 42,361
========
Net asset value, redemption price, and offering price per share $ 14.97
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
48
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA BALANCED STRATEGY FUND
YEAR ENDED MAY 31, 2006
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $23) $ 4,936
Interest 14,702
Securities lending (net) 302
--------
Total income 19,940
--------
EXPENSES
Management fees 4,697
Administration and servicing fees 953
Transfer agent's fees 1,761
Custody and accounting fees 261
Postage 225
Shareholder reporting fees 78
Trustees' fees 9
Registration fees 46
Professional fees 51
Other 18
--------
Total expenses 8,099
Expenses paid indirectly (70)
Expenses reimbursed (1,743)
--------
Net expenses 6,286
--------
NET INVESTMENT INCOME 13,654
--------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments:
Unaffiliated transactions 43,138
Affiliated transactions (56)
Foreign currency transactions 5
Change in net unrealized appreciation/depreciation of investments (32,984)
--------
Net realized and unrealized gain 10,103
--------
Increase in net assets resulting from operations $ 23,757
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
49
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA BALANCED STRATEGY FUND
YEARS ENDED MAY 31,
2006 2005
---------------------------
FROM OPERATIONS
Net investment income $ 13,654 $ 9,831
Net realized gain on investments 43,082 26,559
Net realized gain on foreign currency transactions 5 -
Change in net unrealized appreciation/depreciation
of investments (32,984) 5,679
---------------------------
Increase in net assets resulting from operations 23,757 42,069
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (12,813) (9,475)
Net realized gains (29,270) (5,841)
---------------------------
Distributions to shareholders (42,083) (15,316)
---------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 116,425 132,983
Shares issued for dividends reinvested 41,645 15,153
Cost of shares redeemed (115,387) (88,077)
---------------------------
Increase in net assets from capital share transactions 42,683 60,059
---------------------------
Capital contribution from USAA Transfer
Agency Company (Note 6E) 4 -
---------------------------
Net increase in net assets 24,361 86,812
NET ASSETS
Beginning of period 609,763 522,951
---------------------------
End of period $ 634,124 $609,763
===========================
Accumulated undistributed net investment income:
End of period $ 2,783 $ 1,663
===========================
CHANGE IN SHARES OUTSTANDING
Shares sold 7,528 8,850
Shares issued for dividends reinvested 2,720 995
Shares redeemed (7,464) (5,849)
---------------------------
Increase in shares outstanding 2,784 3,996
===========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
50
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA BALANCED STRATEGY FUND
MAY 31, 2006
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
USAA INVESTMENT TRUST (the Trust), registered under the Investment
Company Act of 1940 (the 1940 Act), as amended, is an open-end
management investment company organized as a Massachusetts business
trust consisting of 10 separate funds. The information presented in
this annual report pertains only to the USAA Balanced Strategy Fund
(the Fund), which is classified as diversified under the 1940 Act. The
Fund's investment objective is to seek high total return, with reduced
risk over time, through an asset allocation strategy that seeks a
combination of long-term growth of capital and current income.
A. SECURITY VALUATION - The value of each security is determined (as
of the close of trading on the New York Stock Exchange (NYSE) on
each business day the exchange is open) as set forth below:
1. Equity securities, including exchange-traded funds (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 the official closing price
on the exchange or primary market on which they trade. Equity
securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sales price, or the most
recently determined official closing price calculated
according to local market convention, available at the time
the Fund is valued. If no last sale or official closing price
is reported or available, the average of the bid and asked
prices is generally used.
2. Equity securities trading in various foreign markets may take
place on days when the NYSE is closed. Further, when the NYSE
is open, the foreign markets may be closed. Therefore, the
calculation of the Fund's net asset value (NAV) may not take
place at the same time the prices of certain foreign
51
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE on
a day the Fund's NAV is calculated will not be reflected in
the value of the Fund's foreign securities. However, USAA
Investment Management Company (the Manager), an affiliate of
the Fund, and the Fund's subadvisers, if applicable, will
monitor for events that would materially affect the value of
the Fund's foreign securities and, if necessary, the Manager
will value the foreign securities in good faith, considering
such available information that the Manager deems relevant,
under valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign market
closing prices of foreign equity securities to reflect what
the Fund believes to be the fair value of the securities as of
the close of the NYSE. Fair valuation of affected foreign
equity securities may occur frequently based on an assessment
that events that occur on a fairly regular basis (such as U.S.
market movements) are significant.
3. Investments in open-end investment companies, other than ETFs,
are valued at their NAV at the end of each business day.
4. Debt securities purchased with original maturities of 60 days
or less are valued at amortized cost, which approximates
market value.
5. Repurchase agreements are valued at cost, which approximates
market value.
6. 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
52
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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.
7. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
been materially affected by events occurring after the close
of their primary markets but before the pricing of the Fund,
are valued in good faith at fair value, using methods
determined by the Manager in consultation with the Fund's
subadvisers, if applicable, under valuation procedures
approved by the Trust's Board of Trustees. 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 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
53
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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 Mac,
are supported only by the credit of the issuing U.S. government
agency, and are neither issued nor guaranteed by the U.S.
government. Obligations pledged as collateral are required to
maintain a value equal to or in excess of the repurchase
agreement price plus accrued interest and are held by the Fund,
either through its regular custodian or through a special
"tri-party" custodian that maintains separate accounts for both
the Fund and its counterparty, until maturity of the repurchase
agreement. The Fund's Manager monitors the creditworthiness of
sellers with which the Fund may enter into repurchase agreements.
E. FOREIGN CURRENCY TRANSLATIONS - The Fund's assets may be invested
in the securities of foreign issuers and may be traded in foreign
54
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
currency. Since the Fund's accounting records are maintained in
U.S. dollars, foreign currency amounts are translated into U.S.
dollars on the following basis:
1. Purchases and sales of securities, income, and expenses at the
exchange rate obtained from an independent pricing service on
the respective dates of such transactions.
2. Market value of securities, other assets, and liabilities at
the exchange rate obtained from an independent pricing service
on a daily basis.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market
prices of securities held. Such fluctuations are included with
the net realized and unrealized gain or loss from investments.
Separately, net realized foreign currency gains/losses may arise
from sales of foreign currency, currency gains/losses realized
between the trade and settlement dates on security transactions,
and from the difference between amounts of dividends, interest,
and foreign withholding taxes recorded on the Fund's books and
the U.S. dollar equivalent of the amounts received. At the end of
the Fund's fiscal year, net realized foreign currency
gains/losses are reclassified from accumulated net realized
gain/loss to accumulated undistributed net investment income on
the statements of assets and liabilities as such amounts are
treated as ordinary income/loss for tax purposes. Net unrealized
foreign currency exchange gains/losses arise from changes in the
value of assets and liabilities, other than investments in
securities, resulting from changes in the exchange rate.
F. SECURITIES PURCHASED ON A DELAYED-DELIVERY OR WHEN-ISSUED BASIS -
Delivery and payment for securities that have been purchased by
the Fund on a delayed-delivery or when-issued basis can take
place a month or more after the trade date. During the period
55
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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
delayed-delivery or 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. As of May
31, 2006, the Fund had no delayed-delivery or when-issued
commitments.
G. EXPENSES PAID INDIRECTLY - A portion of the brokerage commissions
that the Fund pays may be recaptured as a credit that is tracked
and used by the custodian to directly reduce expenses paid by the
Fund. In addition, through arrangements with the Fund's custodian
and other banks utilized by the Fund for cash management
purposes, realized credits, if any, generated from cash balances
in the Fund's bank accounts are used to reduce the Fund's
expenses. For the year ended May 31, 2006, brokerage commission
recapture credits and custodian and other bank credits reduced
the Fund's expenses by $60,000 and $10,000, respectively,
resulting in a total reduction in Fund expenses of $70,000.
H. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liabilities arising out of the performance of their duties to the
Trust. In addition, in the normal course of business the Trust
enters into contracts that contain a variety of representations
and warranties that provide general indemnifications. The Trust's
maximum exposure under these arrangements is unknown, as this
would involve future claims that may be made against the Trust
that have not yet occurred. However, the Trust expects the risk
of loss to be remote.
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
56
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) LINE 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, 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
0.07% 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, 2006, the facility fees
assessed by CAPCO were limited to an amount not to exceed 0.09%
annually of the $300 million loan agreement.
For the year ended May 31, 2006, the Fund paid CAPCO facility fees of
$1,000, which represents 1.9% of total fees paid to CAPCO by the USAA
funds. The Fund had no borrowings under this agreement during the year
ended May 31, 2006.
(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
57
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
accordance with U.S. generally accepted accounting principles. Also,
due to the timing of distributions, the fiscal year in which amounts
are distributed may differ from the year that the income or realized
gains were recorded by the Fund.
During the current fiscal year, permanent differences between
book-basis and tax-basis accounting resulted in reclassifications to
the statement of assets and liabilities to increase paid-in capital by
$2,257,000, increase accumulated undistributed net investment income
by $280,000, and decrease accumulated net realized gain on investments
by $2,536,000. This includes differences in the accounting for foreign
currency gains and losses and security paydowns, and the utilization
of earnings and profits distributed to shareholders on redemption of
shares as part of the dividends-paid deduction for federal income tax
purposes. This reclassification has no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2006, and 2005, was as follows:
2006 2005
---------------------------------
Ordinary income* $21,021,000 $9,475,000
Long-term realized capital gains 21,062,000 5,841,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
As of May 31, 2006, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 8,881,000
Undistributed long-term capital gains 21,726,000
Unrealized appreciation of investments 2,580,000
The difference between book-basis and tax-basis unrealized
appreciation of investments is attributable to the tax deferral of
losses on wash sales.
