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 INTERNATIONAL FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006
[LOGO OF USAA]
USAA(R)
USAA INTERNATIONAL Fund
[GRAPHIC OF USAA INTERNATIONAL 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 7
INVESTMENT OVERVIEW 8
FINANCIAL INFORMATION
Distributions to Shareholders 12
Report of Independent Registered Public Accounting Firm 13
Portfolio of Investments 14
Notes to Portfolio of Investments 19
Financial Statements 20
Notes to Financial Statements 23
EXPENSE EXAMPLE 37
ADVISORY AGREEMENTS 39
DIRECTORS' AND OFFICERS' INFORMATION 47
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OT HERS 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
3
. . . C O N T I N U E D
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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
[PHOTO OF DAVID R. MANNHEIM] [PHOTO OF MARCUS L. SMITH]
DAVID R. MANNHEIM MARCUS L. SMITH
MFS Investment Management MFS Investment Management
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HOW DID THE FUND PERFORM?
For the year ended May 31, 2006, the USAA International Fund had a
total return of 27.91%. This compares to a return of 29.59% for the
Lipper International Funds Index and 28.24% for the Morgan Stanley
Capital International Europe, Australasia and Far East (MSCI-EAFE)
Index.
CAN YOU DESCRIBE THE OVERSEAS EQUITY MARKET ENVIRONMENT OVER THE COURSE OF THE
REPORTING YEAR?
Overseas markets strongly outperformed those in the United States,
with more than three times the return of the S&P 500 Index on a U.S.
dollar basis. Among developed markets, the best performance came from
Japan, where there were signs that the two-steps-forward,
three-steps-back economic environment of the past two decades may have
finally given way to more consistent economic growth. As the year
progressed, the rally in Japanese stocks spread from exporters and
banks to companies focused on domestic demand as it began to appear
that the Japanese consumer might add depth to the recovery. Markets in
continental Europe performed much better than expected, despite a
continuation of lackluster economic growth, while emerging markets
provided the highest returns as a group.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 9 FOR BENCHMARK DEFINITIONS.
FOREIGN INVESTING IS SUBJECT TO ADDITIONAL RISKS, SUCH AS CURRENCY
FLUCTUATIONS, MARKET ILLIQUIDITY, AND POLITICAL INSTABILITY.
5
. . . C O N T I N U E D
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HOW WAS THE FUND POSITIONED?
The Fund's geographic and industry sector weightings are a result of
our company-by-company bottom-up fundamental research. In other words,
we don't make a decision to overweight or underweight any country,
region, or sector; it simply flows from our analysis of individual
stocks.
We remained underweight in Japan, because although we don't dispute
that an economic recovery is taking hold, stock prices have moved up
very quickly, and from a valuation standpoint, we believe we're
finding better opportunities elsewhere. We were overweight in
continental Europe, slightly overweight in the United Kingdom, and had
6.6% of net assets in emerging markets, which are not in the MSCI-EAFE
Index.
Among our best individual performers relative to the MSCI-EAFE Index
was Schneider Electric S.A. (France), the global leader in electrical
equipment distribution, which is benefiting from higher corporate
expenditures on property and equipment. Other stocks that did well in
the industrial goods and services sector were Sweden's Sandvik AB and
Atlas Copco AB.
In utilities and communications, our holding in Hutchison
Telecommunications International Ltd. (Hong Kong) did well based on
its strong position in the mobile phone market in India; we also
benefited by not owning France Telecom (France) and Deutsche Telekom
(Germany).
Although we were underweight in the strong energy sector, we had very
positive stock selection, led by EnCana Corp. (Canada) and CNOOC Ltd.
(China).
SANDVIK AB, ATLAS COPCO AB, AND ENCANA 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 14-18.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
WHAT AREAS OR HOLDINGS DETRACTED FROM PERFORMANCE?
Consistent with our philosophy of looking for above-average
sustainable growth companies, we tended not to own metals and mining
stocks that benefited from the strong rise in commodity prices. This
hurt performance in the basic materials sector, because we owned more
stable growing stocks such as Air Liquide S.A. (France) that
underperformed the group.
In the auto and housing sector, our overweight position in Bridgestone
Corp. (Japan) hurt relative performance, because the stock was held
back by the rise in commodity prices. In consumer staples, our
substantially overweight position in Nestle(acute) S.A. (Switzerland)
detracted from performance on a relative basis; the stock did fine on
an absolute basis, but it underperformed the market.
WHAT'S YOUR OUTLOOK?
We continue to see a slowdown in global earnings growth, from
above-trend levels back to being more in line with long-term trends.
It's important to recognize that global earnings are very high, and
it's just harder to show high growth from these levels. As earnings
slow, we believe the markets tend to reward companies that show the
ability to sustain above-average earnings growth, and we believe we're
finding these companies throughout the world and in many sectors.
We thank you, the Fund's shareholders, for your confidence and trust.
7
F U N D
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RECOGNITION
USAA INTERNATIONAL FUND
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OVERALL MORNINGSTAR RATING(TM)
out of 195 foreign large growth funds for the period ending May 31, 2006:
OVERALL RATING
* * * *
3-YEAR 5-YEAR 10-YEAR
* * * * * * * * * * * *
out of 195 funds out of 153 funds out of 66 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.
- ------------------------------------------------------------------------------
[LOGO OF LIPPER LEADER]
PRESERVATION
The Fund is listed as a Lipper Leader for Preservation among 8,112 equity funds
for the overall period ending May 31, 2006.
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.)
LIPPER RATINGS FOR PRESERVATION REFLECT FUNDS' HISTORICAL LOSS AVOIDANCE
RELATIVE TO OTHER FUNDS WITHIN THE SAME ASSET CLASS AS OF MAY 31, 2006.
PRESERVATION RATINGS ARE RELATIVE, RATHER THAN ABSOLUTE, MEASURES, AND FUNDS
NAMED LIPPER LEADERS FOR PRESERVATION MAY STILL EXPERIENCE LOSSES PERIODICALLY;
THOSE LOSSES MAY BE LARGER FOR EQUITY AND MIXED EQUITY FUNDS THAN FOR
FIXED-INCOME FUNDS. THE FUND RECEIVED A LIPPER LEADER RATING FOR PRESERVATION
AMONG 8,112 AND 6,347 EQUITY FUNDS FOR THE THREE- AND FIVE-YEAR PERIODS,
RESPECTIVELY, AND A SCORE OF 2 AMONG 2,238 EQUITY FUNDS FOR THE 10-YEAR PERIOD.
RATINGS ARE SUBJECT TO CHANGE EVERY MONTH AND ARE BASED ON AN EQUAL-WEIGHTED
AVERAGE OF PERCENTILE RANKS FOR THE PRESERVATION METRIC OVER THREE-, FIVE-, AND
10-YEAR PERIODS (IF APPLICABLE). THE HIGHEST 20% OF FUNDS IN EACH PEER GROUP ARE
NAMED LIPPER LEADERS, THE NEXT 20% RECEIVE A SCORE OF 2, THE MIDDLE 20% ARE
SCORED 3, THE NEXT 20% ARE SCORED 4, AND THE LOWEST 20% ARE SCORED 5. LIPPER
RATINGS ARE NOT INTENDED TO PREDICT FUTURE RESULTS, AND LIPPER DOES NOT
GUARANTEE THE ACCURACY OF THIS INFORMATION. MORE INFORMATION IS AVAILABLE AT
WWW.LIPPERLEADERS.COM. LIPPER LEADER COPYRIGHT 2006, REUTERS, ALL RIGHTS
RESERVED.
