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 EMERGING MARKETS FUND - ANNUAL REPORT FOR PERIOD ENDING MAY 31, 2006
[LOGO OF USAA]
USAA(R)
USAA EMERGING
MARKETS Fund
[GRAPHIC OF USAA EMERGING MARKETS 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
INVESTMENT OVERVIEW 7
FINANCIAL INFORMATION
Distributions to Shareholders 11
Report of Independent Registered Public Accounting Firm 12
Portfolio of Investments 13
Notes to Portfolio of Investments 20
Financial Statements 22
Notes to Financial Statements 25
EXPENSE EXAMPLE 40
ADVISORY AGREEMENTS 42
DIRECTORS' AND OFFICERS' INFORMATION 50
THIS REPORT IS FOR THE INFORMATION OF THE SHAREHOLDERS AND OTHERS WHO HAVE
RECEIVED A COPY OF THE CURRENTLY EFFECTIVE PROSPECTUS OF THE FUND, MANAGED BY
USAA INVESTMENT MANAGEMENT COMPANY. IT MAY BE USED AS SALES LITERATURE ONLY WHEN
PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS, WHICH PROVIDES FURTHER DETAILS
ABOUT THE FUND.
(C)2006, USAA. All rights reserved.
2
M E S S A G E
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from the PRESIDENT
"
IT IS A CLASSIC SCENARIO. WHEN MARKETS
[PHOTO OF CHRISTOPHER W. CLAUS] GO UP, RISK TOLERANCE GOES UP, AND
INVESTORS START TO CHASE PERFORMANCE.
"
JUNE 2006
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Remember risk? It is the flip side of the risk/reward equation. In
exchange for the possibility of higher returns, you take on more risk.
But during the last two to three years, many investors have forgotten
this fundamental investment truth. Hungry for returns in the
low-interest-rate environment, they flocked into the riskier asset
classes - the emerging markets, small-cap stocks, precious metals, and
commodities. Investor experience has been all about reward and very
little about risk.
In May, however, risk finally re-emerged as a consideration in
investment decision-making. Rising global interest rates and the
potential for a worldwide economic slowdown have led to increased
market volatility, reminding investors that outsized rewards are
generally paired with greater risk. As a result, the old adage that
you should be paid for the risk you assume has taken on renewed
meaning.
It is a classic scenario. When markets go up, risk tolerance goes up,
and investors start to chase performance. The opposite approach is
often the better course. You would be wise to cultivate patience
during rising markets and potentially reduce the amount of risk you
take. Experienced investors know that as market returns increase, so
do the chances of a correction.
Still, when the financial markets are awash in liquidity, it is easy
to forget the fundamentals. If you cannot find the returns you want in
conservative equity and fixed-income investments, you are tempted to
seek higher returns elsewhere. This is precisely what happened during
the last couple of years.
But in the spring, it all began to unravel as global interest rates
continued to rise. In the months ahead, we may see even higher
short-term rates as
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
D. KIRK HENRY, CFA ANDREW B. JOHNSEN, CFA
The Boston Company Asset The Boston Company Asset
Management, LLC Management, LLC
CLIFFORD A. SMITH, CFA PARAMESWARI ROYCHOUDHURY, CFA
The Boston Company Asset The Boston Company Asset
Management, LLC Management, LLC
CAROLYN M. KEDERSHA, CFA, CPA MICHELLE Y. CHAN, CFA
The Boston Company Asset The Boston Company Asset
Management, LLC Management, LLC
- --------------------------------------------------------------------------------
HOW DID THE FUND PERFORM?
For the year ended May 31, 2006, the USAA Emerging Markets Fund
had a total return of 34.52%. This compares to a return of
39.40% for the Lipper Emerging Markets Funds Index and 40.41%
for the Morgan Stanley Capital International (MSCI) Emerging
Markets Index.
WHAT WAS THE OVERALL MARKET ENVIRONMENT DURING THE REPORTING YEAR?
The positive market environment of the previous two years
continued, with low inflation, low interest rates, and strong
economic growth around the world driven by U.S. demand and
Asian production. As you can see by the returns, it was another
great year to be invested in emerging markets.
As the reporting year was ending, however, we started to see a
significant sell-off, driven by higher inflation, concerns
about further Federal Reserve Board rate hikes, a tapped U.S.
consumer, and overheated commodities markets. For the past
three years, investors have increasingly looked to invest in
riskier
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
REFER TO PAGE 8 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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markets; we think that may be changing a bit, given the new
environment. We have been concerned for some time about the
level of "hot" money in higher-risk asset classes and have been
positioned accordingly. That, in our opinion, has been the
major reason the Fund has slightly underperformed the MSCI
Emerging Markets Index benchmark over the course of the
three-year rally.
HOW WAS THE FUND INVESTED BY REGION?
India was among our best markets during the year, and we had
very strong stock selection there. We owned Reliance Industries
Ltd. GDR, a conglomerate that was broken up into five parts.
This transaction helped investors to see additional value in
those companies. Another Indian stock that helped was Dr.
Reddy's Laboratories Ltd. ADR, a pharmaceutical company. We
bought the company after it had sold off heavily, and it
subsequently had a nice rebound.
We had good stock selection in Russia, where our large holdings
OAO Gazprom ADR and LUKoil Holdings ADR benefited from high
energy prices and strong demand after the government relaxed
controls on foreign ownership of Gazprom.
We were hurt by our stock selection in Mexico, where our
valuation discipline led us to avoid richly valued stocks
including American Movile and WalMart de Mexico. The same was
true in Brazil, where our exposure tended to be in more stable
companies such as Petroleo Brasileiro S.A. ADR and Brasil
Telecom Participacoes S.A. ADR, instead of the big banks, which
benefited as interest rates fell. Another market that hurt us
was China, where we simply weren't comfortable with the
valuations of companies highly leveraged to commodity prices,
and didn't participate in IPOs in the financial sector because
of concerns over valuation and asset quality.
DR. REDDY'S LABORATORIES LTD. ADR WAS SOLD OUT OF THE FUND
PRIOR TO MAY 31, 2006.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS
ON PAGES 13-19.
6
. . . C O N T I N U E D
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COMMENTARY on the Fund
WHAT IMPACT DID YOUR POSITIONING BY INDUSTRY SECTORS HAVE ON PERFORMANCE?
We did well in energy thanks to the Russian oil companies and
were helped in health care by the investment in Dr. Reddy's
Laboratories, and by our avoidance of Teva Pharmaceuticals, the
large Israeli generic drug maker. Banks were another strong
area, despite our underexposure in Brazil, because we owned
Nedcor Ltd. in South Africa and Kookmin Bank in Korea, which
both did quite well. The big negative area was
telecommunications services; we tended to own the established
phone companies, which underperformed, and didn't have enough
exposure to newer mobile companies, which had large gains and
ever-higher valuations.
WHAT'S YOUR OUTLOOK?
Near term, we expect market weakness to continue as growth
slows globally. As mentioned earlier, a lot of hot money has
flowed into emerging markets, and we think that needs to be
flushed out to bring valuations down to more reasonable levels.
There are plenty of great companies in emerging markets that we
can't own because valuations are simply too high for our
investment discipline. Longer term, we remain very bullish
given the great strides being made in many emerging market
countries in terms of structural changes, stable currencies,
trade surpluses, growing foreign reserves, more stable
political situations, and growing local demand.