Distributions of net investment income are made quarterly.
Distributions of realized gains from security transactions not offset
by capital losses
58
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
are made annually in the succeeding fiscal year or as otherwise
required to avoid the payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales/maturities of securities,
excluding short-term securities, for the year ended May 31, 2006, were
$968,335,000 and $939,936,000, respectively.
As of May 31, 2006, the cost of securities, including short-term
securities, for federal income tax purposes, was $672,136,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2006, for federal income tax purposes, were $21,741,000 and
$19,161,000, respectively, resulting in net unrealized appreciation of
$2,580,000.
(5) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party securities-lending agent,
Metropolitan West Securities LLC (MetWest), may lend its securities to
qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the securities loaned, initially in an amount at
least equal to 102% of the fair value of domestic securities loaned
and 105% of the fair value of international securities loaned. Cash
collateral is invested in high-quality short-term investments. The
Fund and MetWest retain 80% and 20%, respectively, of the income
earned from the investment of cash received as collateral, net of any
expenses associated with the lending transactions. 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.
59
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
Wachovia Corp., parent company of MetWest, has agreed to indemnify the
Fund against any losses due to counterparty default in securities-
lending transactions. For the year ended May 31, 2006, the Fund
received securities-lending income of $302,000, which is net of the
20% income retained by MetWest. As of May 31, 2006, the Fund loaned
securities having a fair market value of approximately $39,434,000 and
received cash collateral of $40,331,000 for the loans. Of this amount,
$40,283,000 was invested in short-term investments, as noted in the
Fund's portfolio of investments, and $48,000 remained in cash.
(6) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager provides investment management
services to the Fund pursuant to an Investment Advisory
Agreement. Under this agreement, the Manager is responsible for
managing the business and affairs of the Fund and for directly
managing the day-to-day investment of a portion of the Fund's
assets, subject to the authority of and supervision by the
Trust's Board of Trustees. The Manager is also authorized to
select (with approval of the Trust's Board of Trustees) one or
more subadvisers to manage the day-to-day investment of a portion
of the Fund's assets. The Manager monitors each subadviser's
performance through quantitative and qualitative analysis, and
periodically recommends to the Trust's Board of Trustees as to
whether each subadviser's agreement should be renewed,
terminated, or modified. The Manager also is responsible for
allocating assets to the subadvisers. The allocation for each
subadviser can range from 0% to 100% of the Fund's assets, and
the Manager can change the allocations without shareholder
approval.
The investment management fee for the Fund is composed of a base
fee and a performance adjustment that increases or decreases the
base fee depending upon the performance of the Fund relative to
the performance of the Lipper Balanced Funds Index, which tracks
the total return performance of the 30 largest
60
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
funds in the Lipper Balanced Funds category. The Fund's base fee
is accrued daily and paid monthly at an annualized rate of 0.75%
of the Fund's average net assets for the fiscal year.
The performance adjustment is calculated monthly by comparing the
Fund's performance to that of the Lipper index over the
performance period. The performance period for the Fund consists
of the current month plus the previous 35 months.
The annual performance adjustment rate is multiplied by the
average net assets of the Fund over the entire performance
period, which is then multiplied by a fraction, the numerator of
which is the number of days in the month and the denominator of
which is 365 (366 in leap years). The resulting amount is then
added to (in the case of overperformance) or subtracted from (in
the case of underperformance) the base fee, as referenced in the
following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- --------------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
whenever the Fund outperforms the Lipper Balanced Funds Index
over that period, even if the Fund had overall negative returns
during the performance period.
For the year ended May 31, 2006, the Fund incurred total
management fees, paid or payable to the Manager, of $4,697,000,
which is net of a performance adjustment of $(70,000) that
decreased the base management fee of 0.75% by 0.01%.
61
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into investment
subadvisory agreements with Wellington Management Company, LLP
(Wellington Management), Loomis, Sayles & Company, L.P. (Loomis
Sayles), and Barrow, Hanley, Mewhinney & Strauss, Inc. (BHMS),
under which Wellington Management, Loomis Sayles, and BHMS direct
the investment and reinvestment of the portion of the Fund's
assets invested in equity securities (as allocated from time to
time by the Manager). Loomis Sayles and BHMS were added as
subadvisers effective March 1, 2006.
The Manager (not the Fund) pays Wellington Management a
subadvisory fee in an annual amount of 0.20% of the portion of
the Fund's average net assets that Wellington Management manages.
Wellington Management has agreed to waive all fees in excess of
0.18% through June 30, 2006. Wellington Management may terminate
this waiver if the Manager allocates less than 100% of certain
USAA funds' assets investable in U.S. stocks to Wellington
Management. The Manager has allocated less than 100% of these
funds' assets investable in U.S. stocks to Wellington Management,
so Wellington Management may terminate this waiver at any time.