8
I N V E S T M E N T
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OVERVIEW
USAA INTERNATIONAL FUND (Ticker Symbol: USIFX)
OBJECTIVE
- --------------------------------------------------------------------------------
Capital appreciation with current income as a secondary objective.
TYPES OF INVESTMENTS
- --------------------------------------------------------------------------------
Invests at least 80% of the Fund's assets in equity securities of
foreign (including emerging market) companies.
- ---------------------------------------------------------------------------------
5/31/06 5/31/05
- ---------------------------------------------------------------------------------
Net Assets $1,001.1 Million $645.9 Million
Net Asset Value Per Share $25.85 $21.32
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/06
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
27.91% 10.53% 7.66%
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.
9
. . . C O N T I N U E D
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CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER USAA
INTERNATIONAL INTERNATIONAL MSCI-EAFE
FUNDS INDEX FUND INDEX
------------- ------------- ---------
05/31/96 $10,000.00 $10,000.00 $10,000.00
06/30/96 10,091.11 10,069.48 10,056.28
07/31/96 9,750.74 9,587.35 9,762.36
08/31/96 9,877.91 9,877.05 9,783.75
09/30/96 10,098.73 10,057.42 10,043.67
10/31/96 10,058.63 10,019.16 9,940.89
11/30/96 10,531.78 10,554.31 10,336.42
12/31/96 10,625.80 10,628.17 10,203.46
01/31/97 10,639.51 10,966.72 9,846.36
02/28/97 10,831.57 11,022.22 10,007.41
03/31/97 10,888.96 11,038.87 10,043.64
04/30/97 10,936.36 11,111.02 10,096.94
05/31/97 11,553.00 11,671.57 10,753.98
06/30/97 12,107.81 12,265.41 11,347.04
07/31/97 12,496.55 12,656.80 11,530.61
08/31/97 11,595.55 11,980.39 10,669.45
09/30/97 12,339.73 12,771.44 11,267.14
10/31/97 11,403.05 11,888.68 10,401.10
11/30/97 11,307.37 11,498.88 10,295.07
12/31/97 11,395.94 11,589.10 10,384.86
01/31/98 11,671.57 11,589.10 10,859.80
02/28/98 12,412.51 12,348.45 11,556.63
03/31/98 13,086.60 13,113.82 11,912.47
04/30/98 13,287.73 13,421.18 12,006.76
05/31/98 13,314.15 13,222.30 11,948.49
06/30/98 13,197.73 12,927.00 12,038.94
07/31/98 13,400.20 12,863.98 12,161.00
08/31/98 11,472.56 10,686.71 10,654.38
09/30/98 11,115.47 10,312.40 10,327.74
10/31/98 11,932.80 11,266.90 11,404.31
11/30/98 12,530.51 11,591.31 11,988.57
12/31/98 12,838.85 12,046.73 12,461.51
01/31/99 12,916.74 12,215.17 12,424.71
02/28/99 12,584.47 11,778.47 12,128.60
03/31/99 13,003.33 12,034.25 12,634.87
04/30/99 13,609.40 12,683.06 13,146.82
05/31/99 13,103.68 12,346.18 12,469.78
06/30/99 13,725.09 12,826.55 12,955.94
07/31/99 14,031.61 13,286.03 13,341.03
08/31/99 14,142.46 13,425.48 13,389.75
09/30/99 14,187.87 13,425.48 13,524.53
10/31/99 14,683.02 13,539.58 14,031.10
11/30/99 15,759.94 14,312.91 14,518.61
12/31/99 17,696.27 15,497.70 15,821.67
01/31/00 16,660.44 14,889.69 14,816.39
02/29/00 17,759.83 15,484.49 15,215.24
03/31/00 17,805.60 15,887.63 15,805.04
04/30/00 16,676.19 15,114.39 14,973.33
05/31/00 16,217.97 14,724.47 14,607.63
06/30/00 16,968.84 15,451.44 15,178.91
07/31/00 16,418.83 14,927.95 14,542.54
08/31/00 16,696.31 15,157.61 14,668.76
09/30/00 15,723.61 14,371.19 13,954.52
10/31/00 15,189.67 13,779.64 13,624.89
11/30/00 14,548.44 13,215.93 13,113.95
12/31/00 15,091.68 13,821.40 13,580.06
01/31/01 15,180.57 14,051.06 13,573.06
02/28/01 14,115.38 13,055.86 12,555.52
03/31/01 13,122.96 12,116.34 11,718.56
04/30/01 13,921.12 13,048.90 12,532.90
05/31/01 13,583.90 12,687.01 12,090.57
06/30/01 13,200.24 12,234.65 11,596.12
07/31/01 12,857.11 12,158.10 11,385.13
08/31/01 12,599.29 12,053.71 11,096.61
09/30/01 11,226.53 10,794.05 9,972.67
10/31/01 11,530.60 11,079.39 10,228.09
11/30/01 11,961.12 11,517.83 10,605.13
12/31/01 12,174.47 11,806.83 10,668.13
01/31/02 11,683.08 11,398.72 10,101.29
02/28/02 11,846.85 11,609.81 10,172.14
03/31/02 12,473.51 12,243.07 10,771.77
04/30/02 12,561.01 12,285.29 10,793.44
05/31/02 12,740.60 12,404.91 10,930.20
06/30/02 12,237.69 12,010.88 10,495.11
07/31/02 11,015.95 10,793.61 9,459.03
08/31/02 11,024.74 10,856.93 9,437.56
09/30/02 9,837.39 10,047.76 8,424.03
10/31/02 10,347.96 10,645.85 8,876.78
11/30/02 10,837.85 10,842.86 9,279.66
12/31/02 10,491.04 10,735.20 8,967.63
01/31/03 10,106.82 10,281.10 8,593.25
02/28/03 9,807.55 10,032.76 8,396.04
03/31/03 9,567.37 9,940.53 8,231.08
04/30/03 10,514.56 10,891.30 9,037.82
05/31/03 11,189.94 11,451.83 9,585.44
06/30/03 11,454.33 11,615.02 9,817.09
07/31/03 11,775.50 11,735.64 10,054.72
08/31/03 12,115.27 11,870.45 10,297.54
09/30/03 12,358.40 12,175.55 10,614.97
10/31/03 13,095.20 12,750.27 11,276.59
11/30/03 13,358.23 13,168.89 11,527.30
12/31/03 14,267.29 14,160.00 12,427.86
01/31/04 14,573.89 14,381.70 12,603.60
02/29/04 14,907.10 14,775.04 12,894.54
03/31/04 14,979.75 14,674.91 12,967.10
04/30/04 14,533.28 14,496.13 12,673.77
05/31/04 14,525.04 14,617.70 12,700.57
06/30/04 14,817.65 14,839.40 12,995.01
07/31/04 14,332.39 14,360.25 12,573.27
08/31/04 14,408.63 14,396.00 12,628.80
09/30/04 14,792.36 14,796.49 12,958.86
10/31/04 15,261.38 15,247.04 13,400.75
11/30/04 16,240.39 16,083.76 14,316.20
12/31/04 16,920.30 16,773.76 14,944.15
01/31/05 16,646.76 16,459.01 14,669.97
02/28/05 17,372.05 17,180.63 15,303.85
03/31/05 16,911.79 16,727.70 14,919.38
04/30/05 16,483.94 16,359.21 14,568.62
05/31/05 16,588.02 16,359.21 14,575.66
06/30/05 16,810.58 16,374.56 14,769.07
07/31/05 17,439.87 17,142.24 15,221.83
08/31/05 17,942.01 17,656.59 15,606.43
09/30/05 18,685.25 18,170.93 16,301.57
10/31/05 18,147.32 17,748.71 15,825.47
11/30/05 18,640.44 18,071.13 16,212.50
12/31/05 19,572.14 18,900.87 16,966.92
01/31/06 20,862.94 20,204.66 18,008.67
02/28/06 20,767.05 20,164.17 17,968.84
03/31/06 21,504.01 20,755.33 18,561.06
04/30/06 22,526.12 21,694.70 19,447.51
05/31/06 21,496.68 20,925.39 18,692.29
[END CHART]
DATA FROM 5/31/96 THROUGH 5/31/06.