We believe the portfolio is well-positioned to preserve the
capital we've made over the past three years as markets adjust
to slower global economic growth. It's important for
shareholders to remember that all markets are cyclical, and
emerging markets in particular require a high level of
discipline regardless of sentiment and short-term money flows.
We thank you for your investment in the Fund.
7
I N V E S T M E N T
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OVERVIEW
USAA EMERGING MARKETS FUND (Ticker Symbol: USEMX)
OBJECTIVE
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Capital appreciation.
TYPES OF INVESTMENTS
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Invests at least 80% of the Fund's assets in equity securities
of emerging market companies.
- --------------------------------------------------------------------------------
5/31/06 5/31/05
- --------------------------------------------------------------------------------
Net Assets $314.9 Million $152.4 Million
Net Asset Value Per Share $16.82 $12.59
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 5/31/06
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
34.52% 18.99% 5.21%
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.
8
. . . C O N T I N U E D
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OVERVIEW
CUMULATIVE PERFORMANCE COMPARISON
[CHART OF CUMULATIVE PERFORMANCE COMPARISON]
LIPPER EMERGING MSCI EMERGING USAA EMERGING
MARKETS FUNDS INDEX MARKETS INDEX MARKETS FUND
------------------- ------------- -------------
05/31/96 $10,000.00 $10,000.00 $10,000.00
06/30/96 10,019.12 10,062.44 9,856.24
07/31/96 9,438.14 9,374.74 9,134.86
08/31/96 9,696.26 9,614.70 9,474.24
09/30/96 9,795.54 9,697.99 9,606.22
10/31/96 9,570.86 9,439.35 9,285.70
11/30/96 9,787.12 9,597.51 9,559.08
12/31/96 9,872.24 9,640.92 9,700.49
01/31/97 10,627.03 10,298.53 10,445.23
02/28/97 11,005.96 10,739.56 10,794.04
03/31/97 10,725.71 10,457.46 10,586.64
04/30/97 10,725.36 10,475.93 10,473.51
05/31/97 11,096.17 10,775.76 10,869.45
06/30/97 11,639.50 11,352.44 11,369.09
07/31/97 11,980.40 11,521.91 11,613.00
08/31/97 10,661.27 10,055.76 10,723.37
09/30/97 11,045.95 10,334.38 11,316.46
10/31/97 9,201.39 8,638.64 9,556.33
11/30/97 8,781.02 8,323.44 9,097.17
12/31/97 8,861.25 8,524.01 9,365.02
01/31/98 8,243.34 7,855.47 8,504.08
02/28/98 8,979.89 8,675.39 9,460.67
03/31/98 9,314.20 9,051.87 9,919.84
04/30/98 9,358.98 8,953.27 9,833.74
05/31/98 8,124.72 7,726.30 8,590.18
06/30/98 7,354.50 6,915.84 7,757.94
07/31/98 7,578.74 7,135.12 7,903.17
08/31/98 5,407.13 5,072.07 5,355.63
09/30/98 5,610.04 5,393.82 5,731.97
10/31/98 6,148.93 5,961.80 6,561.85
11/30/98 6,561.94 6,457.63 6,909.24
12/31/98 6,479.90 6,364.05 6,918.89
01/31/99 6,348.40 6,261.37 6,745.19
02/28/99 6,293.90 6,322.27 6,696.94
03/31/99 6,995.18 7,155.49 7,362.78
04/30/99 7,966.92 8,040.77 8,385.66
05/31/99 7,870.73 7,993.99 8,192.66
06/30/99 8,754.66 8,901.25 9,070.79
07/31/99 8,536.83 8,659.44 8,865.10
08/31/99 8,442.33 8,738.22 8,729.02
09/30/99 8,142.50 8,442.50 8,320.75
10/31/99 8,387.56 8,622.27 8,505.44
11/30/99 9,312.76 9,395.38 9,215.04
12/31/99 10,948.85 10,590.29 10,546.75
01/31/00 10,821.92 10,653.40 10,323.18
02/29/00 11,143.99 10,794.10 10,673.12
03/31/00 11,177.05 10,846.78 10,653.68
04/30/00 9,961.09 9,818.59 9,292.81
05/31/00 9,430.89 9,412.67 8,729.02
06/30/00 9,898.53 9,744.23 9,195.60
07/31/00 9,494.66 9,243.09 8,776.11
08/31/00 9,592.77 9,288.53 8,892.86
09/30/00 8,675.98 8,477.50 8,104.76
10/31/00 8,028.26 7,862.85 7,618.28
11/30/00 7,302.56 7,175.31 6,849.64
12/31/00 7,566.16 7,348.61 7,180.45
01/31/01 8,442.77 8,360.51 7,851.79
02/28/01 7,788.11 7,705.88 7,180.45
03/31/01 7,045.16 6,949.01 6,538.30
04/30/01 7,405.13 7,292.37 6,839.91
05/31/01 7,608.77 7,379.42 6,966.40
06/30/01 7,476.04 7,227.94 6,869.10
07/31/01 7,012.42 6,771.20 6,509.11
08/31/01 6,920.98 6,704.41 6,275.60
09/30/01 5,933.37 5,666.71 5,487.50
10/31/01 6,244.83 6,018.38 5,759.93
11/30/01 6,863.43 6,646.71 6,217.22
12/31/01 7,301.49 7,174.30 6,764.41
01/31/02 7,589.38 7,417.42 7,096.28
02/28/02 7,759.14 7,539.28 7,320.79
03/31/02 8,184.11 7,993.55 7,808.84
04/30/02 8,284.09 8,044.65 7,818.60
05/31/02 8,207.89 7,916.48 7,740.51
06/30/02 7,607.97 7,322.57 7,164.61
07/31/02 7,039.36 6,765.64 6,559.43
08/31/02 7,097.11 6,869.89 6,637.51
09/30/02 6,385.42 6,128.69 5,924.96
10/31/02 6,689.96 6,526.36 6,139.70
11/30/02 7,140.01 6,975.60 6,569.19
12/31/02 6,963.56 6,743.83 6,422.77
01/31/03 6,923.23 6,714.47 6,344.68
02/28/03 6,759.92 6,533.24 6,168.98
03/31/03 6,541.94 6,348.00 5,993.29
04/30/03 7,172.27 6,913.43 6,569.19
05/31/03 7,688.01 7,409.61 7,057.24
06/30/03 8,075.02 7,831.92 7,398.88
07/31/03 8,444.66 8,322.41 7,808.84
08/31/03 9,008.86 8,881.01 8,209.04
09/30/03 9,208.67 8,946.12 8,394.50
10/31/03 9,925.97 9,707.41 9,028.97
11/30/03 10,073.24 9,826.70 9,194.91
12/31/03 10,929.13 10,539.10 9,829.38
01/31/04 11,241.63 10,913.40 10,131.97
02/29/04 11,746.23 11,416.83 10,571.22
03/31/04 11,903.77 11,563.53 10,639.55
04/30/04 10,965.57 10,618.13 9,985.55
05/31/04 10,751.59 10,477.36 9,819.62
06/30/04 10,806.80 10,456.55 9,946.51
07/31/04 10,648.19 10,271.65 9,800.09
08/31/04 11,061.96 10,701.63 10,092.93
09/30/04 11,710.62 11,319.72 10,571.22
10/31/04 12,067.99 11,590.90 10,834.77
11/30/04 13,060.44 12,664.51 11,820.63
12/31/04 13,737.23 13,274.20 12,404.10
01/31/05 13,786.07 13,316.22 12,286.34
02/28/05 14,935.57 14,485.50 13,218.61
03/31/05 13,920.06 13,531.18 12,296.15
04/30/05 13,579.41 13,170.53 12,050.82
05/31/05 13,999.54 13,634.24 12,355.03
06/30/05 14,464.25 14,104.88 12,816.26
07/31/05 15,462.73 15,102.92 13,620.96
08/31/05 15,703.15 15,238.87 13,679.84
09/30/05 17,076.52 16,659.84 14,769.12
10/31/05 16,046.81 15,571.36 13,738.72
11/30/05 17,249.55 16,860.62 14,700.43
12/31/05 18,222.81 17,859.41 15,572.46
01/31/06 20,320.25 19,865.02 16,985.44
02/28/06 20,201.34 19,846.10 16,995.32
03/31/06 20,475.46 20,024.00 17,341.16
04/30/06 21,925.91 21,452.82 18,497.23
05/31/06 19,515.17 19,210.03 16,619.85
[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 Emerging Markets Fund to the following
benchmarks:
o The Lipper Emerging Markets Funds Index tracks the total
return performance of the 30 largest funds within the Lipper
Emerging Markets Funds category.