For the year ended May 31, 2006, the Manager incurred subadvisory
fees, paid or payable to Wellington Management, of $514,000.
The Manager (not the Fund) pays Loomis Sayles a subadvisory fee
in an annual amount of 0.20% of the portion of the Fund's average
net assets that Loomis Sayles manages. For the year ended May 31,
2006, the Manager incurred subadvisory fees, paid or payable to
Loomis Sayles, of $66,000.
The Manager (not the Fund) pays BHMS a subadvisory fee based on
the aggregate net assets that BHMS manages in the USAA Balanced
Strategy Fund, USAA Value Fund, and USAA Growth & Income Fund
combined (BHMS funds), in an annual amount of 0.75% of the first
$15 million of assets, 0.55% on
62
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
assets over $15 million and up to $25 million, 0.45% on assets
over $25 million and up to $100 million, 0.35% on assets over
$100 million and up to $200 million, 0.25% on assets over $200
million and up to $1 billion, and 0.15% on assets over $1
billion. For the period of March 1, 2006, through May 31, 2006,
the Manager incurred subadvisory fees for the Fund, paid or
payable to BHMS of $93,000.
C. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and shareholder servicing functions for the Fund.
For such services, the Manager receives a fee accrued daily and
paid monthly at an annualized rate of 0.15% of the Fund's average
net assets. For the year ended May 31, 2006, the Fund incurred
administration and servicing fees, paid or payable to the
Manager, of $953,000.
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 year ended May 31,
2006, the Fund reimbursed the Manager $22,000 for these legal and
tax services. These expenses are included in the professional
fees expenses on the Fund's statement of operations.
D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit
the annual expenses of the Fund to 1.00% of its average annual
net assets, before reductions of any expenses paid indirectly,
and will reimburse the Fund for all expenses in excess of that
amount. This arrangement may be modified or terminated at any
time. For the year ended May 31, 2006, the Fund incurred
reimbursable expenses of $1,743,000, of which $766,000 was
receivable from the Manager.
E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
63
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket
expenses. The Fund also pays SAS fees that are related to the
administration and servicing of accounts that are traded on an
omnibus basis. For the year ended May 31, 2006, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $1,761,000. In
addition, the Fund recorded a receivable from SAS of $4,000 for
adjustments related to corrections to shareholder transactions.
F. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(7) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors,
officers, and/or employees of the Manager. None of the affiliated
trustees or Fund officers received any compensation from the Fund.
(8) SECURITY TRANSACTIONS WITH AFFILIATED FUNDS
- --------------------------------------------------------------------------------
During the year ended May 31, 2006, in accordance with affiliated
transaction procedures approved by the Trust's Board of Trustees,
purchases and sales of security transactions were executed between the
Fund and the following affiliated USAA funds at the then-current
market price with no brokerage commissions incurred:
NET REALIZED
COST TO LOSS
SELLER PURCHASER PURCHASER TO SELLER
----------------------------------------------------------------------------------------------
USAA Balanced Strategy Fund USAA First Start Growth Fund $1,527,000 $(56,000)
USAA Intermediate-Term Fund USAA Balanced Strategy Fund 1,563,000 (4,000)
USAA Cornerstone Strategy Fund USAA Balanced Strategy Fund 866,000 (91,000)
64
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
(9) FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Per share operating performance for a share outstanding throughout each period
is as follows:
YEAR ENDED MAY 31,
--------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------------------------------------------------------------
Net asset value at beginning of period $ 15.41 $ 14.70 $ 13.35 $ 14.20 $ 15.25
--------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .34 .26 .20 .28 .35(a,c)
Net realized and unrealized gain (loss) .26 .86 1.37 (.70) (.40)(a,c)
--------------------------------------------------------------------
Total from investment operations .60 1.12 1.57 (.42) (.05)(a,c)
--------------------------------------------------------------------
Less distributions:
From net investment income (.31) (.25) (.22) (.29) (.34)
From realized capital gains (.73) (.16) - (.14) (.66)
--------------------------------------------------------------------
Total distributions (1.04) (.41) (.22) (.43) (1.00)
--------------------------------------------------------------------
Net asset value at end of period $ 14.97 $ 15.41 $ 14.70 $ 13.35 $ 14.20
====================================================================
Total return (%)* 3.84 7.67 11.82 (2.71) (.06)
Net assets at end of period (000) $634,124 $609,763 $522,951 $350,842 $327,563
Ratio of expenses to average
net assets (%)**(b,d) 1.00 1.00 1.00 1.00 1.02
Ratio of expenses to average net assets,
excluding reimbursements (%)**(d) 1.27 1.29 1.33 1.47 1.35
Ratio of net investment
income to average net assets (%)** 2.15 1.74 1.38 2.19 2.41(c)
Portfolio turnover (%) 153.47 68.26 55.26 113.80 42.34
* Assumes reinvestment of all net investment income and realized capital gain
distributions during the period.