The graph illustrates the comparison of a $10,000 hypothetical
investment in the USAA International Fund to the following benchmarks:
o The Lipper International Funds Index tracks the total return
performance of the 30 largest funds within the Lipper
International Funds category.
o The Morgan Stanley Capital (MSCI-EAFE) International Europe,
Australasia and Far East Index is an unmanaged index that
reflects the movements of stock markets in Europe, Australasia,
and the Far East by representing a broad selection of
domestically listed companies within each market.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THE CUMULATIVE
PERFORMANCE QUOTED DOES NOT REFLECT THE DEDUCTION OF TAXES THAT A
SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND
SHARES.
10
. . . C O N T I N U E D
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OVERVIEW
- ------------------------------------------------------
TOP 10 INDUSTRIES
(% of Net Assets)
- ------------------------------------------------------
Pharmaceuticals 10.3%
Diversified Banks 5.9%
Regional Banks 5.3%
Electrical Components & Equipment 4.9%
Multi-Line Insurance 4.3%
Integrated Oil & Gas 4.1%
Packaged Foods & Meat 4.0%
Casinos & Gaming 3.5%
Distillers & Vintners 3.5%
Household Products 3.5%
- ------------------------------------------------------
TOP 10 EQUITY HOLDINGS
(% of Net Assets)
- ------------------------------------------------------
Nestle S.A. 3.5%
Reckitt Benckiser plc 3.5%
Schneider Electric S.A. 3.3%
Samsung Electric S.A. 3.2%
Roche Holdings AG 3.1%
UBS AG 2.9%
AXA S.A. 2.8%
Total S.A. ADR 2.6%
GlaxoSmithKline plc 2.5%
Toyota Motor Corp 2.2%
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 14-18.
11
. . . C O N T I N U E D
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ASSET ALLOCATION
5/31/06
[PIE CHART OF ASSET ALLOCATION]
France 21.4%
United Kingdom 21.0%
Japan 16.4%
Switzerland 13.5%
Germany 3.7%
Italy 3.7%
Korea 3.2%
Spain 3.0%
Other* 24.5%
[END CHART]
*INCLUDES COUNTRIES WITH LESS THAN 3% OF THE PORTFOLIO, MONEY MARKET
INSTRUMENTS, (1.4%), AND SHORT-TERM INVESTMENTS PURCHASED WITH CASH COLLATERAL
FROM SECURITIES LOANED (10.8%).
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
12
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA INTERNATIONAL 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 $0.978741 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 $7,016,000.
The Fund has elected under Section 853 of the Internal Revenue Code to
pass through the credit for taxes paid in foreign countries. The
gross income derived from foreign sources and the related foreign
taxes for the fiscal year ended May 31, 2006, are $39,244,000 and
$1,907,000, respectively.
0.30% 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
$711,000 as qualifying interest income.
The Fund has designated a portion of the amount paid to redeeming
shareholders, in the amount of $3,647,000, as a long-term capital gain
distribution for tax purposes.
13
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D
========================--------------------------------------------------------
Public ACCOUNTING Firm
THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
USAA INTERNATIONAL FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
International 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 International 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
14
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA INTERNATIONAL FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
STOCKS (98.2%)
AUSTRALIA (1.3%)
807,538 QBE Insurance Group Ltd. (Property & Casualty Insurance) $ 13,014
----------
AUSTRIA (0.9%)
150,790 Erste Bank der oesterreichischen Sparkassen AG
(Regional Banks)(b) 8,595
----------
BRAZIL (0.5%)
112,700 Companhia Vale Do Rio Doce ADR(Steel) 5,251
----------
CANADA (0.9%)
193,042 Canadian National Railway Co. (Railroads) 8,629
----------
CHINA (0.7%)
9,086,500 CNOOC Ltd. (Oil & Gas Exploration & Production)(a) 6,899
----------
FRANCE (21.4%)
807,910 AXA S.A. (Multi-Line Insurance)(b) 28,055
55,657 Air Liquide S.A. (Industrial Gases) 11,568
64,167 Air Liquide S.A. - Bonus Shares (Industrial Gases)(a) 13,337
538,740 Credit Agricole S.A. (Regional Banks)(b) 20,082
42,300 Groupe DANONE (Packaged Foods & Meat) 5,103
209,440 LVMH Moet Hennessy Louis Vuitton S.A. (Apparel &
Accessories & Luxury Goods) 20,584
291,820 Legrand S.A. (Electrical Components & Equipment)*(b) 8,537
88,070 Pernod Ricard S.A. (Distillers & Vintners)(b) 17,188
232,140 Sanofi-Aventis S.A. (Pharmaceuticals)(b) 21,879
320,766 Schneider Electric S.A. (Electrical Components & Equipment) 33,273
37,102 Societe Television Francaise (Broadcasting & Cable TV) 1,226
394,986 Total S.A. ADR (Integrated Oil & Gas)(b) 25,757
133,510 Veolia Environnement S.A. (Multi-Utilities)(b) 7,399
----------
213,988
----------
GERMANY (3.7%)
239,600 Bayer AG (Diversified Chemicals) 10,758
143,730 E. On AG (Multi-Utilities) 16,576
88,340 Schering AG (Pharmaceuticals) 9,633
----------
36,967
----------
15
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
HONG KONG (2.7%)
1,307,500 Esprit Holdings Ltd. (Apparel Retail)(a) $ 10,492
5,606,000 Hutchison Telecommunications International Ltd. (Wireless
Telecommunication Services)*(a) 9,018
3,556,400 Li & Fung Ltd. (Trading Companies & Distributors)(a) 7,251
----------
26,761
----------
INDONESIA (0.6%)
12,678,500 PT Bank Central Asia Tbk (Diversified Banks) 5,617
----------
ITALY (3.7%)
409,160 Assicurazioni Generali S.p.A. (Multi-Line Insurance) 14,885
130,815 FastWeb S.p.A. (Communications Equipment)*(b) 6,460
2,120,540 UniCredito Italiano S.p.A. (Regional Banks) 16,168
----------
37,513
----------
JAPAN (16.4%)
1,511,000 Asahi Glass Co. Ltd. (Building Products)(b) 19,964
643,000 Bridgestone Corp. (Tires & Rubber) 13,083
260,100 Canon, Inc. (Electronic Equipment Manufacturers) 17,934
433,000 Kaneka Corp. (Diversified Chemicals) 4,178
399,000 Kao Corp. (Personal Products) 9,909
106,800 Nintendo Co. Ltd. (Leisure Products) 17,897
107,800 Nitto Denko Corp. (Specialty Chemicals) 8,238
24,420 ORIX Corp. (Other Diversified Financial Services) 6,954
282,400 Omron Corp. (Electrical Components & Equipment) 7,653
794,000 Ricoh Co. Ltd. (Office Electronics) 15,415
2,023,000 Shinsei Bank Ltd. (Diversified Banks) 13,392
1,543,000 Tokyo Gas Co. Ltd. (Gas Utilities) 7,650
424,900 Toyota Motor Corp. (Automobile Manufacturers) 22,388
----------
164,655
----------
KOREA (3.2%)
50,110 Samsung Electronics Co. Ltd. (Semiconductors)(a) 31,994
----------
MEXICO (1.0%)
571,880 Grupo Televisa S.A. de C.V. ADR (Broadcasting & Cable TV) 10,517
----------
POLAND (0.1%)
134,960 Powszechna Kasa Oszczednosci Bank Polski S.A.