o The Morgan Stanley Capital International (MSCI) Emerging
Markets Index is a free-float-adjusted market capitalization
index that is designed to measure equity market performance
in the global emerging markets.
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.
9
. . . C O N T I N U E D
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- ---------------------------------------------------------------------
TOP 10 INDUSTRIES*
(% of Net Assets)
- ---------------------------------------------------------------------
Diversified Banks 13.9%
Integrated Telecommunication Services 10.5%
Integrated Oil & Gas 8.9%
Semiconductors 5.1%
Electric Utilities 3.8%
Computer Hardware 2.9%
Diversified Chemicals 2.9%
Automobile Manufacturers 2.7%
Wireless Telecommunication Services 2.6%
Electrical Components & Equipment 2.5%
*EXCLUDES MONEY MARKET INSTRUMENTS AND SHORT-TERM INVESTMENTS PURCHASED
WITH CASH COLLATERAL FROM SECURITIES LOANED.
- ----------------------------------------------------------------------
TOP 10 EQUITY HOLDINGS
(% of Net Assets)
- ----------------------------------------------------------------------
LUKoil Holdings ADR 2.8%
Petroleo Brasileiro S.A. ADR 2.7%
United Microelectronics Corp. 2.7%
OAO Gazprom ADR 2.4%
Reliance Industries GDR 2.0%
Samsung Electronics Co. Ltd. 1.9%
Telefonos de Mexico S.A. de C.V. ADR "L" 1.9%
Nedcor Ltd. 1.6%
Kookmin Bank 1.5%
Quanta Computer, Inc. 1.5%
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 13-19.
10
. . . C O N T I N U E D
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OVERVIEW
ASSET ALLOCATION
5/31/06
[PIE CHART OF ASSET ALLOCATION]
Korea 18.1%
Taiwan 16.1%
Brazil 11.9%
China 8.1%
South Africa 7.6%
Mexico 6.4%
Russia 6.0%
India 5.8%
Malaysia 5.5%
Other* 15.3%
[END CHART]
*INCLUDES COUNTRIES WITH LESS THAN 3% OF THE PORTFOLIO, MONEY MARKET
INSTRUMENTS (1.2%), AND SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (1.7%).
PERCENTAGES ARE OF THE NET ASSETS OF THE FUND AND MAY NOT EQUAL 100%.
YOU WILL FIND A COMPLETE LIST OF SECURITIES THAT THE FUND OWNS ON
PAGES 13-19.
11
D I S T R I B U T I O N S
==========================------------------------------------------------------
to SHAREHOLDERS
USAA EMERGING MARKETS 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.
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 $5,256,000.
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 $7,244,000 and $688,000,
respectively.
0.63% 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
$164,000 as qualifying interest income.
12
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 EMERGING MARKETS FUND:
We have audited the accompanying statement of assets and liabilities of the USAA
Emerging Markets 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 Emerging Markets 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
13
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
USAA EMERGING MARKETS FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------
STOCKS (97.9%)
ARGENTINA (0.1%)
35,700 Petrobras Energia S.A. ADR "B" (Integrated Oil & Gas)* $ 360
--------
BRAZIL (11.9%)
52,100 Banco Itau S.A. ADR (Diversified Banks)(b) 1,388
93,160 Brasil Telecom Participacoes S.A. ADR (Preferred)
(Integrated Telecommunication Services) 2,851
263,000 Braskem S.A. "A" (Preferred) (Commodity Chemicals) 1,606
76,600 Braskem S.A. ADR (Commodity Chemicals) 921
32,804,300 Centrais Electricas Brasileiras S.A. (Electric Utilities) 610
54,799,000 Centrais Electricas Brasileiras S.A. "B" (Preferred) (Electric Utilities) 967
40,517,000 Companhia Energetica de Minas Gerais (CEMIG) (Preferred)
(Electric Utilities) 1,547
174,271,400 Companhia Paranaense de Energia-Copel (Preferred) (Electric Utilities) 1,432
5,400 Companhia Vale Do Rio Doce ADR (Steel) 252
17,803,400 Companhia de Saneamento Basico do Estado de Sao Paulo
(SABESP) (Water Utilities) 1,564
24,900 Companhia de Saneamento Basico do Estado de Sao Paulo
(SABESP) ADR (Water Utilities) 554
21,893,700 Companhia de Tecidos Norte de Minas (Preferred) (Textiles) 1,685
69,244 Embraer Empresa Brasileira de Aeronautica S.A. ADR (Preferred)
(Aerospace & Defense) 2,316
186,100 Grendene S.A. (Footwear) 1,336
330,200 Klabin S.A. (Preferred) (Paper Packaging) 707
97,686 Petroleo Brasileiro S.A. ADR (Integrated Oil & Gas) 8,484
136,700 Tele Norte Leste Participacoes S.A. ADR (Preferred) (Integrated
Telecommunication Services)(b) 1,793
40,700 Telemar Norte Leste S.A. (Integrated Telecommunication Services) 779
999,741,484 Telemig Celular Participacoes S.A. (Preferred) (Wireless
Telecommunication Services) 1,807
69,785 Telesp-Telecomunicacoes de Sao Paulo S.A. (Preferred) (Integrated
Telecommunication Services) 1,280
31,700 Uniao De Bancos Brasileiros S.A. (Unibanco) GDR (Preferred)
(Diversified Banks) 2,023
109,200 Votorantim Celulose e Papel S.A. ADR (Paper Products)(b) 1,554
--------
37,456
--------
CHILE (0.4%)
51,000 Compania Cervecerias Unidas S.A. ADR (Brewers) 1,186
25,500 Masisa S.A. ADR (Forest Products) 213
--------
1,399
--------
14
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------
CHINA (8.1%)
372,800 BYD Co. Ltd. "H" (Electrical Components & Equipment)*(a) $ 723
5,060,000 Brilliance China Automotive Holdings Ltd. (Auto Parts & Equipment)(a) 813
5,608,600 CNOOC Ltd. (Oil & Gas Exploration & Production)(a) 4,259
3,020,700 China Petroleum and Chemical Corp. "H" (Integrated Oil & Gas)(a) 1,780
12,937,500 China Telecom Corp. Ltd. "H" (Integrated Telecommunication Services)(a) 4,172
7,847,800 Denway Motors Ltd. (Automobile Manufacturers)(a) 2,722
1,704,500 Global Bio-chem Technology Group Co. Ltd. (Agricultural Products)(a) 691
6,759,400 Huadian Power International Corp. Ltd. "H" (Electric Utilities)(a) 1,765