** For the year ended May 31, 2006, average net assets were $635,954,000.
(a) Calculated using average shares.
(b) Effective August 1, 2001, the Manager voluntarily agreed to limit the Fund's
expense ratio to 1.00% of the Fund's average annual net assets. Prior to
this date, the voluntary expense ratio limit was 1.25% of the Fund's average
annual net assets.
(c) In 2001, a change in amortization method was made as required by an
accounting pronouncement. This change had no effect on these amounts.
(d) Reflects total operating expenses of the Fund before reductions of any
expenses paid indirectly. The Fund's expenses paid indirectly decreased
the expense ratios as follows:
(.01%) (.02%) (.02%) (.01%) (.00%)(+)
+ Represents less than 0.01% of average net assets.
65
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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, 2005, through May 31, 2006.
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
66
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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, 2005 -
DECEMBER 1, 2005 MAY 31, 2006 MAY 31, 2006
--------------------------------------------------------
Actual $1,000.00 $1,002.10 $4.94
Hypothetical
(5% return before expenses) 1,000.00 1,020.00 4.99
*Expenses are equal to the Fund's annualized expense ratio of 0.99%,
which is net of reimbursements and any expenses paid indirectly,
multiplied by the average account value over the period, multiplied by
182 days/365 days (to reflect the one-half year period). The Fund's
ending account value on the first line in the table is based on its
actual total return of 0.21% for the six-month period of December 1,
2005, through May 31, 2006.
67
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
FEBRUARY BOARD MEETING
- --------------------------------------------------------------------------------
As disclosed in the Information Statement to shareholders dated May
22, 2006, the Board of Trustees, including the Trustees who are not
"interested persons" of the Trust (the "Independent Trustees") at a
meeting held on February 22, 2006, approved the adoption of
Subadvisory Agreements with Loomis, Sayles & Company, L.P. (Loomis
Sayles) and Barrow, Hanley, Mewhinney & Strauss, Inc. (BHMS) with
respect to the Fund. In advance of the meeting, the Trustees received
and considered a variety of information relating to the Subadvisory
Agreements, Loomis Sayles, and BHMS and were given the opportunity to
ask questions and request additional information from management. In
addition, the Board also relied on information about Loomis Sayles and
BHMS that it had received for its April 28, 2005, meeting in
connection with its approval of the continuation of the subadvisory
agreement with Loomis Sayles with respect to the USAA Growth Fund and
the subadvisory agreement with BHMS with respect to the USAA Value
Fund. The information provided to the Board for the February meeting
included, among other things: (i) materials about the experience and
success of each subadviser in managing similar accounts; (ii) the
qualifications of the individuals at each subadviser responsible for
these investment activities; (iii) the investment performance of each
subadviser in similar accounts as correlated against indices for the
Fund; and (iv) the fees to be paid to each subadviser. Prior to
voting, the Independent Trustees reviewed the proposed Subadvisory
Agreements with management and with experienced independent counsel
and received materials from such counsel discussing the legal
standards for their consideration of the proposed Subadvisory
Agreements. The Independent Trustees also reviewed the proposed
Subadvisory Agreements in private sessions with their counsel at which
no representatives of management were present.
In approving the Fund's Subadvisory Agreements with each subadviser
with respect to the Fund, the Board considered various factors, among
68
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
them: (i) the nature, extent, and quality of services to be provided
to the Fund by each subadviser, including the personnel that will be
providing services; (ii) each subadviser's compensation and any other
benefits that will be derived from the subadvisory relationship by
each subadviser; (iii) comparisons of subadvisory fees and performance
to comparable investment companies; and (iv) the terms of each
Subadvisory Agreement. The Board's analysis of these factors is set
forth below.
After full consideration of a variety of factors, the Board, including
the Independent Trustees, voted to approve the Subadvisory Agreements
with respect to the Fund. In approving the Subadvisory Agreements, the
Trustees did not identify any single factor as controlling, and each
Trustee attributed different weights to various factors. Throughout
their deliberations, the Independent Trustees were represented and
assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Trustees considered information provided to them
regarding the services to be provided by each subadviser. The Board
considered each subadviser's level of knowledge and investment style.
The Board reviewed the experience and credentials of the investment
personnel who will be responsible for managing the investment of
portfolio securities with respect to the Fund and each subadviser's
level of staffing. The Trustees noted that the materials provided to
them indicated that the method of compensating portfolio managers is
reasonable and includes appropriate mechanisms to prevent a manager
with underperformance from taking undue risks. The Trustees also noted
each subadviser's brokerage practices. The Board also considered each
subadviser's regulatory and compliance history. The Board noted that
the Manager's monitoring processes of each subadviser includes: (i)
regular telephonic meetings to discuss, among other matters,
investment strategies and to review portfolio performance; (ii)
monthly portfolio compliance checklists and quarterly compliance
certifications to the Board; and (iii) due diligence visits to each
subadviser.