(Regional Banks) 1,528
----------
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
SINGAPORE (1.2%)
7,570,000 Singapore Telecommunications Ltd. (Integrated
Telecommunication Services) $ 12,130
----------
SPAIN (3.0%)
1,018,350 Banco Bilbao Vizcaya Argentaria S.A. (Diversified Banks) 21,100
264,270 Iberdrola S.A. (Electric Utilities)(b) 8,483
----------
29,583
----------
SWEDEN (1.9%)
3,858,420 LM Ericsson Telephone Co. "B" ADR (Communications Equipment) 12,331
242,800 Svenska Handelsbanken AB "A" (Regional Banks) 6,500
----------
18,831
----------
SWITZERLAND (13.5%)
22,000 Actelion Ltd. (Pharmaceuticals)* 2,562
148,607 Julius Baer Holding Ltd. "B" (Diversified Banks) 13,110
116,346 Nestle(acute) S.A. (Packaged Foods & Meat) 34,707
200,180 Roche Holdings AG (Pharmaceuticals) 31,163
246,317 Swiss Re (Reinsurance) 17,313
51,910 Synthes, Inc. (Health Care Equipment) 6,356
260,589 UBS AG (Diversified Capital Markets) 29,469
----------
134,680
----------
THAILAND (0.5%)
1,946,980 Bangkok Bank Public Co. Ltd. (Diversified Banks) 5,412
----------
UNITED KINGDOM (21.0%)
251,980 AstraZeneca plc (Pharmaceuticals) 13,308
541,600 BG Group plc (Oil & Gas Exploration & Production) 7,191
1,083,460 Diageo plc (Distillers & Vintners) 17,770
888,370 GlaxoSmithKline plc (Pharmaceuticals) 24,588
1,666,661 Ladbrokes plc (Casinos & Gaming) 12,390
292,160 Next plc (Apparel Retail) 8,879
962,820 Reckitt Benckiser plc (Household Products) 35,382
456,840 Royal Dutch Shell plc "A" (Integrated Oil & Gas) 15,003
1,180,195 Smith & Nephew plc (Health Care Equipment) 9,634
518,620 Smiths Group plc (Aerospace & Defense) 8,603
3,517,820 Tesco plc (Food Retail) 21,085
831,030 WPP Group plc (Advertising) 10,234
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- ---------------------------------------------------------------------------------------------
1,939,520 William Hill plc (Casinos & Gaming) $ 22,325
401,390 Yell Group plc (Publishing) 3,765
----------
210,157
----------
Total stocks (cost: $793,216) 982,721
----------
PRINCIPAL
AMOUNT
(000)
- ----------
MONEY MARKET INSTRUMENTS (1.4%)
COMMERCIAL PAPER
$14,300 Citigroup Funding Inc., 5.05%, 6/01/2006 (cost: $14,300) 14,300
----------
NUMBER
OF SHARES
- ----------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (10.8%)
MONEY MARKET FUNDS (0.1%)
911,471 AIM Short-Term Investment Co. Liquid Assets Portfolio, 4.92%(c) 911
----------
PRINCIPAL
AMOUNT
(000)
- ----------
CORPORATE OBLIGATIONS (1.0%)
$10,000 Canadian Imperial Bank of Commerce, Yankee CD (Canada),
5.23%, 1/30/2007 10,009
----------
REPURCHASE AGREEMENTS (9.7%)(d)
10,000 Credit Suisse First Boston, LLC, 5.00%, acquired on
5/31/2006 and due 6/01/2006 at $10,000 (collateralized by
$10,705 of Freddie Mac Discount Notes(e), 5.25%(f), due
4/18/2007; market value $10,204) 10,000
28,000 Deutsche Bank Securities, Inc., 5.02%, acquired on 5/31/2006
and due 6/01/2006 at $28,000 (collateralized by $2,950 of
Freddie Mac Notes(e), 5.00%, due 11/13/2014; $26,530 of
Fannie Mae Discount Notes(e), 5.21%(f), due 12/29/2006;
combined market value $28,561) 28,000
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- ---------------------------------------------------------------------------------------------
$40,000 Merrill Lynch Government Securities, Inc., 5.01%, acquired
on 5/31/2006 and due 6/01/2006 at $40,000 (collateralized
by $45,910 of International Bank for Reconstruction and
Development Notes(e), 4.75%, due 2/15/2035; market value
$40,800) $ 40,000
19,000 Morgan Stanley & Co., Inc., 5.02%, acquired on 5/31/2006 and
due 6/01/2006 at $19,000 (collateralized by $19,775 of
Fannie Mae Notes(e), 2.15% -7.54%, due 6/19/2006 - 6/19/2028;
market value $19,624) 19,000
----------
97,000
----------
Total short-term investments purchased with cash collateral
from securities loaned (cost: $107,921) 107,920
----------
TOTAL INVESTMENTS (COST: $915,437) $1,104,941
==========
19
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA INTERNATIONAL 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%.
ADR - American depositary receipts are receipts issued by a U.S. bank
evidencing ownership of foreign shares. Dividends are paid in U.S.
dollars.
CD - Certificate of deposit
SPECIFIC NOTES
- --------------------------------------------------------------------------------
(a) Security was fair valued at May 31, 2006, by USAA Investment
Management Company (the Manager) in accordance with
valuation procedures approved by the Board of Trustees.
(b) The security or a portion thereof was out on loan as of May 31,
2006.
(c) Rate represents the money market fund annualized seven-day yield
at May 31, 2006.
(d) Collateral on repurchase agreements is received by the Fund upon
entering into the repurchase agreement. The collateral is marked-
to-market daily to ensure its market value is equal to or in excess
of the repurchase agreement price plus accrued interest.
(e) U.S. government agency issues. Securities issued by government-
sponsored enterprises (GSEs) are supported only by the credit of
the issuing agency, instrumentality, or corporation, and are
neither issued nor guaranteed by the U.S. government.
(f) Zero-coupon security. Rate represents the effective yield at date
of purchase.