2,597,800 Huaneng Power International, Inc. "H" (Electric Utilities)(a) 1,675
1,263,000 Panva Gas Holdings Ltd. (Commodity Chemicals)*(a) 568
1,027,000 Shanghai Industrial Holdings Ltd. (Industrial Conglomerates)(a) 2,024
3,899,200 Sinotrans Ltd. "H" (Air Freight & Logistics)(a) 1,234
1,586,500 Weiqiao Textile Co. Ltd. "H" (Textiles)(a) 1,980
1,517,000 Yanzhou Coal Mining Co. Ltd. "H" (Diversified Metals & Mining)(a) 1,096
--------
25,502
--------
CZECH REPUBLIC (0.7%)
16,360 Komercni Banka a.s. (Diversified Banks) 2,299
--------
HONG KONG (0.3%)
1,201,500 Texwinca Holdings Ltd. (Textiles)(a) 827
--------
HUNGARY (0.9%)
675,000 Magyar Tavkozlesi Rt. (Integrated Telecommunication Services)* 2,786
--------
INDIA (5.8%)
58,500 Gail India Ltd. GDR (Oil & Gas Refining & Marketing) 1,784
215,500 Hindalco Industries Ltd. GDR(Aluminum)*(a) 474
739,300 Hindalco Industries Ltd. GDR (Aluminum) 2,795
13,500 ICICI Bank Ltd. ADR (Diversified Banks) 359
405,950 Mahanagar Telephone Nigam Ltd. ADR (Integrated
Telecommunication Services) 2,980
109,557 Reliance Industries Ltd. GDR (Diversified Chemicals)(a) 6,130
8,700 Reliance Industries Ltd. GDR (Diversified Chemicals)* 354
77,100 State Bank of India Ltd. GDR (Diversified Banks) 3,346
--------
18,222
--------
INDONESIA (1.8%)
3,725,200 PT Bank Mandiri Tbk (Regional Banks) 680
1,738,100 PT Gudang Garam Tbk (Tobacco) 1,793
15
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------
10,097,800 PT Indofood Sukses Makmur Tbk (Packaged Foods & Meat) $ 1,026
1,721,800 PT Indonesian Satellite Corp. Tbk (Integrated
Telecommunication Services) 930
1,649,800 PT Telekomunikasi Indonesia Tbk (Integrated
Telecommunication Services) 1,257
--------
5,686
--------
ISRAEL (1.6%)
180,000 Bank Hapoalim Ltd. (Diversified Banks) 840
153,300 Bank Leumi Le-Israel (Regional Banks) 576
106,700 Check Point Software Technologies Ltd. (Systems Software)* 2,061
190,460 Super-Sol Ltd. (Food Retail)* 553
97,000 Taro Pharmaceutical Industries Ltd. (Pharmaceuticals)*(b) 1,170
--------
5,200
--------
KOREA (18.1%)
18,410 Daelim Industrial Co. Ltd. (Construction & Engineering)(a) 1,320
113,340 Hanwha Chemical Corp. (Diversified Chemicals)(a) 1,174
3,850 Hyundai Department Store Co. Ltd. (Department Stores)(a) 327
22,540 Hyundai Mobis (Auto Parts & Equipment)(a) 1,762
42,690 Hyundai Motor Co. Ltd. (Automobile Manufacturers)(a) 3,273
60,480 Industrial Bank of Korea (Consumer Finance)(a) 1,037
7,330 KT Corp. (Integrated Telecommunication Services)(a) 311
159,900 KT Corp. ADR (Integrated Telecommunication Services) 3,526
29,993 Kangwon Land, Inc. (Casinos & Gaming)(a) 525
60,380 Kookmin Bank (Diversified Banks)(a) 4,826
9,330 Kookmin Bank ADR (Diversified Banks) 751
100,950 Korea Electric Power Corp. (Electric Utilities)(a) 4,098
9,100 Kumho Tire Co. Ltd. ADR (Tires & Rubber)(a) 67
166,920 Kumho Tire Co., Inc. (Tires & Rubber)(a) 2,396
78,330 LG Chem Ltd. (Diversified Chemicals)(a) 3,149
53,630 LG Electronics, Inc. (Electrical Components & Equipment)(a) 3,837
35,410 LG Philips LCD Co. Ltd. (Electronic Equipment Manufacturers)*(a) 1,322
3,920 Lotte Shopping Co. Ltd. (Hypermarkets & Super Centers)(a) 1,447
92,400 Lotte Shopping Co. Ltd. GDR (Hypermarkets & Super Centers)*(a,b) 1,645
7,240 POSCO (Steel)(a) 1,855
34,500 POSCO ADR (Steel) 2,218
30,420 SK Corp. (Oil & Gas Refining & Marketing)(a) 2,038
174,150 SK Telecom Co. Ltd. ADR (Wireless Telecommunication Services) 4,545
9,536 Samsung Electronics Co. Ltd. (Semiconductors)(a) 6,088
19,030 Samsung SDI Co. Ltd. (Computer Storage & Peripherals)(a) 1,591
37,430 Shinhan Financial Group Co. Ltd. (Other Diversified Financial Services)(a) 1,692
--------
56,820
--------
16
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------
MALAYSIA (5.5%)
1,542,900 AMMB Holdings Berhad (Multi-Sector Holdings) $ 1,071
825,000 Commerce Asset-Holding Berhad (Diversified Banks) 1,386
1,704,600 Gamuda Berhad (Construction & Engineering) 1,615
345,400 Genting Berhad (Casinos & Gaming) 2,140
267,800 Kuala Lumpur Kepong Berhad (Agricultural Products) 745
550,900 MK Land Holdings Berhad (Real Estate Management & Development) 98
1,142,800 Malayan Banking Berhad (Diversified Banks) 3,431
92,000 Maxis Communications Berhad (Wireless Telecommunication Services) 224
487,800 Proton Holdings Berhad (Automobile Manufacturers) 779
512,300 Resorts World Berhad (Hotels, Resorts, & Cruise Lines) 1,721
2,485,500 Sime Darby Berhad (Multi-Sector Holdings) 4,073
--------
17,283
--------
MEXICO (6.4%)
176,644 Cemex S.A. de C.V. CPO (Construction Materials)* 1,003
115,920 Coca Cola Femsa S.A. de C.V. ADR (Soft Drinks)* 3,583
34,200 Consorcio ARA, S.A. de C.V. (Real Estate Management & Development) 142
1,688,900 Controladora Comercial Mexicana S.A. de C.V. (UBC) "B" (Food Retail) 2,643
279,947 Desc S.A. de C.V. "B" (Industrial Conglomerates)* 269
407,400 Embotelladoras Arca S.A. (Soft Drinks) 999
49,900 Grupo Aeroportuario del Sureste S.A. de C.V. ADR "B" (Airport Services) 1,705
1,021,400 Grupo Continental S.A. (Soft Drinks) 1,661
439,800 Kimberly-Clark de Mexico S.A. de C.V. "A" (Household Products) 1,489
123,200 Organizacion Soriana S.A. de C.V. "B" (Food Distributors) 532
306,200 Telefonos de Mexico S.A. de C.V. ADR "L" (Integrated
Telecommunication Services) 6,060
--------
20,086
--------
PHILIPPINES (1.3%)
1,127,500 ABS-CBN Broadcasting Corp. PDR (Broadcasting & Cable TV)* 304
458,300 Banco De Oro (Regional Banks) 316
48,500 Banco De Oro GDR (Regional Banks)*(a) 669
1,695,048 Bank of the Philippine Islands (Diversified Banks) 1,682
716,900 Manila Electric Co. "B" (Construction & Engineering)* 305
5,054,200 SM Prime Holdings, Inc. (Retail REITs) 783
--------
4,059
--------