69
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of each subadviser. In considering the cost of
services to be provided by each subadviser and the profitability to
each subadviser of its relationship with the Fund, the Trustees noted
that the fees under the Subadvisory Agreements will be paid by the
Manager. The Trustees also relied on the ability of the Manager to
negotiate the Subadvisory Agreements with respect to the Fund and the
fees thereunder at arm's length. The Board also considered information
relating to the cost of services to be provided by each subadviser,
each subadviser's anticipated profitability with respect to the Fund,
and the potential economies of scale in each subadviser's management
of the Fund, to the extent available. However, this information was
less significant to the Board's consideration of the Subadvisory
Agreements than the other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that each subadviser
charges to comparable clients. The Board considered that the Fund pays
a management fee to the Manager and that, in turn, the Manager will
pay a subadvisory fee to each subadviser. The Board noted the
Manager's expertise and resources in monitoring the performance,
investment style, and risk-adjusted performance of each subadviser.
The Board also noted the long-term performance record of Loomis Sayles
and BHMS for similar accounts as compared to relevant benchmark
indices. The Board also considered the success of Loomis Sayles in
managing the USAA First Start Growth Fund and a portion of the USAA
Growth Fund, and the success of BHMS in managing the USAA Value Fund.
CONCLUSION. The Board reached the following conclusions regarding the
Subadvisory Agreements with respect to the Fund, among others: (i)
each subadviser is qualified to manage the Fund's assets in accordance
with its investment objectives and policies; (ii) each subadviser
maintains an appropriate compliance program; (iii) each subadviser's
performance in managing accounts similar to the Fund is reasonable in
relation to
70
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
relevant indices; and (iv) the Fund's advisory expenses are reasonable
in relation to those of similar funds and to the services to be
provided by the Manager and each subadviser. Based on the Board's
conclusions, the Trustees determined that approval of the Subadvisory
Agreements with respect to the Fund would be in the interests of the
Fund and its shareholders.
APRIL BOARD MEETING
- --------------------------------------------------------------------------------
At a meeting of the Board of Trustees held on April 19, 2006, the
Board, including the Independent Trustees, approved the continuance of
the Investment Advisory Agreement between the Trust and the Manager
with respect to the Fund and the Subadvisory Agreements with respect
to the Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and Subadvisory Agreements and the Manager and the Subadvisers, and
were given the opportunity to ask questions and request additional
information from management. The information provided to the Board
included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis
comparing the Fund's investment performance, expenses, and fees to
comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the
Manager's revenues and costs of providing services to the Fund and
compensation paid to affiliates of the Manager; and (iii) information
about the Manager's and Subadvisers' operations and personnel. Prior
to voting, the Independent Trustees reviewed the proposed continuance
of the Investment Advisory Agreement and the Subadvisory Agreements
with management and with experienced independent counsel and received
materials from such counsel discussing the legal standards for their
consideration of the proposed continuation of the Investment Advisory
Agreement and the Subadvisory Agreements with respect to the Fund. The
Independent
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
Trustees also reviewed the proposed continuation of the Investment
Advisory Agreement and the Subadvisory Agreements with respect to the
Fund in private sessions with their counsel at which no
representatives of management were present.
At each regularly scheduled meeting of the Board and its committees,
the Board of Trustees of the Trust receives and reviews, among other
things, information concerning the Fund's performance and related
services provided by the Manager and by the Subadvisers. At the
meeting at which the renewal of the Investment Advisory Agreement and
Subadvisory Agreements is considered, particular focus is given to
information concerning Fund performance, comparability of fees and
total expenses, and profitability. However, the Board noted that the
evaluation process with respect to the Manager and the Subadvisers is
an ongoing one. In this regard, the Board's and its committees'
consideration of the Investment Advisory Agreement and Subadvisory
Agreements included certain information previously received at such
meetings.
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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 its senior
and investment personnel, as well as current staffing levels. The
Board discussed the Manager's effectiveness in monitoring the
performance of the Subadvisers and its timeliness in responding to
performance issues. The allocation of the Fund's brokerage, including
the Manager's process for monitoring "best execution" and the
utilization of "soft dollars," were also considered. The Manager's
role in coordinating the activities of the Fund's other service
providers was also considered. The Board considered the Manager's
financial condition and that it had the financial wherewithal to
continue to provide the same scope and high quality of services under
the Investment Advisory Agreement. In reviewing the Investment
Advisory Agreement, the Board focused on the experience, resources,
and strengths of the Manager and its affiliates in managing investment
companies, including the Fund.
The Board also reviewed the compliance and administrative services
provided to the Fund by the Manager, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager
and its affiliates provide compliance and administrative services to
the Fund. The Trustees, guided also by information obtained from their
73
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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
objective and classification, sales load type (in this case,
investment companies with no sales loads), asset size, and expense
components (the "expense group") and (ii) a larger group of investment
companies that includes all no-load retail open-end investment
companies in the same investment classification/objective as the Fund
regardless of asset size, excluding outliers (the "expense universe").