* Non-income-producing security for the year ended May 31, 2006.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA INTERNATIONAL FUND
MAY 31, 2006
ASSETS
Investments in securities, at market value (including securities
on loan of $101,792) (identified cost of $915,437) $1,104,941
Cash 33
Cash denominated in foreign currencies (identified cost of $1,417) 1,449
Receivables:
Capital shares sold 1,147
USAA Transfer Agency Company (Note 7D) 29
Dividends and interest 3,744
Securities sold 3,547
Other 354
Unrealized appreciation on foreign currency contracts held, at value 6
----------
Total assets 1,115,250
----------
LIABILITIES
Payables:
Upon return of securities loaned 108,316
Securities purchased 4,524
Capital shares redeemed 501
Accrued management fees 655
Accrued transfer agent's fees 24
Other accrued expenses and payables 89
----------
Total liabilities 114,109
----------
Net assets applicable to capital shares outstanding $1,001,141
==========
NET ASSETS CONSIST OF:
Paid-in capital $ 730,316
Accumulated undistributed net investment income 24,214
Accumulated net realized gain on investments 57,026
Net unrealized appreciation of investments 189,504
Net unrealized appreciation on foreign currency translations 81
----------
Net assets applicable to capital shares outstanding $1,001,141
==========
Capital shares outstanding, unlimited number of shares authorized,
no par value 38,732
==========
Net asset value, redemption price, and offering price per share $ 25.85
==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA INTERNATIONAL FUND
YEAR ENDED MAY 31, 2006
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $3,789) $ 34,525
Interest 957
Securities lending (net) 722
--------
Total income 36,204
--------
EXPENSES
Management fees 5,892
Administration and servicing fees 1,210
Transfer agent's fees 1,671
Custody and accounting fees 493
Postage 181
Shareholder reporting fees 60
Trustees' fees 9
Registration fees 89
Professional fees 64
Other 16
--------
Total expenses 9,685
Expenses paid indirectly (55)
--------
Net expenses 9,630
--------
NET INVESTMENT INCOME 26,574
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain on:
Investments 73,959
Foreign currency transactions 391
Change in net unrealized appreciation/depreciation of:
Investments 89,804
Foreign currency translations 131
--------
Net realized and unrealized gain 164,285
--------
Increase in net assets resulting from operations $190,859
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA INTERNATIONAL FUND
YEARS ENDED MAY 31,
FROM OPERATIONS 2006 2005
---------------------------
Net investment income $ 26,574 $ 5,668
Net realized gain on investments 73,959 32,598
Net realized gain (loss) on foreign currency transactions 391 (190)
Change in net unrealized appreciation/depreciation of:
Investments 89,804 19,169
Foreign currency translations 131 (98)
---------------------------
Increase in net assets resulting from operations 190,859 57,147
---------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (7,016) (3,680)
Net realized gains (34,696) (35,604)
---------------------------
Distributions to shareholders (41,712) (39,284)
---------------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 286,691 188,433
Reinvested dividends 40,668 38,077
Cost of shares redeemed (121,301) (77,945)
---------------------------
Increase in net assets from capital share transactions 206,058 148,565
---------------------------
Capital contribution from USAA Transfer Agency
Company (Note 7D) 28 3
---------------------------
Net increase in net assets 355,233 166,431
NET ASSETS
Beginning of period 645,908 479,477
---------------------------
End of period $1,001,141 $645,908
===========================
Accumulated undistributed net investment income:
End of period $ 24,214 $ 3,438
===========================
CHANGE IN SHARES OUTSTANDING
Shares sold 11,727 8,747
Shares issued for dividends reinvested 1,743 1,766
Shares redeemed (5,036) (3,661)
===========================
Increase in shares outstanding 8,434 6,852
===========================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA INTERNATIONAL 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 International Fund (the
Fund), which is classified as diversified under the 1940 Act. The
Fund's primary investment objective is capital appreciation with
current income as a secondary objective.
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 official closing price on
the exchange or primary market on which they trade. Equity
securities traded primarily on foreign securities exchanges or
markets are valued at the last quoted sales price, or the most
recently determined official closing price calculated
according to local market convention, available at the time
the Fund is valued. If no last sale or official closing price
is reported or available, the average of the bid and asked
prices is generally used.
2. Equity securities trading in various foreign markets may take
place on days when the NYSE is closed. Further, when the NYSE
is open, the foreign markets may be closed. Therefore, the
calculation of the Fund's net asset value (NAV) may not take
place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
24
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
between the time of their last quoted sales or official
closing prices and the close of normal trading on the NYSE on
a day the Fund's NAV is calculated will not be reflected in
the value of the Fund's foreign securities. However, USAA
Investment Management Company (the Manager), an affiliate of
the Fund, and the Fund's subadviser, if applicable, will
monitor for events that would materially affect the value of
the Fund's foreign securities and, if necessary, the Manager
will value the foreign securities in good faith, considering
such available information that the Manager deems relevant,
under valuation procedures approved by the Trust's Board of
Trustees. In addition, the Fund may use information from an
external vendor or other sources to adjust the foreign market
closing prices of foreign equity securities to reflect what
the Fund believes to be the fair value of the securities as of
the close of the NYSE. Fair valuation of affected foreign
equity securities may occur frequently based on an assessment
that events that occur on a fairly regular basis (such as U.S.
market movements) are significant.
3. Investments in open-end investment companies, other than 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 the Service's judgment, these prices are readily available
and are
25
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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
subadviser, 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 regulated
investment companies and to distribute substantially
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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 on
short-term securities are amortized on a straight-line basis over
the life of the respective 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
currency. Since the Fund's accounting records are maintained
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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. 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
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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 $46,000 and $9,000, respectively,
resulting in a total reduction in Fund expenses of $55,000.
G. INDEMNIFICATIONS - Under the Trust's organizational documents,
its officers and trustees are indemnified against certain
liabilities arising out of the performance of their duties to the
Trust. In addition, in the normal course of business the Trust
enters into contracts that contain a variety of representations
and warranties that provide general indemnifications. The Trust's
maximum exposure under these arrangements is unknown, as this
would involve future claims that may be made against the Trust
that have not yet occurred. However, the Trust expects the risk
of loss to be remote.
H. USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that may
affect the reported amounts in the financial statements.
(2) 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
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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 2.3% 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
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
$3,647,000, increase accumulated undistributed net investment income
by $1,218,000, and decrease accumulated net realized gain on
investments by $4,865,000. This includes differences in the accounting
for foreign currency gains
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
and losses, passive foreign investment corporation gains and losses,
and the utilization of earnings and profits distributed to
shareholders on redemption of shares as part of the dividends-paid
deduction for federal income tax purposes. This reclassification has
no effect on net assets.
The tax character of distributions paid during the years ended May 31,
2006, and 2005, was as follows:
2006 2005
--------------------------------
Ordinary income* $ 9,842,000 $12,638,000
Long-term realized capital gains 31,870,000 26,646,000
*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 $ 25,563,000
Undistributed long-term capital gains 55,909,000
Unrealized appreciation of investments 189,276,000
Unrealized appreciation on foreign currency translations 76,000
The difference between book-basis and tax-basis unrealized
appreciation of investments is attributable to the tax deferral of
losses on wash sales. The difference between book-basis and tax-basis
appreciation on foreign currency translations is due to the tax
recognition of gains and losses on foreign currency contracts.
Distributions of net investment income and realized gains from
security transactions not offset by capital losses are made annually
in the succeeding fiscal year or as otherwise required to avoid the
payment of federal taxes.
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the year ended May 31, 2006, were
$540,290,000 and $348,108,000, respectively.
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
As of May 31, 2006, the cost of securities, including short-term
securities, for federal income tax purposes, was $915,665,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2006, for federal income tax purposes, were $210,231,000 and
$20,955,000, respectively, resulting in net unrealized appreciation of
$189,276,000.
(5) FORWARD FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
The Fund may enter into forward currency contracts to hedge against
foreign currency exchange risks on the non-U.S. dollar denominated
securities held in the Fund's portfolio. A forward currency contract
is an agreement to purchase or sell a specified currency at a
specified future date or over a specified time period at a price set
at the trade date of the contract. Forward currency contracts are
valued on a daily basis using foreign currency exchange rates obtained
from an independent pricing service. Risks of entering into currency
contracts include the potential inability of the counterparty to meet
the terms of the contract and the Fund's giving up the opportunity for
potential profit.
At May 31, 2006, the Fund had no open forward foreign currency
contracts.
(6) LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
The Fund, through its third-party securities-lending agent,
Metropolitan West Securities LLC (MetWest), may lend its securities to
qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the securities loaned, initially in an amount at
least equal to 102% of the fair value of domestic securities loaned
and 105% of the fair value of international securities loaned. Cash
collateral is invested in high-quality short-term investments. The
Fund and MetWest retain 80% and
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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.