POLAND (1.5%)
198,900 Powszechna Kasa Oszczednosci Bank Polski S.A. (Regional Banks) 2,251
398,087 Telekomunikacja Polska S.A. (Integrated Telecommunication Services) 2,493
--------
4,744
--------
17
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------
RUSSIA (6.0%)
114,300 LUKoil Holdings ADR (Integrated Oil & Gas) $ 8,847
8,900 Mining and Metallurgical Co. Norilsk Nickel ADR (Diversified
Metals & Mining) 1,074
59,800 Novolipetsk Steel Corp. GDR (Steel)(a) 1,315
178,450 OAO Gazprom ADR (Integrated Oil & Gas) 7,620
--------
18,856
--------
SOUTH AFRICA (7.6%)
672,900 Alexander Forbes Ltd. (Other Diversified Financial Services)* 1,398
397,774 Aveng Ltd. (Building Products) 1,302
152,202 Bidvest Group Ltd. (Industrial Conglomerates) 2,260
58,460 Mittal Steel South Africa Ltd. ADR (Steel) 547
1,262,774 Nampak Ltd. (Paper Packaging) 3,252
289,579 Nedcor Ltd. (Diversified Banks) 4,944
685,700 Network Healthcare Holdings Ltd. (Health Care Facilities)* 931
23,470 SASOL Ltd. (Integrated Oil & Gas) 876
1,576,364 Sanlam Ltd. (Life & Health Insurance) 3,583
331,983 Sappi Ltd. (Paper Products) 4,091
255,487 Steinhoff International Holdings Ltd. (Home Furnishings) 814
--------
23,998
--------
TAIWAN (16.1%)
949 Accton Technology Corp. (Communications Equipment)*(a) 1
420,597 Advanced Semiconductor Engineering, Inc. (Semiconductor Equipment)(a) 431
3,341,050 Benq Corp. (Communications Equipment)(a) 2,455
989,000 Cathay Financial Holding Co. Ltd. (Other Diversified Financial Services)(a) 2,155
1,615,120 China Motor Corp. Ltd. (Automobile Manufacturers)(a) 1,689
3,334,222 Chinatrust Financial Holding Co. Ltd. (Diversified Banks)(a) 2,667
90,700 Chunghwa Telecom Co. Ltd. ADR (Integrated Telecommunication Services) 1,859
4,352,545 Compal Electronics, Inc. (Computer Hardware)(a) 4,411
118,612 Elan Microelectronics Corp. (Semiconductor Equipment)(a) 68
605,000 Far Eastern Textile Ltd. (Textiles)(a) 463
4,718,200 First Financial Holding Co. Ltd. (Diversified Banks)(a) 3,459
1,178,700 Formosa Chemicals & Fibre Corp. (Specialty Chemicals)(a) 1,835
1,167,000 Fubon Financial Holding Co. Ltd. (Diversified Banks)(a) 1,022
1,388,000 Nien Hsing Textile Co. Ltd. (Textiles)(a) 762
625,000 Nien Made Enterprise Co. Ltd. (Home Furnishings)(a) 701
1,116,057 Optimax Technology Corp. (Electronic Equipment Manufacturers)(a) 1,145
2,531,000 Powerchip Semiconductor Corp. (Semiconductors)*(a) 1,695
3,178,286 Quanta Computer, Inc. (Computer Hardware)(a) 4,739
18
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
MARKET
NUMBER VALUE
OF SHARES SECURITY (000)
- --------------------------------------------------------------------------------------------------------
75,000 Radiant Opto-Electronics Corp. (Electrical Components & Equipment)(a) $ 146
8,321,639 SinoPac Holdings Co. (Diversified Banks)*(a) 4,080
1,164,674 Sunplus Technology Co. Ltd. (Semiconductor Equipment)(a) 1,381
1,688,720 Taiwan Cellular Corp. (Wireless Telecommunication Services)(a) 1,688
900,000 Taiwan Cement Corp. (Building Products)(a) 760
13,540,675 United Microelectronics Corp. (Semiconductors)(a) 8,419
266,000 Wan Hai Lines Ltd. (Marine)(a) 186
6,338,440 Yageo Corp. (Electrical Components & Equipment)*(a) 2,423
--------
50,640
--------
THAILAND (2.6%)
2,023,200 C.P. 7-Eleven Public Co. Ltd. (General Merchandise Stores) 371
5,973,000 Charoen Pokphand Foods Public Co. Ltd. (Agricultural Products) 885
1,361,200 Delta Electronics Public Co. Ltd. (Electrical Components & Equipment) 643
1,181,800 Kasikornbank Public Co. Ltd. (Diversified Banks) 1,921
7,536,300 Krung Thai Bank Public Co. Ltd. (Regional Banks) 2,055
1,235,900 Siam Commercial Bank Public Co. Ltd. (Diversified Banks) 1,896
232,400 Siam Makro Public Co. Ltd. (General Merchandise Stores) 427
--------
8,198
--------
TURKEY (1.2%)
201,910 Koc Holding AS (Industrial Conglomerates)* 783
89,111 Tupras-Turkiye Petrol Rafinerileri A.S. (Oil & Gas Refining & Marketing) 1,501
256,900 Turkiye Is Bankasi (Diversified Banks) 1,502
--------
3,786
--------
Total stocks (cost: $275,847) 308,207
--------
MONEY MARKET INSTRUMENTS (1.2%)
MONEY MARKET FUNDS
3,787,586 SSgA Prime Money Market Fund, 4.84%(c)(cost: $3,787) 3,787
--------
SHORT-TERM INVESTMENTS PURCHASED WITH CASH
COLLATERAL FROM SECURITIES LOANED (1.7%)
MONEY MARKET FUNDS (0.1%)
319,937 AIM Short-Term Investment Co. Liquid Assets Portfolio, 4.92%(c) 320
11,104 Merrill Lynch Premier Institutional Fund, 4.81%(c) 11
--------
331
--------
19
P O R T F O L I O
==================--------------------------------------------------------------
of INVESTMENTS
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
PRINCIPAL MARKET
AMOUNT VALUE
(000) SECURITY (000)
- --------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS (1.6%)(d)
$3,000 Credit Suisse First Boston, LLC, 5.00%, acquired on
5/31/2006 and due 6/01/2006 at $3,000 (collateralized by
$2,965 of Tennessee Valley Authority Bonds(e), 6.00%, due
3/15/2013; market value $3,061) $ 3,000
1,000 Deutsche Bank Securities, Inc., 5.02%, acquired on 5/31/2006
and due 6/01/2006 at $1,000 (collateralized by $1,020 of
Federal Home Loan Bank Bonds(e), 4.97%, due 8/21/2006;
market value $1,021) 1,000
1,000 Morgan Stanley & Co., Inc., 5.02%, acquired on 5/31/2006 and
due 6/01/2006 at $1,000 (collateralized by $1,065 of Federal
Home Loan Bank Bonds(e), 6.25%, due 6/15/2021; market
value $1,071) 1,000
--------
5,000
--------
Total short-term investments purchased with cash collateral from
securities loaned (cost: $5,331) 5,331
--------
TOTAL INVESTMENTS (COST: $284,965) $317,325
========
20
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
USAA EMERGING MARKETS 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.