Among other data, the Board noted that the Fund's management fee rate
- which includes advisory and administrative services and the effects
of any performance fee adjustment as well as any fee waivers or
reimbursements - was below the median of both its expense group and
its expense universe. The data indicated that the Fund's total
expenses, after reimbursements, were lower than the median of both its
expense group and its expense universe. The Board took into account
the various services provided to the Fund by the Manager and its
affiliates. The Board also noted the level and method of computing the
management fee, including any performance adjustment to such fee. The
Trustees also took into account the Manager's current voluntary
undertakings to maintain expense limitations for the Fund and that the
subadvisory fees under the Subadvisory Agreements are paid by the
Manager.
In considering the Fund's performance, the Board of Trustees noted
that the Board reviews at its regularly scheduled meetings information
about
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
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 was lower than the average of its performance
universe and its Lipper index for the one-year period ended December
31, 2005, was equal to the average of its performance universe and
lower than its Lipper index for the three-year period ended December
31, 2005, and exceeded the average of its performance universe and its
Lipper index for the five-year period ended December 31, 2005. The
Board also noted that the Fund's percentile performance ranking was in
the top 50% of its performance universe for the three-year period
ended December 31, 2005, and was in the bottom 50% of its performance
universe for the one-year period ended December 31, 2005. The Board
took into account steps management has taken to address the Fund's
recent performance, including the hiring of additional new subadvisers.
COMPENSATION AND PROFITABILITY. The Board took into consideration the
level and method of computing the management fee. The information
considered by the Board included operating profit margin information
for the Manager's business as a whole. The Board also received and
considered profitability information related to the management
revenues from the Fund. This consideration included a broad review of
the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the
Trustees noted that the Manager has reimbursed a portion of its
management fees to the Fund and also pays the subadvisory fees. The
Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax expenses. In reviewing the overall profitability
of the management fee to
75
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
the Manager, the Board also considered the fact that affiliates
provide shareholder servicing and administrative services to the Fund
for which they receive compensation. The Board also considered the
possible direct and indirect benefits to the Manager from its
relationship with the Trust, including that the Manager may derive
reputational and other benefits from its association with the Fund.
The Trustees recognized that the Manager should be entitled to earn a
reasonable level of profits in exchange for the level of services it
provides to the Fund and the entrepreneurial risk that it assumes as
Manager.
ECONOMIES OF SCALE. The Board considered whether there should be
changes in the management fee rate or structure in order to enable the
Fund to participate in any economies of scale. The Board took into
account management's discussions of the current advisory fee
structure. The Board also considered the fee waivers and expense
reimbursement arrangements by the Manager and the fact that the
Manager pays the subadvisory fees. The Board determined that the
current investment management fee structure was reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability and
resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the overall performance of the Fund is
reasonable in relation to the performance of funds with similar
investment objectives and to relevant indices, and appropriate action
has been taken to address the Fund's more recent performance; (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.
76
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
SUBADVISORY AGREEMENTS
- --------------------------------------------------------------------------------
In approving the Subadvisory Agreements with respect to the Fund, the
Board considered various factors, among them: (i) the nature, extent,
and quality of services provided to the Fund by the Subadvisers,
including the personnel providing services; (ii) the Subadvisers'
compensation and any other benefits derived from the subadvisory
relationship; (iii) comparisons of subadvisory fees and performance to
comparable investment companies; and (iv) the terms of the Subadvisory
Agreements. The Board's analysis of these factors is set forth below.
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Subadvisory Agreements. In approving the Subadvisory Agreements, the
Trustees did not identify any single factor as controlling, and each
Trustee attributed different weights to various factors. Throughout
their deliberations, the Independent Trustees were represented and
assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Trustees considered information provided to them
regarding the services provided by the Subadvisers, including
information presented periodically throughout the previous year. The
Board considered the Subadvisers' level of knowledge and investment
style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment
of portfolio securities with respect to the Fund and the Subadvisers'
level of staffing. The Trustees noted that the materials provided to
them by the Subadvisers indicated that the method of compensating
portfolio managers is reasonable and includes appropriate mechanisms
to prevent a manager with underperformance from taking undue risks.
The Trustees also noted the Subadvisers' brokerage practices. The
Board also considered the Subadvisers' regulatory and compliance
history. The Board noted that the Manager's monitoring processes of
the Subadvisers include: (i) regular telephonic meetings to discuss,
among other matters,
77
A D V I S O R Y
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AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
investment strategies, and to review portfolio performance; (ii)
monthly portfolio compliance checklists and quarterly compliance
certifications to the Board; and (iii) due diligence visits to the
Subadvisers.