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 $722,000, 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
$101,792,000, which excluded $323,000 of securities on loan that were
sold prior to May 31, 2006. The Fund received cash collateral of
$108,316,000 for the loans. Of this amount, $107,921,000 was invested
in short-term investments, as noted in the Fund's portfolio of
investments, and $395,000 remained in cash.
(7) TRANSACTIONS WITH MANAGER
- --------------------------------------------------------------------------------
A. MANAGEMENT FEES - The Manager provides investment management
services to the Fund pursuant to an Investment Advisory
Agreement. Under this agreement, the Manager is responsible for
managing the business and affairs of the Fund, subject to the
authority of and supervision by the Trust's Board of Trustees.
The Manager is authorized to select (with approval of the Trust's
Board of Trustees) one or more subadvisers to manage the actual
day-to-day investment 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
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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 International Funds Index, which
tracks the total return performance of the 30 largest funds in
the Lipper International 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%.
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
whenever the Fund outperforms the Lipper International 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 $5,892,000,
which included a performance adjustment of $(157,000) that
decreased the base management fee of 0.75% by 0.02%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with MFS Investment Management
(MFSIM), under which MFSIM directs the investment and
reinvestment of the Fund's assets (as allocated from time to time
by the Manager). Effective January 3, 2006, the Manager (not the
Fund) pays MFSIM a subadvisory fee in the annual amount of 0.29%
of the Fund's average net assets that MFSIM manages. Prior to
January 3, 2006, the Manager (not the Fund) paid MFSIM a
subadvisory fee based on the aggregate average net assets that
MFSIM managed in the USAA World Growth Fund, the USAA
International Fund, the USAA Life Investment Trust World Growth
Fund, and the USAA Cornerstone Strategy Fund combined (MFSIM
Funds), in the annual amount of 0.335% of the first $350 million
of assets, plus 0.225% of assets over $350 million but not over
$1 billion, plus 0.200% of assets over $1 billion. For the year
ended May 31, 2006, the Manager incurred subadvisory fees for the
Fund, paid or payable to MFSIM, of $2,153,000.
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
35
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
administration and servicing fees, paid or payable to the
Manager, of $1,210,000.
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 $27,000 for these legal and
tax services. These expenses are included in the professional
fees expenses on the Fund's statement of operations.
D. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket
expenses. The Fund also pays SAS fees that are related to the
administration and servicing of accounts that are traded on an
omnibus basis. For the year ended May 31, 2006, the Fund incurred
transfer agent's fees, paid or payable to SAS, of $1,671,000.
Additionally, the Fund recorded a receivable from SAS of $29,000
at May 31, 2006, for adjustments related to corrections to
shareholders transactions, of which $28,000 was related to
paid-in capital adjustments and $1,000 was related to dividends
payable adjustments.
E. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a
continuing best-efforts basis. The Manager receives no
commissions or fees for this service.
(8) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors, officers,
and/or employees of the Manager. None of the affiliated trustees or
Fund officers received any compensation from the Fund.
36
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA INTERNATIONAL 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 $ 21.32 $ 20.45 $ 16.15 $ 17.63 $ 18.23
------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .72 .10 .15 .11 .14
Net realized and unrealized gain (loss) 5.09 2.35 4.30 (1.46) (.56)
------------------------------------------------------------------
Total from investment operations 5.81 2.45 4.45 (1.35) (.42)
------------------------------------------------------------------
Less distributions:
From net investment income (.21) (.14) (.10) (.13) (.18)
From realized capital gains (1.07) (1.44) (.05) - -
------------------------------------------------------------------
Total distributions (1.28) (1.58) (.15) (.13) (.18)
------------------------------------------------------------------
Net asset value at end of period $ 25.85 $ 21.32 $ 20.45 $ 16.15 $ 17.63
==================================================================
Total return (%)* 27.90 11.91 27.63 (7.63) (2.22)
Net assets at end of period (000) $1,001,141 $645,908 $479,477 $347,543 $382,459
Ratio of expenses to average
net assets (%)**(a) 1.20 1.24 1.31 1.42 1.32
Ratio of net investment income to
average net assets (%)** 3.29 1.02 .91 .79 .78
Portfolio turnover (%) 44.46 41.11 58.70 148.14 35.63
* Assumes reinvestment of all net investment income and realized capital gain distributions during the period. Includes
adjustments in accordance with U.S. generally accepted accounting principles and could differ from the Lipper reported return.
** For the year ended May 31, 2006, average net assets were $808,051,000.
(a) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses paid
indirectly decreased the expense ratios as follows:
(.01%) (.01%) (.01%) (.01%) (.00%)(+)
+ Represents less than 0.01% of average net assets.
37
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA INTERNATIONAL 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
38
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA INTERNATIONAL 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 $1,157.90 $6.29
Hypothetical
(5% return before
expenses) 1,000.00 1,019.10 5.89
*Expenses are equal to the Fund's annualized expense ratio of 1.17%,
which is net of any expenses paid indirectly, multiplied by the
average account value over the period, multiplied by 182 days/365
days (to reflect the one-half year period). The Fund's ending account
value on the first line in the table is based on its actual total
return of 15.79% for the six-month period of December 1, 2005,
through May 31, 2006.
39
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA INTERNATIONAL FUND
MAY 31, 2006
At a meeting of the Board of Trustees held on April 19, 2006, the
Board, including the Trustees who are not "interested persons" of the
Trust (the "Independent Trustees"), approved the continuance of the
Investment Advisory Agreement between the Trust and the Manager with
respect to the Fund and the Subadvisory Agreement with respect to the
Fund.
In advance of the meeting, the Trustees received and considered a
variety of information relating to the Investment Advisory Agreement
and Subadvisory Agreement and the Manager and the Subadviser, and were
given the opportunity to ask questions and request additional
information from management. The information provided to the Board
included, among other things: (i) a separate report prepared by an
independent third party, which provided a statistical analysis
comparing the Fund's investment performance, expenses, and fees to
comparable investment companies; (ii) information concerning the
services rendered to the Fund, as well as information regarding the
Manager's revenues and costs of providing services to the Fund and
compensation paid to affiliates of the Manager; and (iii) information
about the Manager's and Subadviser's operations and personnel. Prior
to voting, the Independent Trustees reviewed the proposed continuance
of the Investment Advisory Agreement and the Subadvisory Agreement
with management and with experienced independent counsel and received
materials from such counsel discussing the legal standards for their
consideration of the proposed continuation of the Investment Advisory
Agreement and the Subadvisory Agreement with respect to the Fund. The
Independent Trustees also reviewed the proposed continuation of the
Investment Advisory Agreement and the Subadvisory Agreement with
respect to the Fund in private sessions with their counsel at which no
representatives of management were present.
At each regularly scheduled meeting of the Board and its committees,
the Board of Trustees of the Trust receives and reviews, among other
things, information concerning the Fund's performance and related
40
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
services provided by the Manager and by the Subadviser. At the meeting
at which the renewal of the Investment Advisory Agreement and
Subadvisory Agreement is considered, particular focus is given to
information concerning Fund performance, comparability of fees and
total expenses, and profitability. However, the Board noted that the
evaluation process with respect to the Manager and the Subadviser is
an ongoing one. In this regard, the Board's and its committees'
consideration of the Investment Advisory Agreement and Subadvisory
Agreement included information previously received at such quarterly
meetings.