CPO - Certificate of ordinary participation
GDR - Global depositary receipts are receipts issued by a U.S. or
foreign bank evidencing ownership of foreign shares. Dividends are paid
in U.S. dollars.
PDR - Philippine depositary receipts are receipts issued by a U.S. or
foreign bank evidencing ownership of a stock traded on the Philippine
stock exchange. Dividends are paid in U.S. dollars.
REIT - Real estate investment trust
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.
21
N O T E S
==========----------------------------------------------------------------------
to Portfolio of INVESTMENTS
(continued)
USAA EMERGING MARKETS FUND
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.
* Non-income-producing security for the year ended May 31, 2006.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22
S T A T E M E N T
==================--------------------------------------------------------------
of ASSETS and LIABILITIES
(in thousands)
USAA EMERGING MARKETS FUND
MAY 31, 2006
ASSETS
Investments in securities, at market value (including securities on
loan of $4,996) (identified cost of $284,965) $317,325
Cash denominated in foreign currencies (identified cost of $3,037) 3,000
Receivables:
Capital shares sold 465
USAA Transfer Agency Company (Note 7E) 8
Dividends and interest 1,694
Securities sold 2,104
Other 6
Unrealized appreciation on foreign currency contracts held, at value 24
--------
Total assets 324,626
--------
LIABILITIES
Payables:
Upon return of securities loaned 5,334
Securities purchased 3,224
Capital shares redeemed 534
Bank overdraft 77
Accrued management fees 292
Accrued transfer agent's fees 11
Other accrued expenses and payables 278
--------
Total liabilities 9,750
--------
Net assets applicable to capital shares outstanding $314,876
========
NET ASSETS CONSIST OF:
Paid-in capital $315,675
Accumulated undistributed net investment income 2,924
Accumulated net realized loss on investments (35,815)
Net unrealized appreciation of investments 32,360
Net unrealized depreciation on foreign currency translations (268)
--------
Net assets applicable to capital shares outstanding $314,876
========
Capital shares outstanding, unlimited number of shares authorized,
no par value 18,718
========
Net asset value, redemption price, and offering price per share $ 16.82
========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
23
S T A T E M E N T
==================--------------------------------------------------------------
of OPERATIONS
(in thousands)
USAA EMERGING MARKETS FUND
YEAR ENDED MAY 31, 2006
INVESTMENT INCOME
Dividends (net of foreign taxes withheld of $691) $ 6,553
Interest 336
Securities lending (net) 95
-------
Total income 6,984
-------
EXPENSES
Management fees 2,353
Administration and servicing fees 360
Transfer agent's fees 603
Custody and accounting fees 347
Postage 57
Shareholder reporting fees 22
Trustees' fees 9
Registration fees 54
Professional fees 57
Other 6
-------
Total expenses 3,868
Expenses paid indirectly (42)
-------
Net expenses 3,826
-------
NET INVESTMENT INCOME 3,158
-------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCY
Net realized gain (loss) on:
Investments 39,076
Foreign currency transactions (195)
Change in net unrealized appreciation/depreciation of:
Investments 15,491
Foreign currency translations (159)
-------
Net realized and unrealized gain 54,213
-------
Increase in net assets resulting from operations $57,371
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
24
S T A T E M E N T S
====================------------------------------------------------------------
of Changes in NET ASSETS
(in thousands)
USAA EMERGING MARKETS FUND
YEARS ENDED MAY 31,
2006 2005
-----------------------
FROM OPERATIONS
Net investment income $ 3,158 $ 1,736
Net realized gain on investments 39,076 13,181
Net realized loss on foreign currency transactions (195) (44)
Change in net unrealized appreciation/depreciation of:
Investments 15,491 10,208
Foreign currency translations (159) (52)
-----------------------
Increase in net assets resulting from operations 57,371 25,029
-----------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,614) (706)
-----------------------
FROM CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 178,935 75,848
Reinvested dividends 1,576 688
Cost of shares redeemed (73,751) (43,591)
-----------------------
Increase in net assets from capital
share transactions 106,760 32,945
-----------------------
Capital contribution from USAA Transfer
Agency Company (Note 7E) 8 3
-----------------------
Net increase in net assets 162,525 57,271
NET ASSETS
Beginning of period 152,351 95,080
-----------------------
End of period $314,876 $152,351
=======================
Accumulated undistributed net investment income:
End of period $ 2,924 $ 1,575
=======================
CHANGE IN SHARES OUTSTANDING
Shares sold 11,077 6,308
Shares issued for dividends reinvested 101 55
Shares redeemed (4,561) (3,717)
-----------------------
Increase in shares outstanding 6,617 2,646
=======================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
25
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
USAA EMERGING MARKETS 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 Emerging Markets Fund (the
Fund), which is classified as diversified under the 1940 Act. The
Fund's investment objective is capital appreciation. The Fund
concentrates its investments in securities of companies in emerging
market countries, which may have limited or developing capital markets.
Such investments may involve greater risks than investments in
developed markets, and political, social, or economic changes in these
markets may cause the prices of such investments to be volatile.
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,
26
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
the calculation of the Fund's net asset value (NAV) may not
take place at the same time the prices of certain foreign
securities held by the Fund are determined. In most cases,
events affecting the values of foreign securities that occur
between the time of 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. Securities for which market quotations are not readily
available or are considered unreliable, or whose values have
27
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 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.
28
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 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.
29
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 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 $35,000 and $7,000, respectively, resulting in a total
reduction in Fund expenses of approximately $42,000.
30
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 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
31
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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
less than $500, which represents 0.6% 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 for foreign currency gains and losses
resulted in reclassifications to the statement of assets and
liabilities to decrease accumulated undistributed net investment income
and decrease accumulated net realized loss on investments by $195,000.
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* $1,614,000 $706,000
*Includes distribution of short-term realized capital gains, if any,
which are taxable as ordinary income.