SUBADVISERS COMPENSATION. The Board also took into consideration the
financial condition of the Subadvisers. In considering the cost of
services to be provided by the Subadvisers and the profitability to
the Subadvisers of its relationship with the Fund, the Trustees noted
the undertakings of the Manager to maintain expense limitations for
the Fund and also noted that the fees under the Subadvisory Agreements
were paid by the Manager. The Trustees also relied on the ability of
the Manager to negotiate the Subadvisory Agreements and the fees
thereunder at arm's length. The Board also considered information
relating to the cost of services to be provided by the Subadvisers,
the Subadvisers' profitability with respect to the Fund, and the
potential economies of scale in the Subadvisers' management of the
Fund, to the extent available. However, for the reasons noted above,
this information was less significant to the Board's consideration of
the Subadvisory Agreements than the other factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that the Subadvisers
charge to comparable clients. The Board considered that the Fund pays
a management fee to the Manager and that, in turn, the Manager pays a
subadvisory fee to the Subadvisers.
As noted above, the Board considered the Fund's performance during the
one-, three-, and five-year periods ended December 31, 2005, as
compared to the Fund's respective peer group and noted that the Board
reviews at its regularly scheduled meetings information about the
Fund's performance results. The Board also considered the performance
of the Subadvisers. The Board noted the Manager's expertise and
resources in monitoring the performance, investment style, and
risk-adjusted performance of the Subadvisers. The Board was mindful of
the Manager's focus on the Subadvisers' performance and the
explanations of management regarding the factors that
78
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA BALANCED STRATEGY FUND
MAY 31, 2006
contributed to the recent performance of the Fund and the steps that
had been taken to address such performance. The Board also noted the
Subadvisers' long-term performance record for similar accounts.
CONCLUSION. The Board reached the following conclusions regarding the
Subadvisory Agreements, among others: (i) the Subadvisers are
qualified to manage the Fund's assets in accordance with its
investment objectives and policies; (ii) the Subadvisers maintain an
appropriate compliance program; (iii) the overall performance of the
Fund is reasonable in relation to the performance of funds with
similar investment objectives and to relevant indices, and appropriate
action has been taken to address the Fund's more recent performance;
and (iv) the Fund's advisory expenses are reasonable in relation to
those of similar funds and to the services to be provided by the
Manager and the Subadvisers. Based on the Board's conclusions, the
Board of Trustees determined that approval of the Subadvisory
Agreements with respect to the Fund would be in the interests of the
Fund and its shareholders.
79
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 five 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
re-election, 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, 2006. 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.
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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.
81
. . . 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.
82
. . . C O N T I N U E D
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INFORMATION
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.
(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.
83
. . . C O N T I N U E D
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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.
(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.
84
. . . C O N T I N U E D
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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.
85
. . . C O N T I N U E D
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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.
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TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
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.
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
TRUST'S BOARD OF TRUSTEES FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND, ARE
AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND
(III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING HOW
THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE
AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND
COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800)
SEC-0330.
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
26889-0706 (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 Directors 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 matters. Dr. Starks is an independent trustee 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. Dr. Starks resigned from the Board of Trustees effective May 22, 2006.
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, 2006 and 2005 were $221,400 and $150,400, respectively.
(b) AUDIT RELATED FEE. The aggregate fees accrued or paid to Ernst & Young, LLP
by USAA Shareholder Account Services (SAS) for professional services rendered
for audit related services related to the annual study of internal controls of
the transfer agent for fiscal years ended May 31, 2006 and 2005 were $50,000 and
$15,500, 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,
State and City Passive Quarterly
Income and tax Foreign Diversification
returns and excise Investment Review under Excise Tax
tax calculations Company Subchapter M Assistance TOTAL
- ----------------------------------------------------------------------------------------------
FYE 5-31-2006 $44,390 $11,125 $11,633 $ 8,494 $ 75,642
FYE 5-31-2005 $41,100 $14,050 $10,993 $ 0 $ 66,143
- ----------------------------------------------------------------------------------------------
TOTAL $85,490 $25,175 $22,626 $ 8,494 $141,785
- ----------------------------------------------------------------------------------------------
(d) ALL OTHER FEES. No such fees were billed by Ernst & Young LLP for fiscal
years ended May 31, 2006 or 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 May 31, 2006 and 2005 were $187,642 and
$109,143, respectively.
(h) Ernst & Young LLP provided non-audit services to IMCO in 2006 and 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 MUTUAL FUNDS 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 Mutual Funds 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 Mutual Funds
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
Mutual Funds 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 Mutual Funds Trust
USAA Life Investment Trust
TREASURER USAA Mutual Fund, Inc.
USAA Tax-Exempt Fund, Inc.
USAA Investment Trust
USAA Mutual Funds 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 31, 2006
------------------------------
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: JULY 31, 2006
------------------------------
By:* /s/ DEBRA K. DUNN
---------------------------------------------
Signature and Title: Debra K. Dunn/Treasurer
Date: JULY 31, 2006
------------------------------
*Print the name and title of each signing officer under his or her signature.