INVESTMENT ADVISORY AGREEMENT
- --------------------------------------------------------------------------------
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Investment Advisory Agreement. In approving the Investment Advisory
Agreement, the Trustees did not identify any single factor as
controlling, and each Trustee attributed different weights to various
factors. Throughout their deliberations, the Independent Trustees were
represented and assisted by independent counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES. In considering the nature,
extent, and quality of the services provided by the Manager under the
Investment Advisory Agreement, the Board of Trustees reviewed
information provided by the Manager relating to its operations and
personnel. The Board also took into account its familiarity with the
Manager's management through Board meetings, discussions, and reports
during the preceding year. The Board considered the fees paid to the
Manager and the services provided to the Fund by the Manager under the
Investment Advisory Agreement, as well as other services provided by
the Manager and its affiliates under other agreements, and the
personnel who provide these services. In addition to the investment
advisory services provided to the Fund, the Manager and its affiliates
provide administrative services, stockholder services, oversight of
Fund
41
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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 level and depth of knowledge of the Manager,
including the professional experience and qualifications of its senior
and investment personnel, as well as current staffing levels. The
Board discussed the Manager's effectiveness in monitoring the
performance of the Subadviser and its timeliness in responding to
performance issues. The allocation of the Fund's brokerage, including
the Manager's process for monitoring "best execution," was also
considered. The Manager's role in coordinating the activities of the
Fund's other service providers was also considered. The Board
considered the Manager's financial condition and that it had the
financial wherewithal to continue to provide the same scope and high
quality of services under the Investment Advisory Agreement. In
reviewing the Investment Advisory Agreement, the Board focused on the
experience, resources, and strengths of the Manager and its affiliates
in managing investment companies, including the Fund.
The Board also reviewed the compliance and administrative services
provided to the Fund by the Manager, including oversight of the Fund's
day-to-day operations and oversight of Fund accounting. The Manager
and its affiliates provide compliance and administrative services to
the Fund. The Trustees, guided also by information obtained from their
experiences as directors/trustees of the Fund and other investment
companies managed by the Manager, also focused on the quality of the
Manager's compliance and administrative staff.
EXPENSES AND PERFORMANCE. In connection with its consideration of the
Investment Advisory Agreement, the Board evaluated the Fund's advisory
fees and total expense ratio as compared to other open-end investment
companies deemed to be comparable to the Fund as determined by the
independent third party in its report. The Fund's
42
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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 adjustment - was below the median of its expense
group and was the median of its expense universe. The data indicated
that the Fund's total expenses were above the median of its expense
group and below the median of its expense universe. The Board took
into account the various services provided to the Fund by the Manager
and its affiliates. The Board also noted the level and method of
computing the management fee, including the performance adjustment to
such fee. The Trustees also took into account that the subadvisory
fees under the Subadvisory Agreement are paid by the Manager.
In considering the Fund's performance, the Board of Trustees noted
that the Board reviews at its regularly scheduled meetings information
about the Fund's performance results. The Trustees also reviewed
various comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other
mutual funds deemed to be in its peer group by the independent third
party in its report (the "performance universe"). The Fund's
performance universe consisted of the Fund and all retail and
institutional open-end investment companies with the same
classification/objective as the Fund regardless of asset size or
primary channel of distribution.
43
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
This comparison indicated that the Fund's performance exceeded the
average of its performance universe and its Lipper index for the
five-year period ended December 31, 2005, and was below the average of
its performance universe and its Lipper index for the one- and
three-year periods ended December 31, 2005. The Board also noted that
the Fund's percentile performance ranking was in the bottom 50% of its
performance universe for the one- and three-year periods ended
December 31, 2005. The Board took into account management's discussion
of the Fund's performance, including the reasons for the Fund's recent
performance and the steps to be taken to address it.
COMPENSATION AND PROFITABILITY. The Board took into consideration the
level and method of computing the management fee. The information
considered by the Board included operating profit margin information
for the Manager's business as a whole. The Board also received and
considered profitability information related to the management
revenues from the Fund. This consideration included a broad review of
the methodology used in the allocation of certain costs to the Fund.
In considering the profitability data with respect to the Fund, the
Trustees noted that the Manager pays the subadvisory fees. The
Trustees reviewed the profitability of the Manager's relationship with
the Fund before tax expenses. In reviewing the overall profitability
of the management fee to the Manager, the Board also considered the
fact that affiliates provide shareholder servicing and administrative
services to the Fund for which they receive compensation. The Board
also considered the possible direct and indirect benefits to the
Manager from its relationship with the Trust, including that the
Manager may derive reputational and other benefits from its
association with the Fund. The Trustees recognized that the Manager
should be entitled to earn a reasonable level of profits in exchange
for the level of services it provides to the Fund and the
entrepreneurial risk that it assumes as Manager.
ECONOMIES OF SCALE. The Board considered whether there should be
changes in the management fee rate or structure in order to enable
44
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
the Fund to participate in any economies of scale. The Board noted the
fact that the Manager pays the subadvisory fee. The Board took into
account management's discussion of the current advisory fee structure.
The Board determined that the current investment management fee
structure was reasonable.
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability and
resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is being
addressed; (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 their conclusions,
the Board determined that continuation of the Investment Advisory
Agreement would be in the interests of the Fund and its shareholders.
SUBADVISORY AGREEMENT
- --------------------------------------------------------------------------------
In approving the Fund's Subadvisory Agreement, the Board considered
various factors, among them: (i) the nature, extent, and quality of
services provided to the Fund, including the personnel providing
services; (ii) the Subadviser's compensation and any other benefits
derived from the subadvisory relationship; (iii) comparisons of
subadvisory fees and performance to comparable investment companies;
and (iv) the terms of the Subadvisory Agreement. The Board's analysis
of these factors is set forth below.
After full consideration of a variety of factors, the Board of
Trustees, including the Independent Trustees, voted to approve the
Subadvisory Agreement. In approving the Subadvisory Agreement, the
Trustees did not identify any single factor as controlling, and each
Trustee attributed
45
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
different weights to various factors. Throughout their deliberations,
the Independent Trustees were represented and assisted by independent
counsel.
NATURE, EXTENT, AND QUALITY OF SERVICES PROVIDED; INVESTMENT
PERSONNEL. The Trustees considered information provided to them
regarding the services provided by the Subadviser, including
information presented periodically throughout the previous year. The
Board considered the Subadviser's level of knowledge and investment
style. The Board reviewed the experience and credentials of the
investment personnel who are responsible for managing the investment
of portfolio securities with respect to the Fund and the Subadviser's
level of staffing. The Trustees noted that the materials provided to
them indicated that the method of compensating portfolio managers is
reasonable and includes appropriate mechanisms to prevent a manager
with underperformance from taking undue risks. The Trustees also noted
the Subadviser's brokerage practices. The Board also considered the
Subadviser's regulatory and compliance history. The Board noted that
the Manager's monitoring processes of the Subadviser include: (i)
regular telephonic meetings to discuss, among other matters,
investment strategies and to review portfolio performance; (ii)
monthly portfolio compliance checklists and quarterly compliance
certifications to the Board; and (iii) due diligence visits to the
Subadviser.
SUBADVISER COMPENSATION. The Board also took into consideration the
financial condition of the Subadviser. In considering the cost of
services to be provided by the Subadviser and the profitability to the
Subadviser of its relationship with the Fund, the Trustees noted that
the fees under the Subadvisory Agreement were paid by the Manager.
The Trustees also relied on the ability of the Manager to negotiate
the Subadvisory Agreement and the fees thereunder at arm's length. The
Board also considered information relating to the cost of services to
be provided by the Subadviser, the Subadviser's profitability with
respect to the Fund, and the potential economies of scale in the
Subadviser's
46
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA INTERNATIONAL FUND
MAY 31, 2006
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 Agreement than the other
factors considered.