32
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
As of May 31, 2006, the components of net assets representing
distributable earnings on a tax basis were as follows:
Undistributed ordinary income $ 2,953,000
Accumulated capital and other losses (35,710,000)
Unrealized appreciation of investments 32,252,000
Unrealized depreciation on foreign currency translations (294,000)
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. For the year ended May 31, 2006, the Fund utilized
capital loss carryovers of $39,075,000 to offset capital gains. At May
31, 2006, the Fund had a current post-October deferred currency loss of
$4,000 and capital loss carryovers of $35,707,000, for federal income
tax purposes. The post-October loss will be recognized on the first day
of the following fiscal year. If not offset by subsequent capital
gains, the capital loss carryovers will expire between 2009 and 2010,
as shown below. It is unlikely that the Trust's Board of Trustees will
authorize a distribution of capital gains realized in the future until
the capital loss carryovers have been utilized or expire.
CAPITAL LOSS CARRYOVERS
- ---------------------------------------
EXPIRES BALANCE
- ----------- -----------
2009 $ 5,743,000
2010 29,964,000
-----------
Total $35,707,000
===========
33
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
(4) INVESTMENT TRANSACTIONS
- --------------------------------------------------------------------------------
Cost of purchases and proceeds from sales of securities, excluding
short-term securities, for the year ended May 31, 2006, were
$216,075,000 and $109,540,000, respectively.
As of May 31, 2006, the cost of securities, including short-term
securities, for federal income tax purposes, was $285,073,000.
Gross unrealized appreciation and depreciation of investments as of
May 31, 2006, for federal income tax purposes, were $43,687,000 and
$11,435,000, respectively, resulting in net unrealized appreciation of
$32,252,000.
(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
34
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
to qualified financial institutions, such as certain broker-dealers, to
earn additional income. The borrowers are required to secure their
loans continuously with cash collateral in an amount at least equal to
the fair value of the securities loaned, initially in an amount at
least equal to 102% of the fair value of domestic securities loaned and
105% of the fair value of international securities loaned. Cash
collateral is invested in high-quality short-term investments. The Fund
and MetWest retain 80% and 20%, respectively, of the income earned from
the investment of cash received as collateral, net of any expenses
associated with the lending transactions. MetWest receives no other
fees from the Fund for its services as securities-lending agent. Risks
to the Fund in securities-lending transactions are that the borrower
may not provide additional collateral when required or return the
securities when due, and that the value of the short-term investments
will be less than the amount of cash collateral required to be returned
to the borrower. 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 $95,000, 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 $4,996,000 and
received cash collateral of $5,334,000 for the loans. Of this amount,
$5,331,000 was invested in short-term investments, as noted in the
Fund's portfolio of investments, and $3,000 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
35
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 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 Emerging Markets Funds Index, which
tracks the total return performance of the 30 largest funds in the
Lipper Emerging Markets Funds category. The Fund's base fee is
accrued daily and paid monthly at an annualized rate of 1.00% 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
36
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
the case of underperformance) the base fee, as referenced in the
following chart:
OVER/UNDER PERFORMANCE ANNUAL ADJUSTMENT RATE
RELATIVE TO INDEX(1) AS A % OF THE FUND'S AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------
+/- 1.00% to 4.00% +/- 0.04%
+/- 4.01% to 7.00% +/- 0.05%
+/- 7.01% and greater +/- 0.06%
(1)Based on the difference between average annual performance of the Fund and
its relevant index, rounded to the nearest 0.01%.
Under the performance fee arrangement, the Fund will pay a
positive performance fee adjustment for a performance period
whenever the Fund outperforms the Lipper Emerging Markets 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 $2,353,000,
which is net of a performance adjustment of $(46,000) that
decreased the base management fee of 1.00% by 0.02%.
B. SUBADVISORY ARRANGEMENTS - The Manager has entered into an
investment subadvisory agreement with The Boston Company Asset
Management, LLC (The Boston Company), under which The Boston
Company directs the investment and reinvestment of the Fund's
assets (as allocated from time to time by the Manager). The
Manager (not the Fund) pays The Boston Company a subadvisory fee
in the annual amount of 0.69% of the portion of the Fund's average
net assets that The Boston Company manages. For the year ended May
31, 2006, the Manager incurred subadvisory fees, paid or payable
to The Boston Company, of $1,660,000.
37
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
C. ADMINISTRATION AND SERVICING FEES - The Manager provides certain
administration and shareholder servicing functions for the Fund.
For such services, the Manager receives a fee accrued daily and
paid monthly at an annualized rate of 0.15% of the Fund's average
net assets. For the year ended May 31, 2006, the Fund incurred
administration and servicing fees, paid or payable to the Manager,
of $360,000.
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 $16,000 for these legal and tax
services. These expenses are included in the professional fees
expenses on the Fund's statement of operations.
D. EXPENSE LIMITATION - The Manager has voluntarily agreed to limit
the annual expenses of the Fund to 1.80% of the Fund's average
annual net assets, before reductions of any expenses paid
indirectly, and will reimburse the Fund for all expenses in excess
of that amount. This agreement may be modified or terminated at
any time. There were no reimbursable expenses for the year ended
May 31, 2006.
E. TRANSFER AGENT'S FEES - USAA Transfer Agency Company, d/b/a USAA
Shareholder Account Services (SAS), an affiliate of the Manager,
provides transfer agent services to the Fund based on an annual
charge of $23 per shareholder account plus out-of-pocket expenses.
The Fund also pays SAS fees that are related to the administration
and servicing of accounts that are traded on an omnibus basis. For
the year ended May 31, 2006, the Fund incurred transfer agent's
fees, paid or payable to SAS, of $603,000. In addition, the Fund
recorded a receivable from SAS of $8,000 for adjustments related
to corrections to shareholder transactions.
38
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
F. UNDERWRITING SERVICES - The Manager provides exclusive
underwriting and distribution of the Fund's shares on a continuing
best-efforts basis. The Manager receives no commissions or fees
for this service.
(8) TRANSACTIONS WITH AFFILIATES
- --------------------------------------------------------------------------------
Certain trustees and officers of the Fund are also directors, officers,
and/or employees of the Manager. None of the affiliated trustees or
Fund officers received any compensation from the Fund.
39
N O T E S
==========----------------------------------------------------------------------
to FINANCIAL Statements
(continued)
USAA EMERGING MARKETS 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 $ 12.59 $ 10.06 $ 7.24 $ 7.93 $ 7.16
-------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income (loss) .13 .13 .07 .03(a) (.02)(a)
Net realized and unrealized gain (loss) 4.21 2.47 2.75 (.72)(a) .81(a)
-------------------------------------------------------------------------
Total from investment operations 4.34 2.60 2.82 (.69)(a) .79(a)
Less distributions:
From net investment income (.11) (.07) - - (.02)
-------------------------------------------------------------------------
Net asset value at end of period $ 16.82 $ 12.59 $ 10.06 $ 7.24 $ 7.93
=========================================================================
Total return (%)* 34.52 25.82 38.95 (8.70) 11.11
Net assets at end of period (000) $314,876 $152,351 $95,080 $54,794 $57,073
Ratio of expenses to average
net assets (%)**(c) 1.61(b) 1.80(b) 1.92(b) 2.33 2.51
Ratio of net investment income (loss)
to average net assets (%)** 1.31 1.42 .92 .42 (.33)
Portfolio turnover (%) 47.88 36.24 75.67 140.89 257.45
* Assumes reinvestment of all net investment income 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 $240,648,000.
(a) Calculated using average shares.