SUBADVISORY FEES AND FUND PERFORMANCE. The Board compared the
subadvisory fees for the Fund with the fees that the Subadviser
charges to comparable clients. The Board considered that the Fund pays
a management fee to the Manager and that, in turn, the Manager pays a
subadvisory fee to the Subadviser.
As noted above, the Board considered the Fund's performance during the
one-, three-, and five-year periods ended December 31, 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 noted the Manager's expertise
and resources in monitoring the performance, investment style, and
risk-adjusted performance of the Subadviser. The Board was mindful of
the Manager's focus on the Subadviser's performance and the
explanations of management regarding the factors that contributed to
the short-term performance of the Fund. The Board also noted the
Subadviser's long-term performance record for similar accounts.
CONCLUSION. The Board reached the following conclusions regarding the
Subadvisory Agreement, among others: (i) the Subadviser is qualified
to manage the Fund's assets in accordance with its investment
objectives and policies; (ii) the Subadviser maintains an appropriate
compliance program; (iii) the performance of the Fund is being
addressed; and (iv) the Fund's advisory expenses are reasonable in
relation to those of similar funds and to the services to be provided
by the Manager and the Subadviser. Based on the Board's conclusions,
the Board of Trustees determined that approval of the Subadvisory
Agreement with respect to the Fund would be in the interests of the
Fund and its shareholders.
47
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.
48
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED DIRECTOR(1)
- --------------------------------------------------------------------------------
CHRISTOPHER W. CLAUS (2,4)
Director
Born: December 1960
Year of Election or Appointment: 2001
President, Chief Executive Officer, Director, and Chairman of the
Board of Directors, IMCO (12/04-present); President and Chief
Executive Officer, Director, and Vice Chairman of the Board of
Directors, IMCO (2/01-12/04); Senior Vice President, Investment
Sales and Service, IMCO (7/00-2/01). Mr. Claus serves as
President, Director/Trustee, and Vice Chairman of the Boards of
Director/Trustee of the USAA family of funds. He also serves as
President, Director, and Chairman of the Board of Directors of
USAA Shareholder Account Services (SAS). He also holds the
Officer position of Senior Vice President of USAA Life Investment
Trust, a registered investment company offering five individual
funds.
(1) INDICATES THE DIRECTOR IS AN EMPLOYEE OF USAA INVESTMENT
MANAGEMENT COMPANY OR AFFILIATED COMPANIES AND IS CONSIDERED
AN "INTERESTED PERSON" UNDER THE INVESTMENT COMPANY ACT OF
1940.
(2) MEMBER OF EXECUTIVE COMMITTEE
(3) MEMBER OF AUDIT COMMITTEE
(4) MEMBER OF PRICING AND INVESTMENT COMMITTEE
(5) MEMBER OF CORPORATE GOVERNANCE COMMITTEE
(6) THE ADDRESS FOR ALL NON-INTERESTED DIRECTORS IS THAT OF THE
USAA FUNDS, P.O. BOX 659430, SAN ANTONIO, TX 78265-9430.
49
. . . 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.
50
. . . C O N T I N U E D
========================--------------------------------------------------------
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.
51
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
INTERESTED OFFICERS(1)
- --------------------------------------------------------------------------------
CLIFFORD A. GLADSON
Vice President
Born: November 1950
Year of Appointment: 2002
Senior Vice President, Fixed Income Investments, IMCO
(9/02-present); Vice President, Fixed Income Investments, IMCO
(5/02-9/02); Vice President, Mutual Fund Portfolios, IMCO
(12/99-5/02). Mr. Gladson also holds the Officer position of Vice
President of USAA Life Investment Trust, a registered investment
company offering five individual funds.
STUART WESTER
Vice President
Born: June 1947
Year of Appointment: 2002
Vice President, Equity Investments, IMCO (1/99-present). Mr.
Wester also holds the Officer position of Vice President of USAA
Life Investment Trust, a registered investment company offering
five individual funds.
MARK S. HOWARD
Secretary
Born: October 1963
Year of Appointment: 2002
Senior Vice President, Life/IMCO/USAA Financial Planning Services
(FPS) General Counsel, USAA (10/03-present); Senior Vice
President, Securities Counsel, USAA (12/02-10/03); Senior Vice
President, Securities Counsel & Compliance, IMCO (1/02-12/02);
Vice President, Securities Counsel & Compliance, IMCO
(7/00-1/02). Mr. Howard also holds the Officer positions of
Senior Vice President, Secretary, and Counsel for USAA Life
Insurance Company, IMCO, USAA Financial Advisers, Inc. (FAI),
FPS, and SAS; and Secretary for USAA Life Investment Trust, a
registered investment company offering five individual funds.
(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.
52
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
DEBRA K. DUNN
Treasurer
Born: August 1969
Year of Appointment: 2005
Assistant Vice President, IMCO/FPS Finance, USAA (9/04-present);
Executive Director, IMCO/FPS Finance, USAA (12/03-9/04);
Executive Director, FPS Finance, USAA (2/03-12/03); Director, FPS
Finance, USAA (12/02-2/03); Director, Strategic Financial
Analysis, IMCO (1/01-12/02); Financial Business Analyst,
Strategic Financial Analysis, IMCO (3/00-1/01). Ms. Dunn also
holds the Officer positions of Assistant Vice President and
Treasurer for IMCO, SAS, FPS, and FAI; and Treasurer of USAA Life
Investment Trust, a registered investment company offering five
individual funds.
EILEEN M. SMILEY
Assistant Secretary
Born: November 1959
Year of Appointment: 2003
Vice President, Securities Counsel, USAA (2/04-present);
Assistant Vice President, Securities Counsel, USAA (1/03-2/04);
Attorney, Morrison & Foerster, LLP (1/99-1/03). Ms. Smiley also
holds the Officer position of Vice President and Assistant
Secretary of IMCO, SAS, FAI, and FPS; and Assistant Secretary of
USAA Life Investment Trust, a registered investment company
offering five individual funds.
ROBERTO GALINDO, JR.
Assistant Treasurer
Born: November 1960
Year of Appointment: 2000
Assistant Vice President, Portfolio Accounting/Financial
Administration, USAA (12/02-present); Assistant Vice President,
Mutual Fund Analysis & Support, IMCO (10/01-12/02); Executive
Director, Mutual Fund Analysis & Support, IMCO (6/00-10/01). Mr.
Galindo also holds the Officer position of Assistant Treasurer of
USAA Life Investment Trust, a registered investment company
offering five individual funds.
53
. . . C O N T I N U E D
========================--------------------------------------------------------
INFORMATION
JEFFREY D. HILL
Chief Compliance Officer
Born: December 1967
Year of Appointment: 2004
Assistant Vice President, Mutual Funds Compliance, USAA
(9/04-present); Assistant Vice President, Investment Management
Administration & Compliance, USAA (12/02-9/04); Assistant Vice
President, Investment Management Administration & Compliance,
IMCO (9/01-12/02); Senior Manager, Investment Management
Assurance and Advisory Services, KPMG LLP (6/98-8/01). Mr. Hill
also serves as Chief Compliance Officer of USAA Life Investment
Trust, a registered investment company offering five individual
funds.
54
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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.
[LOGO OF RECYCLED PAPER]
Recycled
Paper
- -------------------------------------------------------------------------------
[LOGO OF USAA] 9800 Fredericksburg Road -------------
USAA(R) San Antonio, Texas 78288 PRSRT STD
U.S.
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USAA
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and others electronically.
Sign up at USAA.COM.
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[LOGO OF USAA] WE KNOW WHAT IT MEANS TO SERVE.(R)
USAA ----------------------------------
INSURANCE o MEMBER SERVICES
23409-0706 (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.