(b) Effective March 1, 2004, the Manager voluntarily agreed to limit the Fund's expense ratio to 1.80% of the Fund's
average annual net assets. From June 1, 2003, through February 29, 2004, the voluntary expense ratio limit
was 2.10% of the Fund's average annual net assets.
(c) Reflects total operating expenses of the Fund before reductions of any expenses paid indirectly. The Fund's expenses
paid indirectly decreased the expense ratios as follows:
(.02%) (.02%) (.03%) (.00%)(+) (.01%)
+ Represents less than 0.01% of average net assets.
40
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
USAA EMERGING MARKETS 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
41
E X P E N S E
==============------------------------------------------------------------------
EXAMPLE (unaudited)
(continued)
USAA EMERGING MARKETS 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 $1,130.60 $8.34
Hypothetical
(5% return before expenses) 1,000.00 1,017.10 7.90
*Expenses are equal to the Fund's annualized expense ratio of 1.57%,
which is net of reimbursements and any expenses paid indirectly,
multiplied by the average account value over the period, multiplied by
182 days/365 days (to reflect the one-half year period). The Fund's
ending account value on the first line in the table is based on its
actual total return of 13.06% for the six-month period of December 1,
2005, through May 31, 2006.
42
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
USAA EMERGING MARKETS 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
services provided by the Manager and by the Subadviser. At the meeting
at which the renewal of the Investment Advisory Agreement and
Subadvisory
43
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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
certain types of 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 accounting, marketing services, assistance in meeting legal and
regulatory requirements, and other services necessary for the operation
of the Fund and the Trust.
44
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
The Board considered the level and depth of knowledge of the Manager,
including the professional experience and qualifications of senior
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 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
45
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 and any fee waivers or reimbursements - was
the median of its expense group and below the median of its expense
universe. The data indicated that the Fund's total expenses, after
reimbursements, were above the median of both its expense group and its
expense universe. The Board took into account the various services
provided to the Fund by the Manager and its affiliates. The Board also
noted the level and method of computing the management fee, including
the performance adjustment to such fee. The Trustees also took into
account the Manager's current undertakings to maintain expense
limitations for the Fund and that the subadvisory fees under the
Subadvisory Agreement are paid by the Manager. The Board also noted the
Fund's comparatively small size and the effect of size on expenses.
In considering the Fund's performance, the Board of Trustees noted that
the Board reviews at its regularly scheduled meetings information about
the Fund's performance results. The Trustees also reviewed various
comparative data provided to them in connection with their
consideration of the renewal of the Investment Advisory Agreement,
including, among other information, a comparison of the Fund's average
annual total return with its Lipper index and with that of other mutual
funds deemed to be in its peer group by the independent third party in
its report (the "performance universe"). The Fund's performance
universe consisted of the Fund and all retail and institutional
open-end investment companies with the same classification/objective as
the Fund regardless of asset size or primary channel of distribution.
This comparison indicated that the Fund's performance was below the
average of its performance universe and its Lipper index for the one-,
three-, and five-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
ending December 31, 2005. The Board took into account
46
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
management's discussion of the factors that contributed to the Fund's
underperformance and the steps to be taken to address such performance.
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 the
Fund to participate in any economies of scale. The Board considered the
fee waivers and expense reimbursement arrangements by the Manager and
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 also considered the effect of the Fund's growth and size on
its performance and fees, noting that if the Fund's assets increase
over time, the Fund may realize other economies of scale if assets
increase proportionally more than some expenses. The Board determined
that the current investment management fee structure was reasonable.
47
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
CONCLUSIONS. The Board reached the following conclusions regarding the
Fund's Investment Advisory Agreement with the Manager, among others:
(i) the Manager has demonstrated that it possesses the capability and
resources to perform the duties required of it under the Investment
Advisory Agreement; (ii) the Manager maintains an appropriate
compliance program; (iii) the performance of the Fund is reasonable in
relation to the performance of funds with similar investment objectives
and to relevant indices; (iv) the Fund's advisory expenses are
reasonable in relation to those of similar funds and to the services to
be provided by the Manager; and (v) the Manager's level of
profitability from its relationship with the Fund is not unreasonable.
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 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
48
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 the
undertakings of the Manager to maintain expense limitations for the
Fund and also noted that the fees under the Subadvisory Agreement were
paid by the Manager. The Trustees also relied on the ability of the
Manager to negotiate 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 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
49
A D V I S O R Y
================----------------------------------------------------------------
AGREEMENTS (unaudited)
(continued)
USAA EMERGING MARKETS FUND
MAY 31, 2006
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 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 reasonable in relation to
the performance of funds with similar investment objectives and to
relevant indices; and (iv) the Fund's advisory expenses are reasonable
in relation to those of similar funds and to the services to be
provided by the Manager and 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.
50
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.
51
. . . 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.
52
. . . 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.
53
. . . 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.
54
. . . 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.
55
. . . 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.
56
. . . 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.
TRUSTEES Christopher W. Claus
Barbara B. Dreeben
Robert L. Mason, Ph.D.
Michael F. Reimherr
Richard A. Zucker
ADMINISTRATOR, USAA Investment Management Company
INVESTMENT ADVISER, P.O. Box 659453
UNDERWRITER, San Antonio, Texas 78265-9825
AND DISTRIBUTOR
TRANSFER AGENT USAA Shareholder Account Services
9800 Fredericksburg Road
San Antonio, Texas 78288
CUSTODIAN AND State Street Bank and Trust Company
ACCOUNTING AGENT P.O. Box 1713
Boston, Massachusetts 02105
INDEPENDENT Ernst & Young LLP
REGISTERED PUBLIC 100 West Houston St., Suite 1800
ACCOUNTING FIRM San Antonio, Texas 78205
TELEPHONE Call toll free - Central time
ASSISTANCE HOURS Monday - Friday, 7 a.m. to 10 p.m.
Saturday, 8:30 a.m. to 5 p.m.
FOR ADDITIONAL (800) 531-8181
INFORMATION ABOUT For account servicing, exchanges,
MUTUAL FUNDS or redemptions (800) 531-8448
RECORDED MUTUAL 24-hour service (from any phone)
FUND PRICE QUOTES (800) 531-8066
MUTUAL FUND (from touch-tone phones only)
USAA TOUCHLINE For account balance, last transaction, fund
prices, or to exchange or redeem fund shares
(800) 531-8777
INTERNET ACCESS USAA.COM
COPIES OF THE MANAGER'S PROXY VOTING POLICIES AND PROCEDURES, APPROVED BY THE
TRUST'S BOARD OF TRUSTEES FOR USE IN VOTING PROXIES ON BEHALF OF THE FUND, ARE
AVAILABLE WITHOUT CHARGE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND
(III) ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. INFORMATION REGARDING HOW
THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, IS AVAILABLE (I) AT USAA.COM; AND (II) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
THE FUND FILES ITS COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE
FIRST AND THIRD QUARTERS OF EACH FISCAL YEAR ON FORM N-Q. THESE FORMS N-Q ARE
AVAILABLE (I) BY CALLING (800) 531-8448; (II) AT USAA.COM; AND (III) ON THE
SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE FORMS N-Q ALSO MAY BE REVIEWED AND
COPIED AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING (800)
SEC-0330.
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25558-0706 (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.